T-Bill yields at 92-week low on Wednesday

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By 2017-12-08

By Paneetha Ameresekere

The Government of Sri Lanka's (GoSL's) Treasury (T)-Bill borrowing rates fell to a 92-week low Wednesday due to a superlative performance by Central Bank of Sri Lanka (CBSL), which manages GoSL's debt.

CBSL issued Rs 17,189 million worth of T-Bills to the market at Wednesday's auction, Rs 311 million less than the original offer of Rs 17.5 billion. This resulted in the Weighted Average Yields (WAYs) of the 91-, 182- and 364-day (three-, six- and 12-month) maturities declining by 23, 12 and 10 basis points each, to 7.97, 8.76 and 9.34 per cent respectively, week on week as at Wednesday, while at the same time declining for the seventh consecutive market week.

WAYs lower than that of Wednesday's were last fetched at the T-Bill auction held on 2 March 2016, where the WAYs realized for the three-, six- and 12-month tenures were 7.68, 8.49 and 9 per cent respectively.

Rupee holds
The benchmark 'spot' Wednesday held on to its previous day's value of Rs 153.25/35 to the US dollar on moderate volumes with the trade having covered their positions for the year, market sources told this reporter.
However, due to the usual ebb and flow of trade underpinned by the country running perennial trade deficits, the 'spot' should weaken going forward, albeit moderately, they said.

A year ago on Tuesday 6 December 2016, 'spot next,' the Market Exchange Rate (MER) then, weakened by between 10 and five cents over its Monday's closing price, to finish the day at Rs 148.90/95 to the dollar in two-way quotes.
The 'spot' then was controlled at Rs 147.95 to the dollar.
YoY as at Wednesday, the MER has weakened by Rs 4.35-4.40 (2.92-2.95 per cent), thereby causing cost-push inflation.

US$ 58 million boost
Wednesday saw CBSL's/national foreign reserves strengthen by US$ 57.97 million (Rs 8,907 million) due to exporter inflows. Conversions are based on the closing rate of the middle value of the 'spot' as at Monday, which was Rs 153.655 to the dollar.
CBSL printed Rs 330 million Wednesday to help meet GoSL's monetary commitments, increasing the latter's face value money printing (FVMP) liabilities by 0.87 per cent to Rs 38,358.06 million (0.3 per cent of GDP). However, with GoSL's borrowing costs falling, its MP Borrowing Costs (BCs) also declined by Rs 5.33 million (1.24 per cent) to Rs 424.09 million, Wednesday over Tuesday.

As a result, net excess liquidity (NEL) increased by Rs 9,273 million (33.82 per cent) to Rs 36,546 million, Wednesday.
A year ago, an inflow of US$ 7.75 million (Rs 1,147 million) received by the market on Friday 2 December 2016 was realized on 6 December 2016. As a result, net shortfall on 6 December 2016 over 5 December 2016 fell by Rs 2,536 million (27.92 per cent) to Rs 6,548 million. However, YoY as at Wednesday, NEL has increased by Rs 43,094 million (minus (-) 658.12 per cent).

Meanwhile, CBSL printed Rs 1,389 million on 6 December 2016 to help GoSL to meet its monetary commitments in the absence of adequate revenue. As a result, GoSL's FVMP liabilities, 6 December 2016 over 5 December 2016, increased by 0.76 per cent to Rs 183,190.45 million (1.5 per cent of GDP). Nonetheless, YoY FVMP has fallen by 1.2 per cent of GDP, deflecting demand-pull inflation.
Due to CBSL's skilful maneuvering of GoSL's MP debt, GoSL's FVMP Borrowing Costs (BCs), 6 December 2016 over 5 December 2016, declined by Rs 57.69 million (1.95 per cent) to Rs 2,907.04 million. Nonetheless, YoY, such costs have fallen sharply by 85.41 per cent (Rs 2,482.95 million).

'Spot' trades are settled after two market days from the date of transaction, whereas in the case of 'spot next' it's three. CBSL deals in 'spot.'

The 'spot' at times is controlled to minimize Sri Lanka's rupee debt costs. Usually the Treasury is bereft of dollars unless it has raised dollars by a syndicated loan, a sovereign bond, or similar such vehicle. Nonetheless, more often than not, such costs are met from CBSL's foreign reserves after buying the required greenbacks by paying CBSL it rupee value in 'spot' equivalents. Therefore, a weak 'spot' will only inflate GoSL's rupee debt stock. To prevent such a scenario, GoSL exerts moral suasion on the 'spot', like what happened on 6 December 2016. Currently, however, the 'spot' is allowed to float freely.

The foreign exchange market is avoided to meet GoSL's foreign debt servicing commitments for fear that this would cause depreciative pressure on the rupee. CBSL is the sole issuer of rupees to the market and sometimes prints money equivalent to the direct holdings of its FV T-Bill holdings, to help GoSL meet its monetary obligations in the absence of adequate revenue. However, MP may cause demand-pull inflationary pressure while increasing GoSL's debt liabilities.

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