Sri Lanka rupee closes at a record low, stocks edge down amidst war jitters

May 04, 2007 (LBO) – The Sri Lanka rupee closed at a record low against the dollar Friday while stocks edged lower with jittery investors remaining on the sidelines, dealers said.

Spot dollar closed at 110.85 rupees, the lowest this year, showing a depreciation of 3.11 percent for the year with the rupee starting at 107.50, dealers said.

Six month forward deals were done at 117.85 rupees to the dollar indicating a nominal depreciation of 6 percent over spot, largely because interest rates are high.

The forward rates are based on the interest rate differential between the rupee and the dollar.

The underlying interest rate on a forward exchange rate of 117.85 is 18.00 percent for the rupee and 5.3 percent for the dollar.

Dealers said importers were booking forward even at the relatively high rates due to the uncertainty brought on by the intensifying conflict.

Earlier in the week the dollar hit 110.90 on intra-day trading.

Though Sri Lanka’s Central Bank has tightened monetary policy, fears remain that fiscal policy continues to be loose.

While defence spending is expected to rise the government has also said 27,000 more people will be hired into the bloated public sector which ate up 54 percent of tax revenues last year.

Stock prices on the Colombo bourse edged further down Friday in thin trading with investors adopting a cautious approach owing to looming uncertainties over the ethnic conflict and its impact on the economy.

The All Share Price Index ended 13.67 points or 0.49 percent down at 2,787.30 while the Milanka was down 8.54 points or 0.22 percent at 3,845.58.

Almost 2.2 million shares changed hands and total turnover was 104.7 million rupees.

John Keells Holdings remained the main attraction Friday with strong foreign buying sending the stock up two rupees to close the week at 149 rupees.

“There was some selling pressure, but not on big volumes,” said Arjuna Dassanayake of DFCC Stockbrokers.

“Investors are adopting a cautious approach because of the current situation in the country.”

Share prices have been edging down since Tamil Tigers staged their third air strike, hitting two petroleum facilities partly owned by the local units of multinationals Shell and Indian Oil Corp over the weekend.

The attacks, like the previous two in the past month, did not cause much damage, and the foreign companies themselves were not believed to be specifically targeted.

But investors, who are used to sudden spikes of violence in the ethnic conflict, are worried about the new Tiger threat from the air and its potential adverse impact on the economy, despite the resilience it has shown over the years.

Dassanayake said he expects the cautious sentiment to continue next week, although he does not anticipate a lot of selling. Foreign interest in JKH is likely to continue.