Interest rates carry upward bias in 2018: CAL

• Caution on managing bunched up debt to avoid rate shocks 
• Expects country to record current account surplus in 21 years 
• Rupee to depreciate moderately by 2-3 % against greenback 
• Economic growth to rebound to 5 % from around estimated 4% last year

Despite the recent easing seen in the interest rates and the money market liquidity remaining in the positive territory for one of the longest stretches in recent times, Sri Lanka’s interest rates carry, “a slight upward bias” but the monetary sector stability will remain on track, said CAL Research. 

In a fairly concise note on the macro-economic outlook for 2018, the research arm of Capital Alliance Limited (CAL) said Sri Lanka’s treasury yields would move in a tight band of plus or minus 100 basis points, with a slight upward bias. 

Sri Lanka’s treasury yields fell steeply with the benchmark 12-month bill falling by 231 basis points to 8.80 percent by the week ending January 12, 2018 from 10.98 percent in March 2017 when the rates were raised for the last time by 25 basis points. 

Sri Lanka’s banks have also been cutting their deposits and the lending rates while the total outstanding market liquidity increased to a surplus of Rs.75.43 billion by the week ending January 12, 2018.

Although the interest rates have declined quite significantly during the last few months, analysts remain skeptical of the future direction of the rates given the bunched up debt repayments— both domestic and foreign—and the mostly unstable political landscape. 

“Management of bunched debt repayments is critical to avoid rate shocks”, CAL Research said.

However, unlike in the past instances where they present mostly a gloomy outlook, the independent research house has this time taken a more sanguine view of the economy ticking off most of the vital areas of the economy such as fiscal consolidation, economic reforms, monetary stability and stable reserves. 

However, the research house forecasted a moderate depreciation of the rupee by between 2.0 percent to 3.0 percent through 2018. 

In 2017, Sri Lankan rupee depreciated by 1.9 percent against the United States dollar while accumulating reserves up to US $ 7.9 billion by the year end— strongest since the end of 2014. 

Meanwhile CAL expects Sri Lanka to record a surplus in the current account of the budget for the first time since 1987. 

For the first time in 63 years, during the first 10 months of 2017, Sri Lanka recorded a surplus of Rs.21.9 billion in the primary account of the budget—expenses less revenue excluding interest payments. 

Perhaps presenting by far the most optimistic growth forecast for Sri Lanka, CAL forecasted the economic growth to rebound to 5.0 percent in 2018, “on the back of a recovery in agriculture, renewed investment spending and a deleveraging cycle that is drawing to a close”.