Explainer: Relaxing SDF and SLF Restrictions

@CBSL yesterday relaxed SDF and SLF restrictions which were placed in Jan 2023.

Want to know what this means? In English?

Pls keep reading.

🧵Thread:

1/18
@CSE_Media What is SDF/SLF?
SDF (Standing Deposit Facility)
Banks can park their excess money on overnight basis. SDF Rate (SDFR) now is 9%.

SLF (Standing Lending Facility)
Banks can borrow money on O/N basis. SLFR is now 10%.

Collectively, SDFR + SLFR is called "CBSL policy rates".

2/18

What shall I do when interest rates are falling?

If you have noticed, market rates have fallen, all the way from 30%+ to (almost) single digits.

@CBSL led the way by cutting rates 650bps in 2023.

🧵Thread:
Keep reading to see where rates might be headed.

1/10
@CSE_Media Will inflation fuel higher rates?

While inflation have bottomed-out, space remains for rates to fall.

Theoretically, lower rates induce consumption led demand-pull inflation.

Practically, for now, it's unlikely, due to deep cuts in purchasing power (tax + price hikes).

2/10

Everyone talks of Domestic Debt Restructuring, but no one worked the numbers.

"Without data, you're just another person with an opinion"

I did the math, so you don’t have to.

TL;DR
A maturity extension is needed for ALL bonds, not just long-term ones.

1/
@CSE_Media #SriLanka twitter.com/i/web/status/1… Let me explain this back-of-the-envelope analysis.

First of all, few disclaimers.

• These are personal views based on my calculations.
• Those calculations are very much simplified. Actuals might massively differ.
• Figures are based on published data as of 31.12.2023.

2/

#SriLanka @IMFNews EFF: Highlights

• immediate disbursement: USD 333 Mn
• catalyse financial support: ~USD 4 Bn+

End 2023 forecasts
• Reserves USD 4.4 Bn
• GDP -3%
• CCPI inflation 15%
• Public debt 111% of GDP
• Exports USD 13.6 Bn
• Imports USD 20.6 Bn

1/5
@CSE_Media • "fiscal institutional reforms on tax admin., public fin. & expenditure management, & energy pricing are critical"

= fuel + utility price formulas to remain, cuts unlikely in short-term

• "momentum of ongoing progressive tax reforms should be maintained"

= No tax cuts

2/5

Should I go short- or long-term with my savings?

That's a question posed by most.

I've been managing investments for the last 16+ years.

Here are five steps you can steal, to stay ahead in the game.

1/9

@CSE_Media #investing First, some background.

Interest rates were much higher. In fact, all-time high.

But now, they are on a downward trend.

What goes up must come down, right?

It does, always. It won' t be different this time.

2/9

Domestic Debt Restructuring (DDR): A stitch in time saves nine.

Excerpts of an interview with Dr. @NCdeMel by
@MarianneDavid24

Details why DDR should be done sooner, rather than later.

Links to full interview + paper is on the last tweet.

@CSE_Media #EconomicCrisisLK

1/10 How to tackle a DDR?

So far #SriLanka has talked about restructuring ext debt & not domestic debt.

Our paper shows that current IMF targets for DR are unlikely to deliver a sustainable pathway for econ recovery & debt management, unless rates are brought down by over 10%.
2/10

🤔 Playing it safe? 🚫
You might be risking everything! 💥

The biggest #risk in life isn't taking risks! 💪

💼 Every decision, every business, has risks and rewards. You can't have your cake and eat it too!

No risk, no reward! 🎂

1/5
@CSE_Media 📚ISO 31,000 defines risk as “effect of uncertainty on objectives”.

There’s no free lunch. 🍚
Nothing ventured - nothing gained.

So don't focus on the risk.
Rather, focus on the objective! 🎯

🔍 Don't miss out on opportunities because you're scared of uncertainty!

2/5

Finance Fallacy: Real rate = Nominal rate – inflation rate

Most investors rely on this formula, which is WRONG!

Let me tell you why.

1/6
@CSE_Media #EconomicCrisisLK First, let's look at the meaning of those terms?

• Nominal int rate: rate of return earned in “money” terms

• Real int rate: rate of return earned in “real” (purchasing power) terms. It's the return after adjusting for effect of #inflation (impact of rising price levels)

2/6

History Repeats:
@CBSL imposes restrictions on discretionary payments (DPs) of banks

What?
CBSL imposed set of restrictions on DPs of banks.

When?
With immediate effect.

These mirror the set of restrictions issued in May 2022, for Financial Year (FY) 2022.

1/9
@CSE_Media Why?
This was issued considering:

• possible adverse impact on liquidity and capital position of banks due to the current economic conditions, and,

• importance of maintaining appropriate levels of liquidity and capital levels to ensure sustainability.

2/9

#SriLanka ISB holders Group insists that Domestic Debt is "reorganised"

This has both good as well as bad sides.

Let me tell you all about it, in English.

1/12

@CSE_Media #EconomicCrisisLK The "Group"
• Known as "an ad-hoc creditor committee"
• Consists of 100+ foreign investors
• Led by a steering committee of 10+ members
• Represents over 55%+ of ISBs non- domestic holdings
• Advised by Rothschild and White & Case

Source: Min. of Finance (23.09.2022)

2/12

Want to get ahead in the #investing game?

Yes, it is a game. One which we all eventually play (or pay).

I've been managing investments for the last 15+ years.

Follow this 11 simple steps and you'll be way ahead of the curve.

Note:
NOT investment advice!

1/13
@CSE_Media 1. A plan is better than no plan

Define your investment objectives (where you want to be).

Then, compare where you want to be vs. where you are now, and draw a path to reach where you want to.

Plans will change. But you'll know what changed and how it impacted your path.

2/13

#IMF MD on Debt Restructuring (Summarised)

What's the biggest problem internally for China?

China is still a developing country. So, China will try to offer support to all developing countries, but, they expect to be paid back because it's a developing country.

1/4
@CSE_Media So, a haircut in Chinese context is politically very difficult.

But they understood that there are ways in which they can reach the equivalent of a haircut by stretching maturities, reducing or eliminating interest rates & payments.

Paris Club is also engaging with China.

2/4

How did Money Market (MM) turned a surplus?

Let me tell you how.

MM turned a surplus of LKR 57 Bn today. This was after 27 Aug 2021.

End 2022 MM was at a deficit of 231 Bn. That's the net amount of money borrowed from CBSL SLF (Standing Lending Facility).
1/5
@CSE_Media SLF operates on an overnight basis.

So, a deficit of LKR 231 Bn refers to the overnight market deficit.

Since then, CBSL have injected liquidity by way of term repos, ranging from 28 to 90 days.

2/5

Déjà Vu: SDF restrictions are back!

@CBSL restricted access to its Standing Deposit (SLF) and Standing Lending Facility (SLF) to Banks.

Last time this happened was in Sep 2014.

Let me tell you:
• Why?
• What?
• How?
in a simple way.

1/13
@CSE_Media #EconomicCrisisLK

https://twitter.com/theGayan/status/1610107582806659075

What is SDF/SLF?
SDF: banks can park their excess money on an overnight basis. SDF Rate now is 14.5% p.a.

SLF: banks can borrow money on an overnight basis, to meet their liquidity needs. SLF Rate now is 15.5% p.a.

Collectively, SDFR and SLFR is called "CBSL policy rates".
2/13

Some are worried about “Domestic Debt Restructuring (DDR)”.

Most are clueless what it is.

It’s good to hope for the best.
But best is to plan for the worst.

Keep reading to know all about DDR, in just 1.5 minutes.

1/12

@CSE_Media What is Domestic Debt (DD)?
IMF defines DD as “sovereign debt issued under domestic law”.

Usually this includes:
• Treasury Bills
• Treasury Bonds
• Development Bonds

Taken together, these are called Government Securities (GSec).

2/12

Everyone talks about Treasury Bills & their 32%+ returns.

What do you mean by
• T Bills
• Jargons like yield, discount?
• Are they risk free?

I've been working with T Bills/Bonds for the last 15+ years.

Here's how you can know all that in just 1.5 minutes.

1/
@CSE_Media Wait!

If you haven’t read my previous thread on T Bonds, I suggest to do so.

Once you understand T Bonds, then T Bills are a no brainer.

TL;DR
T Bills are a short-term, zero coupon variant of T Bonds.

Still want to learn the specifics, read on.

https://twitter.com/theGayan/status/1578672047739109376

2/

Taxes are Bad. Inflation is worse. Ignorance is worst.

Yes, taxes are up.
Yes, it’s very steep.
Yes, it could’ve been done at a slower pace.

The million dollar question is:
At what cost?

Want to know?
Let me tell you more.

@CSE_Media #EconomicCrisisLK

1/6 Yes, taxes take our money away. We feel it as it’s visible.

But if you look closely, inflation takes away more.

It’s a silent serial killer.

It’s worse for low/middle income groups, because they spend most % share of their income on food.

Remember, food inflation is 95%.

2/6

New Taxes: Inland Revenue Amendment Bill published

Personal Income Tax
• Tax rates range from 6%, 12%, 18%, 24%, 30% and 36%, in slabs of Rs. 500,000.
• Effective from 01.10.2022.
• For 6 months (01.10.2022 to 31.03.2023) the amounts are pro-rated by 50%

1/5
@CSE_Media @CSE_Media Changes from 2022 Interim Budget
• As per my understanding, these rates differ from what was published then.

• Original rates were 4%, 8%, 12%, 16%, 20%, 24%, 28% and 32%, for each Rs 1.2 Mn slabs.

• I'm not a tax expert. Hope someone would confirm this.

2/5

Everyone talks about Treasury Bonds and their attractive 30%+ returns.

But what do you mean by TBs & jargons like coupons, YTM, etc? Is it actually risk free?

I've been working with TBs for the last 15+ years.

Here's how you can know what I know in 1.5 minutes.
@CSE_Media
1/12 What is a T Bond?
TBs are issued by @CBSL on behalf of the Govt of Sri Lanka, for funding expenditure.

Since the issuer is Govt, they are part of Govt. Securities (GSec).

As the Govt. can print money to repay, they are "technically" credit risk free. More on this later.

2/12

Everyone tells inflation is about to come down.

Does this mean Cost of Living (COL) falls?

Over the years, I’ve seen many confuse the two.

Does #inflation coming down mean COL falls?
NOPE.

Let me tell you why.

1/6 First of all, what's inflation?
Inflation is the continuous rise in general price levels.

Inflation rate is the rate at which this rise happens.
Or in other words, the rate at which COL increases.

Not clear yet?
Let me give you an example.

2/6