Market reaction to Fed tapering worries ‘exaggerated’, says CB Chief
Saturday, 20 July 2013 00:00
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The Wall Street Journal: The market reaction to the threat of the Federal Reserve tapering its stimulus program later this year has been “exaggerated,” especially since many policymakers have already prepared for the possibility, the Head of Sri Lanka’s Central Bank said Wednesday.
Ajith Nivard Cabraal, Governor of the Central Bank, said it’s no surprise the Fed would need to scale down its asset purchases at some point. Sri Lanka’s central bank, for example, has been preparing for this eventuality since the second round of Fed bond-buying, also known as quantitative easing or QE, he said in an interview Wednesday.
“It’s a bit of an exaggerated reaction particularly because we have seen the Fed’s measures…Those were all going to be temporary measures,” he said. “It’s not something which has to be taking people by surprise.”
Sri Lanka starting preparing for the Fed’s stimulus unwinding by maintaining a limit on foreign investor holdings in its local currency government bond market, and only gradually increased the cap over time. Currently foreign investors can only hold about 12.5% of Sri Lankan local currency government bonds. That cap has helped maintain demand for these notes and drawn in long-term investors rather than hot money, he said.
Of course, less Fed stimulus can still result in some capital outflows from the country, he added. Funds dedicated to Sri Lanka bonds, for instance, have seen net outflows of $106 million since 29 May, though for the year they’ve taken in a total of $36.6 million in new money, according to fund tracker EPFR Global.
The rupee, meanwhile, has slumped 4% against the dollar since June amid a broader sell-off of emerging-market assets on Fed tapering worries. It traded at Rs. 131.60 per dollar Wednesday, from Rs. 131.40 the previous session, according to CQG.
Foreign exchange rate volatility has been a concern for the Central Bank, which committed to a freely floating currency in 2012. The Central Bank has intervened in the currency market this year, primarily during moments of huge inflows or sudden depreciation pressure due to funding imports, Cabraal said.
The monetary authority has absorbed a net $500 million this year in such interventions, though they have only intervened in the recent market volatility in “a limited fashion,” he added.
He said that Sri Lanka doesn’t plan to sell a global dollar bond this year, despite the success of last year’s bond sale. In 2012, the country sold $1 billion in 10-year notes at a yield of 5.875%, and the deal was 11 times oversubscribed. Instead, the Central Bank elected to leave room for Sri Lankan corporations to enter the market, he said.
Even with some capital outflows and exaggerated market moves, the shift in Fed policy has positive aspects for Sri Lanka and other emerging markets, the central banker said. For one, it means the world’s largest economy is improving. That, combined with the continued strong growth momentum that he expects in China, should bode well for emerging markets, Cabraal said. “For the rest of the world, it’s going to be very good,” he added.
For more of Cabraal’s views on the shift in Fed policy, the changing nature of monetary policymaking and Sri Lanka’s economy, listen to his entire interview on the DJ FX Trader podcast: http://bit.ly/193sQGd.
