What Crisis?

Sri Lankas financial markets are likely to remain rudderless as election campaigning starts putting the budding economic recovery on ice.
The stockmarket plunged 124 points wiping off Rs. 30 bn of its value on Monday, as President Chandrika Kumaratunga opted for a snap poll to ease the current political deadlock.rn

rnThe Central Bank has forecast the economy will expand 6.5 percent in 2004, up from projected growth of 5.5 percent in 2003 and 4.0 percent in 2002.rn

rnBut traders and analysts said the positive projections for this year could be destroyed, if the country enters into another protracted period of violence, political instability or another government with a slim majority.rn

rn”I doubt there will be a clear winner at the elections. The PA/JVP combination could muster around 95-100 seats, UNP around 85-90 seats. But the Tamil Alliance controlled by the LTTE will remain independent, but they will hold the key to a possible future government. If the political instability get worse, we will see key areas such as tourism and foreign investment hit,” said Vajira Premawardhana, Research Manager at Lanka Orix Securities.rn

rn”The market is going to remain very volatile as events are still likely to unfold,” said Chinthaka Ranasinghe Head of Research at John Keells Stock Brokers.rn

rnIn an effort to calm the markets, senior officials the Central Bank held an emergency meeting with market players on Monday to curb volatility in foreign-exchange and money markets.rn

rn”The Central Bank basically told us to stay calm and tell our customers that there is nothing to panic about,” said the head of treasury at a private bank who attended the meeting.rn

rnBank officials had told market players that even if there were a change of government, the new legislators would have to stick the targets set out the Fiscal Management Act.rn

rnOfficials emphasised that economic fundamentals have not changed since Saturdays announcement, but that if the caretaker cabinet maintains the current fiscal discipline, interest rates would remain stable or even go down further in the months ahead.rn

rnBut for most of the day, there were little trades on the rupee and secondary bond markets as quotes were too wide.rn

rnThe dollar opened at 98.50 rupees, up from Rs. 98.15 at Fridays close. The Central Bank stepped into the market on Monday, with state-run Bank of Ceylon selling dollars at 98.25 to the rupee. rn

rnThe intervention brought the dollar down to Rs. 98.10, and the rupee ended the days trading at 98.00, dealers said.rn

rnDealers said the greenback would keep rising in the run up to the April 2 polls, unless the Central Bank intervenes in the market.rn

rnThe Central Bank rarely intervenes directly in the forex market, but usually buys dollars via state-owned banks. rn

rnHowever, any shortage of dollars in the currency market – and there are signs that some banks may be low – could trigger a sharp drop in the rupee.rn

rnCall money rates were steady, at about 7.50 percent. rn

rnSecondary market bond yields are unlikely to shoot up, unless the Tigers return to war or the new government goes on a post-election spending spree. But yields have been climbing steadily since the President grabbed power last November.rn

rnAnalysts expect equities to remain skittish for the foreseeable future, as the main political actors slug it out on the election platform.rn

rnldblquote We may see some big players return to the market in the last few days before elections to buy stocks and sell them as the results come out,
dblquote says Premawardhana.rn

rnBut the currency and bond markets may be less volatile as most investors watch events from the sidelines. rn

rnCentral Banks monetary policy announcement on the interest rate front is expected on Wednesday, following its monthly meeting late Tuesday.rn

rnDealers dont expect the bank to tinker with the rates, keeping the overnight repurchase rate (repo rate) at 7.00 percent and the reverse repurchase rate (reverse repo) at 8.50 percent.rn

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-LBO Newsdesk: LBOEmail@vanguardlanka.comrn