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Prevailing supply shock might fuel inflation: ICRA

17 May 2021

  • Treasury market yields to face consistent pressure

  • Diminished mobility expected to disrupt service sector expansion

  Supply shocks and import controls induced by the Covid-19 pandemic may influence fears of fuel inflation during this month, International Credit Rating Agency (ICRA) Lanka predicted in the report “The Economy at a glance for April 2021” it released recently. ICRA Lanka further predicted that the investors may keep factoring this in the Treasury market, leading to consistent pressure on the yields in the near term, under the outlook for May 2021. Following the report’s advice to get the pandemic situation under control, ICRA Lanka also expected the expansion in the services sector to be disrupted in May, as diminished mobility and loss in consumer confidence will be impacting revenues. The credit rating giant also expects that financial firms may re-evaluate the risks involved if the pandemic situation keeps escalating, which could affect credit growth. Also, the rising commodity prices were expected to induce difficulty to secure a lid on the trade deficit. Nevertheless, the iIndustrial sector was reported to have shown resilience during the previous waves and is expected to perform better than the services sector, along with the recovery in the major export market which can help keep the exports around $ 1 billion in May as well. In terms of the real sector, the Purchasing Managers Index (PMI) for manufacturing and services recorded the highest index value since June 2020, which indicates a stronger recovery in March 2021. On the other hand, commodities have been experiencing price fluctuations involving falling global rubber prices increasing due to market changes such as supply constraints from India and demand surge from China. This was followed by gold prices gradually surging in April to $ 1790/oz as US Treasury yields slipped, followed by global tea prices experiencing an increase during the start of April due to supply constraints from India, which moderated towards the month-end. ICRA Lanka reported that Brent Crude oil prices also slipped in April as the global impact of the Covid-19 pandemic on the future oil demand. As per equities, the Colombo Stock Exchange (CSE) touched a two-month high in the first half of April before losing much of the gains by the month-end, which closed with just 1.22% and 0.65% advances in the ASPI (All Share Price Index) and S&P SL20, respectively, whilst foreign investors were mostly on the selling side. However, the net foreign outflow was lower compared to previous months of 2021, whilst half of the GICS sectors recorded gains, with the best-performing sector being transportation in April. ICRA Lanka also reported that US markets experienced a sharp rally in April due to a series of robust economic reports, healthy corporate earnings, and a jump in retail sales, whilst European markets remained upbeat as vaccine rollouts manifested signs of success. Asian markets, however, slipped due to rising Covid cases. In regard to the external sector, the merchandise exports in March exceeded $ 1 billion due to the recovery in key export destinations and rising commodity prices. In the meantime, worker remittances grew 17% to $ 612 million in March. Also, excluding the minor inflow of $ 2 million of capital to treasuries, the foreign participation remained almost nonexistent in April. On the other hand, foreign capital outflow $ 19 million continued in the equities market. As per prices and wages, while the wage growth retreated in March on account of strong performance in the services and industry sectors, wages in the agricultural sector recorded dismal growth. Lastly, headline inflation recorded a marginal decrease from March to 3.9% in April, while food inflation remained close to double digits and non-food inflation remained just below 2%. Nevertheless, as the Department of Census and Statistics has been imputing missing prices since the beginning of the pandemic; it should be noted that these omissions may affect the index’s representativeness of the general price level of the economy.

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