Bond yields are likely to move up in 2020, from 50 to 100 basis points across maturities, an equity researcher said.

‘We are increasing our bond yields by 50 basis points and overall we are expecting it to increase by 50 to 100 basis points from the second quarter of 2020 onwards. So by the end of 2Q 2020, we are expecting, first, the yield curve to move up and then start moving up further,”  Head of research at First Capital, Dimantha Mathews said whilst speaking at the First Capital Investment Strategy 2020 Second Research Conference which was held on Tuesday (18).

Speaking further Mathews noted that they expect Sri Lanka’s budget deficit to move up to 7.5 % of Gross Domestic Product (GDP).

Regarding GDP growth First Capital is expecting growth to pick up to 4% in 2020, which is higher than the international agencies' growth forecast of 3.6%.

“As of the end of last year, foreign reserves closed at $ 7.6 billion. With that, if you look at the amounts of imports we have, it is in the range of $ 1.5 billion. Hence, 4-months of imports is around $ 6 billion. However, we expect during the year consumer demand to accelerate. With that we expect import to increase somewhere in the range of $ 1.7 billion – $ 1.8 billion,” he added.

Speaking about debt repayments for 2020, Mathew said it is about $ 6 billion.

“From July last year to June this year it was somewhere in the range of $ 4.8 billion. Now it has moved up to $ 6 billion with the $ 1 billion sovereigns that we have to pay around September,” he said.

“By around June, foreign reserves will continue to deteriorate but close at around $ 7 billion. That is also taking into account the $ 1 billion chines loan that is likely to be granted. However, we feel that the government needs to raise around  $2 billion- $ 2.5 billion to maintain reserves at $ 7 billion to the end of the year,” he added.

Speaking further Mathews noted that even though the rupee bond repayments are coming down the foreign maturities are actually high this year.

“The total debt that we have to pay for this year is in the range of Rs.2.4 trillion. Now that has a component of 800 billion treasury bills. So, from this year the debt level is actually going to come down because when you add that component into the following years the next year debt also increases to somewhere in the range of Rs.2.3 trillion."

“Right now with Sri Lanka continuously rolling over the debt and having slower GDP growth. Our debt to GDP actually has now increased to somewhere in the range of 85% of GDP. However, we believe from this year, debt to GDP will slightly move down because our GDP is accelerating and also we are looking at large FDI’s coming possibly from the port city,” he added.

We expect credit growth to accelerate due to consumer demand, he further noted.

“Last year we had credit growth somewhere in the range of 4.5% but we expect credit growth to accelerate around 14% this year. In addition, we are looking at credit growth rolling by around 14% next year with the bulk of credit coming in the first half of 2021. The second half of this year and the first half of next year is where we feel that the credit growth is likely to accelerate mainly because of consumer demand,”

Speaking about inflation, first capital expects Inflation to be in the range of 5-6% for the most part of the year.

However, it is slightly higher than last year. “First half there is likely to be food inflation and in the second half of the year we are looking at some currency depreciation because of a slightly higher level of imports,” Mathews noted.

Looking at the external front, there are two positives to look at Mathews noted.

“One is that economic growth for South Asia is expected to accelerate.  On top of that, we had a large number of outflows over the last few months and our foreign holding component is actually very low now. We do not have much foreign holding to have outflows. Which is positive because there will be less pressure in the coming months,”

Then the biggest negative that we are looking at is the rating outlook, he stressed.

“This year with the hefty taxes, some rating agencies have cut down our outlook to negative. So which means that there is a probability that the rating can get downgraded if there is any deterioration in the economic outlook. So which is a big negative for us because we are looking at raising somewhere in the range of $ 2 billion - $ 2.5 billion towards the third quarter of this year. So with the positives and the negatives, the external sector outlook is also neutral for us,” he said.