Sri Lanka Business Forecast Report Q1 2013

Sri Lanka Business Forecast Report Q1 2013 - new country guide report published
2012-12-14 14:58:13 - Sri Lanka Business Forecast Report Q1 2013 - a new country guide report on

Heading into 2013, we are less convinced that Sri Lankan economic growth is headed towards any sort of material recovery from the ongoing slowdown. Therefore, we have downgraded our full-year real GDP growth projection for 2013 to 5.4%, implying that the ongoing slowdown will likely intensify in H113 before growth starts to pick up in H213.

The island´s economy is still



feeling the pinch on multiply fronts – rising credit costs, the weak Sri Lankan rupee, and the fragile state of the global economy.

Crucially, leading indicators continue to paint a bleak outlook for the economy.

Furthermore, more than two and a half years after the EU decided to withdraw preferential tariff benefits to Sri Lanka, it appears that the country´s exporters are now beginning to feel the economic squeeze. The ruling government´s inadequate progress on the human rights front suggests to us that these privileges are unlikely to be reinstated any time soon.

With price concerns gradually coming off the table, we believe the primary focus of the Central Bank of Sri Lanka´s policies over the next 12 months will be fixed on economic growth. We are projecting 125 basis points (bps) worth of easing in 2013, taking the reverse repo rate to 8.50% by end-2013.

Much of Sri Lanka´s macroeconomic imbalances are being ironed out.

Taking into account our view for monetary easing going forward, we believe that these dynamics favour an outright bullish stance towards the country´s local debt. We reiterate that the country´s public debt profile has markedly improved over the years.

While the country´s overall business environment remains mediocre from a pan-Asian perspective, we cannot ignore the rapid and dynamic changes taking place in its regulatory framework, which indicate that its business environment is making significant strides. This in turn should help to sustain the country´s foreign direct investment boom.

Major Forecast Changes

We have decided to downgrade our full-year real GDP growth forecast for 2013 to 5.4% (from 5.9% previously), implying that growth will remain flat heading into the next calendar year.

On the back of our 2013 growth downgrade, we have adjusted our forecasts for consumer price inflation (CPI) and the CBSL´s policy rate. We are now pencilling in more aggressive disinflation and more dovish moves by the CBSL. For 2013, we have downgraded our average CPI forecast to 7.0% (from 8.0% previously), and we have downgraded end-2013 policy rate projection to 8.50% (from 9.00 previously).

Key Risks To Outlook

Risks To Completion Of Sri Lanka-India CEPA: Potential political stumbling blocks remain, which could stall the completion of CEPA.

These include the recurring conflict between Indian fishermen and the Sri Lankan Navy, the government´s (perceived) lack of political reconciliation with the country´s Tamil minority, and the likelihood of rising domestic protectionist sentiment at home.

Upside Risks To Current Account Deficit: Even though the country´s concerted efforts at external rebalancing are starting to take hold, we highlight that the overall process still faces a number of challenges.

Risks include the potential for adverse global commodity price movements (especially that of oil prices), deeper weakness in the country´s main export markets (the EU and the US), and political instability in its key sources of remittance inflows (the Middle East).

Upside Risks To Inflation And Policy Rate Outlook: Although headline CPI has passed its peak, we note that core inflation has gradually risen over the past few months. This may limit the ongoing period of disinflation currently taking place, and the likelihood for aggressive monetary policy easing in 2013.

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