Net foreign outflows from Sri Lanka’s stock/bond markets approach $ 500mn for 2018

October 8, 2018 (LBO) – Net foreign selling of Sri Lanka’s stocks and bonds is nearing US$500 million dollars for 2018.  The outflows have been a significant factor in the devaluation of Sri Lanka’s currency and declining foreign reserves.

Year to date in 2018, net foreign selling of Sri Lanka’s stocks and government securities stands at Rs82.7bn (US$486mn).  A net of Rs76.6bn has come out of government bonds, while Rs6.1bn has come out of the Colombo stock market.

The Sri Lanka Rupee (LKR) sits at an all time low of Rs170 to the dollar, while local stock market is in the doldrums. Sri Lankan markets have been damaged by external shocks, as outflows from emerging markets have caused those countries’ respective currencies and capital markets to weaken.

Foreign reserves in Sri Lanka have declined in Sri Lanka from close to US$8.6bn at the end of August to near US$7.2bn by the end of September.

The major stock market indices in the country, the ASPI and the S&P SL 20, are down close to 10% and 20% respectively for 2018. Trading volumes at the Colombo Stock Exchange have dried up in addition to the stock price declines, with most days registering just a few million dollars worth of transactions.

The Central Bank of Sri Lanka decided not to raise interest rates at the last monetary policy meeting.  The declining foreign reserves and  currency weakness have so far been combatted mainly with credit and import controls.  There have been interventions in the currency markets, but so far these have been much less than what has been done historically when the country was feeling similar balance of payments pressures.

Interest rates on US 10 year treasuries have broken through key technical levels sending bond yields on a on a march to 3.5%.  The recent significant rise in US interest rates is likely to cause further turbulence in emerging markets, with Sri Lanka likely to be maligned along with the crowd.

Graphic by: Sanjeewa Dayarathne