Treasury Bond scandal Scares away foreigners from GSM

The Treasury (T)-Bond scandal, involving former Central Bank of Sri Lanka (CBSL) Governor Arjuna Mahendran and his son-in-law Arjun Aloysius’ family owned primary dealer Perpetual Treasuries, has resulted in foreigners staying away from the government securities market (GSM) resulting in yields rising, market sources told this reporter on Wednesday.
“Yields of treasuries, from two month to five year tenures, rose sharply by 20 basis points across the board yesterday due to slack demand,” they said. A new negative aspect was CEOs from some State banks being taken up for questioning before the presidential commission investigating this scandal, they said.

However, due to CBSL, which manages Government of Sri Lanka (GoSL) debt, retiring some of its face value money printing (FVMP) holdings at Wednesday’s trading, GoSL’s MP borrowing costs fell by Rs 12.02 million (1.56%) to Rs 760.98 million over its Tuesday’s costs. A year ago on 4 October 2016, GoSL’s MP costs were Rs 2,128.98 million, a decline of 64.26% (Rs 1,368 million) since.
CBSL’s FVMP holdings declined by Rs 1,829 million (2.81%) to Rs 63,306.72 million yesterday, to be equivalent to 0.5% of GDP as per last year’s estimates. A year ago, 4 October 2016, over 3 October 2016, CBSL’s FVMP holdings fell by Rs 797.91 million (1.03%) to Rs 77,983.80 million, to be equivalent to 0.7% of GDP as per last year’s estimates, data showed. Year on year (YoY), CBSL’s FVMP costs have declined by 0.2% of GDP as per last year’s estimates.

Rupee weakens sharply
Meanwhile, the benchmark ‘spot’ depreciated sharply by 15 cents to Rs 153.35 to the US dollar due to substantial import demand at Wednesday’s trading, they said. However, a year ago on Tuesday, 4 October 2016, the benchmark ‘spot’ held at the Rs 146.75/85 to the dollar in two way quotes, unchanged over its 3 October 2016 close, records maintained by this reporter showed.
YoY the ‘spot’ has weakened by between Rs 6.60-6.50 (4.50-4.43%), thereby causing supply side inflationary pressure. Wednesday also saw US$ 25.31 million (Rs 3,875 million) creamed off GoSL’s/CBSL’s foreign reserves to service GoSL’s foreign debt. Conversions are based on the middle rate (MR) of the ‘spot’ as at Monday, which was Rs 153.15 to the dollar.

As a result, FV net excess liquidity fell by Rs 5,704 million (28.86%) to Rs 14,061 million, on Wednesday. A year ago on 4 October 2016, GoSL’s FV MP borrowing costs declined by Rs 43.49 million (2%) to Rs 2,128.98 million. Further, FV net shortfall increased by Rs 443 million (0.79%) to Rs 56,735 million on 4 October 2016.

Meanwhile, the market suffered a net foreign outflow of Rs 354.91 million (US$ 2.42 million) on 4 October 2016. Conversions are based on the middle rate of the ‘spot’ as at Friday 30 September 2016, which market sources told this reporter was Rs 146.85 to the dollar.

CBSL is the sole issuer of new rupees to the market and deals in ‘spot’, in which trades are settled after two market days from the date of transaction. In the absence of adequate revenue, CBSL prints money (i.e. the value of CBSL’s direct Treasury (T)-Bill holdings) and lends to the GoSL to meet its monetary commitments. But MP may cause demand-side inflationary pressure while increasing GoSL’s debt. However, when such T-Bills on maturity are retired and not re-issued to CBSL, like that which took place on 4 October 2016 and yesterday, that deflates inflationary pressure.

GoSL’s foreign debt servicing costs are met from CBSL’s foreign reserves to prevent depreciative pressure on the rupee if met from the foreign exchange market. This action however causes a depletion of rupee liquidity from the market, needed to pay CBSL to buy the required dollars, which leads to upward rate pressure.