Executive Summary

• Yields rise with inflation and external side remains problematic: With inflation well above the central bank’s target, treasury yields have gone up another 60-100bps across the board. More recently, policy rate got hiked 50bps to 7.75%. On the external side, exports have dipped and financial account outflows remain fairly strong; the only highlight is that remittances have bounced back somewhat thanks to banks offering higher than quoted exchange rates. While treasury yields have gone up another notch this month, inflation and external side situation suggests there is scope for rates to rise further.
• Bank lending rates yet to move meaningfully: Due to the methodology surrounding SMART, there is a lagged impact on lending rates compared to movements in treasury. Currently, SMART reference rate stands at 7.43% (lending cap at 11.18%), well below the 182-day rate of 10.5%; the spread between lending rates and 182-day (68 bps) also appears quite low. Hence there is easily potential for a 200-300 bps upwards adjustment on lending rates in the next 3-4 months depending on how 182-day yields play out.
• Expect more market driven monetary policy after elections: Word on the street is that the central bank is likely to remove controls on both exchange rates and interest rates after the election. The key question is what will be the eventual hits on these two fronts once these are fully opened up. In general, we are more optimistic compared to a few months back as interest rates have effectively been opened up on the treasury end, while banks have been getting more leeway on remittance pricing both hint that the post election adjustment may not be radical.
• Activity indicators mixed: Vat collection, electricity and card spend appears to be doing well, while both government and private sector capex remains weak. Going forward, we might see a slowdown in electricity consumption due to maintenance work in the LNG supply chain. Overall, both government and private sector capex appear to be slow due to the uncertainty surrounding elections we expect it to remain so until early next year.

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