Net foreign outflows from Sri Lanka’s stock/bond markets cross $ 500mn YTD

October 12, 2018 (LBO) – Net foreign selling of Sri Lanka’s stocks and bonds has crossed US$500 million dollars for 2018.  The outflows, which have been a significant factor in the devaluation of Sri Lanka’s currency and declining foreign reserves, show no signs of slowing down.

Year to date in 2018, net foreign selling of Sri Lanka’s stocks and government securities stands at Rs89.5bn (US$523mn).  A net of Rs82.9bn has come out of government bonds, while Rs6.6bn has come out of the Colombo stock market. Foreigners still hold Rs241bn worth of government securities so there is plenty more that could flow out.

Image courtesy of Sanjeewa Dayarathne

The Sri Lanka Rupee (LKR) sits at an all time low of Rs171 to the dollar, while the local stock market is in the doldrums. Sri Lankan markets have been damaged more by external factors than the local situation. Outflows from emerging markets have caused those countries’ currencies and capital markets to weaken across the globe.

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.  However at the last government securities auction, yields spiked across the board, possibly indicating a higher interest rates coming down the pike.

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 in prior periods balance of payments stress.

The balance of payments and economic backdrop in Sri Lanka is clearly strained, however analysts say that the Central Bank has handled the situation relatively well all things considered.