Strategy Report 2017

Transcription

1 Dimantha Mathew Head of Research Strategy Report 2017 SRI LANKA Uncertainty provides volatility; Hope in 2H2017

2 Table of Contents Track Record GDP Growth Outlook Factors to Consider for 2017 Outlook Political Uncertainty clouds 1H Economic Outlook for 1H2017 Weak: Uncertain External Environment in Unknown Terrain Interest Rate View for Exchange Rate View for Recommendations Requirements to improve weaknesses 33

3 Track Record 3 Section 1.0

4 Withdrawal of Jul 2016 Recommendation 4 Date Recommendation Accuracy Recommendation 1 Recommendation 2 Recommendation 3 Recommendation 4*** Jan 2015 Dec 2015 Nov 2015 Feb 2016 Nov 2015 Jul Yr T-Bill to rise 200bps (8.0%) over 12 Months 1Yr T-Bill to rise 100bps (8.0%) over 4 months 1Yr T-Bill to rise 300bps (10.0%) over 14 months 1Yr T-Bill to decline 150bps (9.0%) over 6 months Mostly Correct Correct Correct Mostly Incorrect *** should have withdrawn the recommendation in Oct 2016 when a sudden drop in foreign reserves and liquidity shortage occurred amidst heavy selling pressure. Now we withdraw it. Rates moving up Rates reverse to move down

5 Secondary Market rate movement significantly different to Auction rates 5 Recommendation Target and Target Date Auction Secondary Market (bps) Recommendation 1 In Jan 2015 Recommendation 2 In Nov 2015 Recommendation 3 In Nov 2015 Recommendation 4 In Jul 2016 Dec bps Feb bps Jul bps -150bps 1 Yr 1 Yr 5 Yr 10 Yr +111bps +135bps +280bps +260bps +156bps +180bps +255bps +280bps +360bps +355bps +280bps +295bps -29bps -25bps +30bps +55bps

6 Reasons for failure in achieving latest targets 6 Expectations remained on par until Oct 2016 From Oct 2016 Government reports released beyond Oct 2016 illustrated sharp depletion in the reserves. Aug to Nov 2016 Official reserves down by USD 950 Mn Sudden Liquidity Shortages were created in the money supply in Sep, Nov and Sudden tax change proposals in the budget for capital market investments debt and equity

7 Reform conditions during 2H2016 still not completed 7 Conditions for positivity still waits to be fulfilled (Not completed only in progress): Full implementation of RAMIS system to increase revenue Debt to Equity conversion on Chinese high debt projects Restructuring and partial sale of Sri Lankan Airlines Anything equivalent to above, to increase Tax to GDP ratio and lower debt payments

8 GDP Growth Outlook Section 2.0

9 Quarter GDP figures show signs of improvement in the Industry segment. 9 Stable growth in services sector 8.0% 12.0% 10.4% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 7.0% 5.6% 2.5% 5.2% 2.7% 4.1% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% 7.3% 6.9% 6.5% 7.8% 2.7% 6.8% 3.9% 4.9% 5.0% 4.9% 4.7% 1.9% 2.2% -0.5% 0.7% -1.9% -6.0% 2Q2015 3Q2015 4Q2015 1Q2016 2Q2016 3Q % 2Q2015 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Source: CBSL Agriculture Industry Services Source: CBSL

10 expects GDP Growth to slowly improve % 5.0% 4.0% 4.5% 4.8% 4.9% 5.4% SL GDP Growth Forecasts E 2017E CBSL 4.8% 5.5% 6.3% World Bank 5.3% 5.3% IMF 4.5% 4.8% ADB 5.0% 5.5% Consensus (Average) 5.1% 5.5% 3.0% 2.0% 1.0% 0.0% 3.4% E 2017E Source: CBSL 5.6% 5.4% 5.2% 5.0% 4.8% 4.6% 4.4% 4.2% 4.0% 5.1% 4.9% 2016E 5.4% 5.5% 2017E Consensus (Average)

11 Factors to Consider for 2017 Outlook 11 Section 3.0

12 Factors to make decisions 12 Political Factors Elections Other areas required to face voters External Factors Trump Factor Global Growth Economic Factors Foreign Reserves Inflation Liquidity Credit Growth Government Borrowings Requirement

13 Political Uncertainty Clouds 1H Section 4.0

14 Some critical votings to take place, possibly in 1H2017 leads to POLITICAL UNCERTAINTY 14 Local Government Elections Elections to the local authorities would be held before March 31, Subject Minister Faiszer Musthapha said DailyMirror President Maithripala Sirisena informed the leaders of his United People's Freedom Alliance (UPFA) yesterday that the local government elections would be conducted early next year, Fisheries Minister Mahinda Amaraweera DailyMirror Elections Commission will start compilation and updating of details about staff members to be recruited to poll related duties in the future Commission s Chairman Mahinda Deshapriya said - DailyMirror Possible Referendum Steering Committee decided on Monday, to have a debate on the new constitutional proposals in Parliament on January 9, 10 and 11 DailyMirror Once the debate on the six sub-committee reports is over in the first week of January 2017, we will present the report of the Steering Committee to the Assembly. Later, the real debate on the nature of the Constitution will initiate. It has to go to Parliament, be passed by two-thirds, and then finally a referendum - Ranil Wickramasinghe - DailyMirror

15 Economic Outlook for 1H2017 Weak: Uncertain 15 Section 5.0

16 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 Foreign Reserves dangerously low 16 Every time Sri Lanka s Reserves record significant declines and also reach closer to USD 5,500 Mn the country tends to go towards a balance of payments crisis Second significant decline in reserves within a space of 6 months On average Sri Lanka spends around USD 1,500 Mn for a month of imports and as a result require about USD 6,000 Mn for 4 months of imports As a result Sri Lanka s Foreign Reserves are dangerously low at the moment USD 'Mn 9,500 9,000 8,500 8,000 7,500 7,000 6,500 6,000 5,500 5,000 4,500 USD 5,500 Mn Within 6 Months Source: CBSL

17 USD 'Bn Foreign Currency Payments are as high as Reserves 17 6,000 5,000 4,000 3,000 2,000 1, ,649 Foreign Reserves 4,668 Foreign Currency Repayment Schedule for 1 Year Source: CBSL

18 Domestic Debt Maturities are also High in 1H Rupee Bonds LKR 477 Bn Rupee Bond Maturities (Jan-Jul 2017) SLDBs USD 1.8 Bn or LKR 268 Bn Maturities (Jan-Jul 2017) LKR 'Bn Source: CBSL

19 U LKR 'Bn Sri Lanka Overall Debt Payments 19 Date Sri Lanka s Current Debt Payments are as follows: Bond Principal* (LKR 'Bn) Term Loan Outstanding (LKR 'Bn) Interest (LKR 'Bn) , *Bills will get added Annually *Bills will get added Annually *Bills will get added Annually *Bills will get added Annually *Includes Bills, Bonds, SLDBs and Sovereign Bonds We expect Sri Lanka s Debt to GDP to reach 76% by 2016E and further increase to closer to 80% by 2018E provided no large scale equity investments take place within the year 2,000 1,800 1,600 1,400 1,200 1, Bond Principal Term Loan Outstanding Interest Source: Bloomberg

20 79 LKR Bn Though continuous money shortage may have resolved in short term printed money remains high, negatively suggesting money shortage in the 1H 2017 as well Excess Liquidity CBSL Holdings of Gov. Securities Source: CBSL Resolving money shortage issue may be temporary as CBSL Holdings remains high

21 Inflation Index Inflation index to spike despite YoY growth remaining low due to high base effect in Point to point Inflation may remain below 5.0% throughout the year with average annual c.3.3% 2.8% 3.1% 4.0% 4.3% 2.9% 1.8% 2.1% 3.6% 3.4% 3.3% 3.8% 3.9% 10.0% 0.0% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2016 YoY Inflation 2017 YoY Inflation 2016 Index 2017E Index Source: Dept. Census and Statistics & 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0%

22 Private sector credit growth continue to slowdown dipping to 12-14% in 2017E Monthly Increase in Credit MoM Growth 6.0% 5.0% 30.00% 25.00% 25% % 20.00% 18% % 2.0% 1.0% 15.00% 10.00% 5.00% 7% 9% 12%-14% 0 0.0% 0.00% E 2017E Source: CBSL Source: CBSL

23 External Environment in Unknown Terrain 23 Section 6.0

24 LKR 'Bn External Environment effect on Sri Lanka can go both ways positive and negative 24 Trump Factor Long term: There is difficulty in assessing how trump s appointment takes effect. There is direct attacks to China and Mexico which be beneficial for us. Then if US does well fund flows move towards US which is negative Short term: Foreign outflows are continuing on a daily basis in all capital markets debt and equity Global Growth outlook slow but outlook for South Asia led by India Growth remains strong At the moment money is moving out of the emerging and frontier markets, but difficult to assess the medium term flow Foreign Holdings vs 1Yr & 5 Yr T Bond Rate Foreign Holdings 1 Yr T'bill 5 Yr Rate Source: CBSL & T Bond (%)

25 Interest Rate View for Section 7.0

26 What does the indicators say for investments? 26 Political Outlook : Negative Uncertainty created with elections and referendums results weak investor sentiment Economic Outlook : Negative Risks created with Weak Foreign Reserves, High Foreign Debt payments, High bond maturities, shortage in money supply due to CBSL holdings of Government Securities outweighs positive factors of point to point inflation being under control and declining credit growth External Outlook: Neutral Trump, global trading and fund flows can go either way in the medium term depending on Trump s performance and other country s (including China s) reaction to it Overall Outlook : Negative

27 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Interest Rates to be volatile within bps strip until uncertainty ends (Target: 7 months) : BEARISH on 1H % 9.5% 1 Yr 5 Yr 13.0% 11.0% Jan - Jul % 12.0% 10 Yr Interest Rates to be volatile within bps strip until uncertainty ends Probability 65% 1 Year 5 Year 10 Year Macro Economic Conditions further worsens, upper band targets of the bonds will break 35%

28 Pressure on interest rates to ease off over the 2H2017 (Target: 12 months) 28 No Bond Maturities beyond Jul 2017 No SLDB Maturities beyond 1 st Aug 2017 : BULLISH on 2H2017 No elections unless 1H2017 elections and referendums are delayed Low Government Borrowing Requirement and low Private Sector Credit Growth may improve money supply and liquidity in the system BY END 2017 Interest Rates to decline and hit the lower bands (1 Yr 9.5%, 5 Yr 11.0%, 10 Yr 12.0% Macro Economic Conditions further worsens in 1H2017, end 2017 rates will remain same as current rates (1 Yr 10.0%, 5 Yr 12.0%, 10 Yr 12.6%) Probability 65% 35%

29 Exchange Rate View for Section 8.0

30 Exchange Rate to continue to weaken throughout USD/LKR 2016 Year end target USD:LKR of LKR has been accurate LKR LKR LKR Bullish Case 65% Probability Interest rate stand as stated in scenario 1 with 5 Yr Bond ending at 11.0% Bearish Case 35% Probability If macro economic conditions weaken during the 1H2017 Source: CBSL

31 Recommendations 31 Section 9.0

32 Recommendations 32 Fixed Income We recommend to invest in shorter tenors to counter the risk in the system and prevent capital erosion. If risk in the system reduces as in our base case (65% probability) towards Apr- Jul 2017 period initiate mid to long term investments. Equity We recommend a low level of equity allocation amidst significant uncertainties during Jan-Jul ASPI is likely to be volatile similar to the interest rates between 6,000-6,500 unless macro economic conditions worsen during the period. If risk in the system reduces as in our base case (65% probability) towards Apr-Jul 2017, we recommend increase equity investments aiming positive returns in 2H2017 Consumer Demand Amidst the tight monetary policy consumer demand is likely to significantly decline during 1H2017 with some pick towards 4Q2017

33 Requirements to improve weaknesses 33 Section 10.0

34 Requirements to amend expected weaknesses 34 Current Government obtains majority votes - Political uncertainty reduces Significant Foreign inflows of USD 4-5 Bn is achieved during 1H Economic Uncertainty reduces External sector improves with Trump presidency and reactions from other countries favour Sri Lanka - External environment becomes supportive for inflows

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36 Dimantha Mathew Head of Research Thank You