Rupee Makes Pyrrhic Gains On Negative Trade Data

After Thursday’s (May 31) state owned People’s Bank defence of the exchange rate (ER), first at Rs. 132.50 and then at the Rs. 131/80 level, the ER gained by a rupee over that of Thursday’s close (Rs. 132/50) to end last week at the Rs. 131/20/131/50 level in two way quotes on market play.
One market source predicted that due to a possible repeat of state intervention in the week beginning Tuesday (tomorrow is a poya holiday for the market), there is room for the ER to strengthen further in the new week. Certain import tax and price increases have also helped to negate pressure on the ER.
Another source said that state intervention in the foreign exchange (forex) market in recent times could be seen only after the ER broke the Rs. 130 barrier. This was the third time the ER passed the Rs. 130 barrier in recent times before retreating, he said.  Some exporters were also seen encashing their US dollar ($) proceeds on Friday, the source said.

On the previous day Thursday, the ER in two way quotes was going at Rs. 132/132.50 as opposed to Rs. 132/40/75 the previous day.
The market is very volatile, he said. These gains however have had to be looked at in the backdrop of negative trade data, making it difficult to predict as to whether these are sustainable in the coming days, he said. “My view is that the $ will strengthen,” the source said, referring to Central Bank of Sri Lanka’s  (CBSL’s) recently released negative trade data.
CBSL on Wednesday (May 30) released first quarter (Q1) trade data which showed that import expenditure in March grew by 3.9% to $ 1,697 million , while export earnings declined by 10.2% to 836 million, causing a situation where imports were twice as big as exports in Q1.
Further, in cumulative terms, there has been a decline in export earnings in 2012 Q1, reflected by a 3% decrease in textiles and garments exports earnings to $ 1,028 million, while tea export earnings declined by 12.3%  to $ 332 million.
Data also showed that the trade deficit in Q1 of the current year widened by 44.8% YoY to $ 2,558.9 million. However, buttressed by inflows totalling $ 1.162.5 million to the Government, overall, the Government’s external account showed a $ 364.8 million surplus which also include tourism and remittance receipts.
The sum of $ 1,162.5 million recorded as inflows, net of tourism and worker remittances receipts during the review period is without disaggregating other inflows. However that may be, it said that foreign direct investments (FDI) in the review period amounted to $ 220 million (and further increased to $ 308 million by the first week of last month), net inflows into the stockmarket ($ 159 million) and foreign net commercial investments in government securities ($ 406 million) are also recorded.
All of those inflows may be attributed as inflows to the Government, despite the fact that foreign portfolio and government securities investments (a total of $565 million in the review period) may also take flight, as quickly as they came in. In fact there has been a minor run by foreign investors in government securities these days, probably caused by the instability of the rupee or the crisis in the euro zone, or due to a mix of both. However that may be, according to CBSL, the deficit in Government of Sri Lanka’s (GoSL’s) BoP account in 1Q was estimated to have had been $ 251 million, while the current account deficit in the review period was $ 978 million. CBSL Chief Economist K.D. Ranasinghe speaking at a Sri Lanka-Singapore Investor forum in Colombo on Wednesday said that they targeted a surplus in the current account by the year end to be equivalent to 3.8% of GDP as opposed to a deficit in the current account equivalent to 7.8% of GDP recorded last year.
Meanwhile in the previous day Wednesday, the ER depreciated to the Rs. 132.10/132/40 levels to the $ largely due to the Government having to settle oil bills, an official source said. The $ which closed last Friday (May 25) at the Rs. 131/131/20 level, has since (ie up to Friday) appreciated by 30 cents (0.2%) in spot, interbank trading. Since the Government announced the free float of the rupee four months ago on February 9, the greenback has had thereafter appreciated by Rs. 17.20 (15 %).
A source told this reporter that part of the problem is that there is a dearth of inflows coming  into the economy, while imports are growing at a steady pace, which is causing pressure on the ER to depreciate further.
A number of reasons have been attributed as being the cause for a dearth in inflows, among which are the Appropriations Act of last November which gives the GoSL wide powers to seize any state land or building leased to the private sector for development on the grounds that they have not been put to productive use with no definition of what is being meant by being productive, nor there being a specific timeframe governing such seizures. The other, the President deciding on the value of the exchange rate (rather than the market)-a reference to President Mahinda Rajapaksa devaluing the rupee by 3% when presenting Budget 2012 in late November of last year and the third, the reversal of the “The Finance Company plc (TFC)-state owned National Savings Bank (NSB)” deal, with some of the sellers of TFC shares being bona fide investors, thereby creating a dangerous precedent, made worse by taking no punitive action against the perpetrators of such a deal, including some former high ranking officials of NSB. “There is no open economy at play,” the source said. Meanwhile FDI in the Q1 of the year amounted to $ 220 million (and further increased to $ 308 million by the first week of last month),  GoSL  targets an FDI figure of $ two billion this year, double that of last year’s amount of $ one billion. However, if the latest available FDI statistics are prorated for the year, the figure thrown up is closer to last year’s figure, falling far short of GoSL’s envisaged $ two billion figure. Nevertheless, economic sanctions imposed on Iran by the USA due to its nuclear programme and the threat that it would also be applied to others who break the same by having commercial dealings with Iran, is also having a bearing on the rupee.
This has resulted in Sri Lanka having to source from others  its crude oil needs, thereby losing its five month credit line advantage from Iran, with credit restricted to a mere month by its new suppliers, resulting in a strain on the ER, an official source said.
However CBSL’s Chief Economist Ranasinghe at Wednesday’s forum said that due to various policy measures instituted by GoSL to rein in imports, April import growth had turned negative, but he didn’t go into details. Those policy measures include the raising of CBSL’s policy rates; capping bank credit growth this year to 18% with a further allowance of 5% permissible if funding is foreign; liberalizing the ER, imposing new vehicle import taxes and increasing electricity and petroleum prices.
In the international landscape, amidst news that Greece’s pro reform parties have had made gains ahead of the June 17 polls, saw the euro making gains on Thursday to be quoted at $ 1.24 as opposed to the previous day’s $ 1.2330 figure. However the Great Britain Pound (GBP) made losses against the safe haven greenback, weakening from $ 1.56 to one GBP to $ 1.55 in the review period.
However that may be, the other safe haven currency, namely the Japanese yen made gains against the greenback, appreciating from yen 79/20 to yen 78/80 against the $ in the review period.
But in the previous day Wednesday, One euro was trading at $ 1.243434 as opposed to $ 1.2557 on Tuesday, the GBP at $ 1.5550 as opposed to $ 1.5709 on Tuesday and the yen at 79.10 to the $ as opposed to yen 79.50 on Tuesday.
Meanwhile the crisis in the Euro zone, due to fears that Greece may be cut off from the Euro belt continued to impinge on the fragile local ER, with the ER plunging to Rs. 131/20/40 to the $ in two way quotes at the beginning of last week Monday (May 28). Greece’s elections are due on June 17 and with reports then pointing out that Greece’s left, which are “anti-austerity” to the chagrin of the IMF and the rest of the EU member countries, where the IMF and the European Central Bank (ECB) are involved in a bailout package to debt ridden Greece, Portugal and Ireland in exchange for austerity, were in the ascendancy, that may see Greece out of the EU in the event it reneges on its austerity promises, if the left is elected to power.
Most of Greece’s, if not all of Europe’s serious debt ridden states, such as also Ireland, Portugal, Spain and Italy, have as their creditors European banks. if the leftists are elected in heavily indebted Greece’s polls, they have threatened to move out of the euro zone because of the stringent and heavily austerity tinted bailout conditions laid out before them by the EU, IMF and ECB which have pumped in billion s of dollars to salvage that economy (see also the business editorial of The Sunday Leader of May 6, 2012).
Most of Greece’s creditor banks are European banks. And if Greece leaves the euro zone by not toeing the EU/IMF/ECB austerity line, not only will there be a likelihood of Greece defaulting on their debt obligations to those institutions, but also to the highly integrated European banks which have heavily invested in Greek government bonds, causing a knock on effect.  “The euro crisis means there are hardly any investments coming from that side, causing further pressure on the ER as the island’s import bill is greater than its exports receipts,” a source said. Further, there is also pressure on the ER due to flight of capital, though marginal, from foreign investments in government securities, he said. In a scenario where the euro zone is plunged into crisis, investors seek and do find comfort in their base currencies, the source said. That also contributes to the further weakening of the rupee. On Friday, May 25, the ER closed at the Rs. 131/131/20 level. “European investors are seeking sanctuary in the euro despite its volatility and the others in the greenback,” he added.

Call Rates Closer To 10%
With market’s excess liquidity diminishing because it feels that it’s more profitable to invest their excess in short term Treasury (T) Bills rather in Central Bank’s repo window (see also page 41) and pressure on “long” term rates to rise increasing due to the belief that inflation will be on an upward trend (the point to point change in inflation increased to 7% last month from the previous’ 6.1%), these negatives may however be subjugated only if there are sizeable inflows in to the country. In fact call money rates edged closer to the 10% level on Friday, increasing by four basis points over the previous to 9.98%.