Rupee forwards down on economic, debt woes

Reuters:  Sri Lankan rupee forwards slid for a third successive session on Thursday due to importer dollar demand, while dealers expect the local currency to remain under pressure in the near term due to growing economic uncertainty and rising debt levels.

Finance Minister Ravi Karunanayaka said on Wednesday that the island nation borrowed over 25 % more last year than in 2014, blaming the high cost of refinancing loans he said were raised by the previous government without parliamentary approval.

One-week rupee forwards, which act as a proxy for the spot currency, ended at 147.70/90 per dollar, down from Wednesday’s close of 146.40/50.

The spot did not trade below 143.90, seen as the Central Bank’s desired level.

“It is apparent that the Central Bank is losing its battle against stopping the rupee depreciation,” a currency dealer said asking not to be named.

“Short-term borrowing has gone up. The debt roll-over cycle is getting short. Unless remittances and exports grow, frequent borrowing is going to increase and that could raise the rates of dollar borrowing in the future,” the dealer said.

Adding to the pessimism was S&P’s outlook revision on Sri Lanka’s “B-plus” sovereign credit rating to negative and Fitch’s one notch rating downgrade to “B-plus” with a negative outlook.

Dealers also said policy uncertainty is deepening with the new taxes, and the capital gains tax may discourage foreign investors.

Sri Lanka will raise value added tax (VAT) and reintroduce capital gains tax to break out of a debt trap, ahead of talks on a $1.5-billion loan it is seeking from the IMF.

The downgrade will be of concern to international investors and market players, said analysts, adding it would push up the cost of government borrowings in the international market, putting pressure on the rupee.

Foreign investors sold Rs. 17.58 billion ($120.16 million) worth of government securities in the week ended 23 March, data from the central bank showed, taking the total offloaded since 30 December to Rs. 83.7 billion.

Commercial banks parked Rs. 15.39 billion of surplus liquidity on Thursday, using the Central Bank’s deposit facility at 6.50 % , while they borrowed Rs. 11.52 billion using the central bank’s standing lending facility, official data showed.Markets will be closed on Friday for a public holiday.