Interest rates to fall further over rising exports
Monday, 23 June 2014 00:00
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By Asia Securities Research
First four months of the year saw exports gaining further momentum mainly led by receipts from garments and textiles. Total exports grew 16.9% YoY to circa $ 3.6 billion assisted by receipts from garments growing 20.9% YoY to $ 1.6 billion. The latter accounted for as much as 45% of total exports income during the period.
Exports of agricultural products further assisted the boom which grew 18.4% YoY to $ 860.8 million assisted by tea, minor agricultural products and vegetable exports. On the flipside, imports grew merely 2.6% YoY to $ 6.2 billion slashing the deficit in the trade balance by 12.1% YoY to $ 2.6 billion. The slower growth in imports was triggered by 16.4% YoY drop in investments goods imports to $ 1.3 billion. However, 22.3% YoY increase in fuel imports to $ 1.8 billion caused the expenditure on imports to rise marginally. Meanwhile the receipts from workers ‘remittances grew 11% YoY to $ 2.2 billion which offset circa 85% of the trade deficit during the period.
The continuous growth in exports coupled with the declining deficit in the trade account will further assist domestic interest rates to gradually fall. This is so given that the balance of payments position can reach a new equilibrium under lower interest rates in the context of the financial system gaining access to higher foreign exchange liquidity. On the other hand, the sharp growth in exports receipts hand in hand with the drop in investments goods imports indicate that the rate of increase in aggregate incomes is currently outpacing the rate of growth in aggregate investments in the economy. This is to say that the savings to investments ratio is shifting further towards positive territory exerting downward pressure on domestic interest rates.
Given that over 60% of the aggregate investments in the economy is absorbed by construction activity (source: CBSL) a small moderation in the latter will cause total investments to bear a similar impact. Conversely, the type of exports which are gaining higher receipts i.e., garments, tea & other agricultural products compared to industrial exports in advanced economies do not require heavy capital investments for output expansion on the back of their labour intensive nature. Under this backdrop, higher external incomes tend to outpace the growth in aggregate investments exerting downward pressure on domestic interest rates. We consequently expect a positive outcome on the trading activity of the Colombo Bourse while a policy rate cut maybe on the cards of approximately 25 basis points towards September if exports growth remains buoyant. The fact that private credit is not creating excessive demand for imports will further strengthen the possibility of a rate cut going forward.
