Rupee, stocks slide as political crisis spurs outflows

Wednesday, 12 December 2018 00:00 - - {{hitsCtrl.values.hits}}

Reuters: The Sri Lankan rupee ended weaker on Tuesday, as foreign investors continued to exit from bonds and stocks as a lingering political crisis weighed on market sentiment ahead of a key ruling by the island nation’s Supreme Court.

The ruling, expected this week, will determine if the current parliament can continue in the next year or an election should be held. The decision could help end the political crisis.

Foreigners sold a net Rs. 165.7 million ($928,812) worth of stocks on Tuesday, and they have been net sellers of Rs. 10 billion since the political crisis began on 26 October. The bond market saw outflows of about Rs. 51.2 billion between 25 October and 5 December, Central Bank data showed.

Foreign investors sold a net Rs. 17 billion ($95.3 million) worth of Government securities in the week ended 5 December, the highest weekly net outflow since the third week of February 2017. The stock market had net foreign outflows to the tune of Rs. 929.1 million last week.

The rupee ended at 179.20/40 per dollar on Tuesday, compared with 179.00/20 in the previous session.

The Colombo stock index fell 0.29% to 6,026.26 on Tuesday. It rose 0.83% last week after a 1.5% rise in the previous week. It has declined 5.4% so far this year.

Stock market turnover was Rs. 689.3 million ($3.86 million), less than this year’s daily average of Rs. 827.3 million.

Credit rating agencies Fitch and S&P downgraded Sri Lanka’s sovereign rating last week, citing refinancing risks and an uncertain policy outlook, after President Maithripala Sirisena’s sacking of his prime minister in October triggered the political crisis.

On Wednesday, Fitch downgraded Sri Lanka’s financial institutions and Sri Lanka Telecom, citing the sovereign downgrade.

This year, there have been Rs. 19 billion of outflows from stocks and Rs. 143.4 billion from Government securities, the latest data from the Bourse and Central Bank data showed.

The rupee hit a record low of 180.85 per dollar on 28 November, surpassing its previous low of 180.50 hit the previous day. It has weakened about 3.3% since the political crisis began. The currency fell 1.8% in November and has slid 16.5% so far this year.

Moody’s downgraded Sri Lanka on 20 November for the first time since it started rating the country in 2010, blaming the political turmoil for aggravating its already problematic finances.

The political paralysis remains the main concern for investors. While Mahinda Rajapaksa and President Sirisena have failed to win support in Parliament for their new Government, the deposed Prime Minister Ranil Wickremesinghe’s coalition, which claims it does have majority support in Parliament, has not been allowed to try to form a Government.

A lower court has stayed Rajapaksa and his Cabinet functioning in their positions, after they refused to step down despite being ousted via two confidence votes.

The Central Bank on 14 November unexpectedly raised its main interest rates to defend the rupee, which has faltered as foreign capital outflows pick up due to the domestic crisis as well as rising US interest rates.

Five-year government bond yields have risen 40 basis points since the political crisis unfolded on 26 October, while yields on Sri Lanka’s dollar bonds due in 2022 have risen by more than a percentage point to 8.31% since then.