Page 57 - Management Digest Udyama Vol 1 Isuue 2

Higher Borrowing requirement:

Heavy COVID spending and
continued infrastructure spending
is expected to lead to over
10% budget deficit for the 2nd
consecutive year, significantly
increasing Govt’s borrowing
requirement.

Uncertainty over access to
creditors:

Weaker external profile due to a
high share of dollar-denominated
debt exposures has continued
to increase the uncertainty
over access to official creditors Policy rate Outlook maintained:
resulting in inadequate foreign
currency inflows forcing Govt to In our Jan-21 Report we forecasted 2 hikes in 2H2021 (3Q/4Q). In
shift to more short-term higher Aug, Monetary Board hiked rates by 50bps. We maintain our forecast
risk SWAPs. that 1 more rate hike is possible in 2H2021. In 1H2022, the extremely
weak economic indicators may force the Monetary Board to further
Weaker conditions may lead to tighten the monetary policy. Thereby, we expect further 2 rate hikes in
downgrade: 1H2022 as well.

Funding from multilateral/ Yield Curve may rise by another 150-200bps and reach our upper
bilateral partners may not be bands of the yield curve by Jun 2022
sufficient to cover external
financing needs over the next 12
months while Foreign Reserves
are also at a dangerously low level
which are likely to be some of the
key facts that may be seriously
looked at, as it may potentially
lead another rating downgrade.

Fixed Income Health Score
plunge well below our
expectations: Banking Rates: Pressure on banking rates to rise

Fixed Income Health was already Banking Rates (AWPR) to change course and shift upwards rising by
in the weak territory during the at least 150bps by Jun 2022:
1H2021. However, the score has
further deteriorated and dropped AWPR didn’t move as early as we expected amidst the high level of
below our forecasted values. liquidity due to continuous quantitative easing strategies adopted by
Going forward it is forecasted to CBSL. We expect the AWPR to have bottomed out and is likely to rise
stay at a dangerously low level amidst the rate hike, SRR hike, negative liquidity, and high demand for
until a potential IMF program is credit in the system. With bond yields expected to move up, we expect
implemented. AWPR to rise to a range of 6.0%-6.5% by Dec-2021 and further move
towards 7.5%-9.0% by Jun-2022.

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