Market sources have blamed the delay in obtaining the second tranche of the International Monetary Fund’s (IMF) Extended Fund Facility (EFF) programme and the high interest rates on offer in Government securities for the collapse of the market over the past month.
Speaking to The Sunday Morning Business, First Capital Holdings Chief Research and Strategy Officer Dimantha Mathew stated that the bearish sentiments observed in the Colombo Stock Exchange (CSE) recently had been largely due to the delay in obtaining the second tranche of the IMF programme, which had been accompanied by a rise in interest rates in Government securities, diverting money away from the equity market.
Elaborating further, he stated: “Right now in terms of interest rates, Government securities have the highest rates. Therefore, they are the most attractive asset class since the debt restructuring is also over. The primary investment option is Government securities and when they move interest rates of these securities towards the 15% mark, we see a slowdown in funds flowing into the equity market. Earlier, when interest rates were dropping, funds flowed freely into the equity market.”
He stated that the market had already observed a slight downtrend in interest rates of Government securities spurred on by the recent agreement Sri Lanka had reached with the Export-Import Bank of China in respect of restructuring $ 4.2 billion of outstanding sovereign debt. Therefore, he expects the Colombo bourse to turn bullish as interest rates continue to fall.
According to Mathew, Sri Lanka is most likely to receive the second tranche of the IMF programme by December, while he expects the debt restructuring process to be completed by November.
However, he emphasised that Sri Lanka would have to take concrete steps towards restructuring its State-Owned Enterprises (SOEs) before the release of the second tranche by the IMF.
“In terms of restructuring the SOEs, they might pass a plan through Parliament. We will need to see these things over the next two months and by December we should receive the second tranche,” he added.
The CSE has been on a downward trend since August and the benchmark All Share Price Index fell to a low of 10,688.86 basis points on Wednesday, down by over 1,000 basis points from the quarterly high of 11,724.22 basis points recorded on 8 August.