Macro Analysis /
Global

Sri Lanka: Rates unchanged; lending targets to MSME sector to be introduced

  • CB maintains rates; average AWPLR records marginal increase

  • Private credit growth remains stable; we forecast at 8.0% - 10.0% YoY in 2021

  • Inflation to record a gradual increase in 2021

Asia Securities
20 January 2021
Published byAsia Securities

In-line with our expectations, the Central Bank (CB) maintained key policy rates at the current level, following its monetary policy meeting yesterday. This came amidst our view of the CB’s expectations on having further room for lower market rates. As announced in November, plans to introduce lending targets for the micro, small and medium scale enterprises (MSME) sector to help boost economic growth is ongoing. SDFR currently stands at 4.50%, and SLFR at 5.50%. Our key takeaways are: 1) credit growth to improve in 2021, 2) market interest rates to remain in single digit levels and 3) inflation to gradually pick up. Public sector credit growth (+25.9% YoY in Nov) remains high, indicating the financing need of the government. We forecast GDP growth of 5.4% YoY in 2021 amidst low single digit inflation within the CB threshold of 4.0% - 6.0%. Our key concerns at this point are 1) the absence of a medium-term policy framework for the government’s revenue generating policies and 2) borrowing requirement of over ~USD 5.0bn in 2021.

CB maintains rates; average AWPLR records marginal increase

The CB maintained key policy rates during the first monetary policy meeting for 2021, in-line with our expectations. The loose monetary policy stance taken by the CB, combined with liquidity injections have resulted in weekly AWPLR declining by 430bps since January 2020, while the AWPLR picked up 13bps in January so far (currently at ~5.82%) despite significant excess liquidity in the market. Meanwhile, 1- year bond yields have picked up marginally to 5.05% in the primary market, from 5.00% in December. Overnight excess liquidity averaged LKR 238bn in January so far, up ~3.2% since end December 2020. Meanwhile, official reserves for 2020 reached USD 5.7bn, covering 4.0 months of imports.

Private credit growth remains stable; we forecast at 8.0% - 10.0% YoY in 2021

Private sector credit remained stable despite the localised lockdowns which took place in November, with MoM private sector credit growing by ~0.7% MoM (+6.2% YoY, +1.0% MoM in Oct) amidst the loose monetary policy stance taken by the CB in its efforts to help lending activities. SoE credit growth remained high, at 25.9% YoY (+27.1% YoY in Oct) indicating increased financing needs of the government. Looking ahead, with improved investor sentiment amidst low interest rates, we expect higher demand for private sector credit in 2021. As such, we forecast credit growth at ~8.0% - 10.0% YoY for 2021.

Inflation to record a gradual increase in 2021

We expect demand to continue its gradual pick up as seen in recent months, as economic activity picks up. As such, we also expect an increase from the non-food basket as a result. In our view, inflation will remain within the CB threshold of 4.0% - 6.0% YoY in 2021 in the absence of an impact from adverse weather conditions.