2013-01-01 02:26:53 - Sri Lanka Business Forecast Report Q4 2012 - a new country guide report on companiesandmarkets.com
Bilateral relations between Sri Lanka and India need to remain as stable as possible should the governments of both countries wish to see the prompt resolution of the long-awaited Comprehensive Economic Partnership Agreement (CEPA). Sri Lanka is poised to suffer a massive slowdown in 2012, as the central bank hits the brakes on an overheating economy, and as the economy suffers from the weakening European demand for its exports.
We expect real GDP growth to come in at 5.0% in 2012, a sharp slowdown from the 8.3% growth rate achieved last year. Private consumption and fixed capital formation growth are expected to slow sharply in 2012 to 4.5% (from 15.5% in 2011) and 6.0% (from 14.6%) respectively. Meanwhile, government and stock
building growth is expected to provide some support, increasing to 5.0% in 2012 (from 2.4% in 2011) and 15.0% (from -56.8%) respectively. Net exports are expected to continue to be a drag on economic growth.
Crucially, leading indicators continue to paint a bleak outlook for the economy. The recent boom in foreign direct investment (FDI) has been nothing short of spectacular. Nonetheless, we believe that the country and its political leadership cannot simply expect FDI to continue flowing in at an ever-increasing pace, given the still-precarious shape of the global economy. The FDI boom could quickly dissipate, given the island nation´s still-mediocre business environment.
While we see more policy rate hikes in the near term (100 basis points to be exact), our outlook for disinflation to start to take hold before the end of the year remains unchanged. Despite the reforms we have witnessed under the umbrella of IMF conditionality, state-owned enterprises (SOEs) remain omnipresent and continue to place a burden on public finances. Privatisation is unlikely to be an option over the medium term, as strong structural political factors act as a hindrance.
Major Forecast Changes
In view of the stronger-than-expected consumer price inflation prints of late, we have revised up our inflation forecasts. We now expect CPI to end the year at 8.5%, implying an average rate of 7.8% for 2012.
Key Risks To Outlook
Risks To Completion Of 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, the likelihood of rising domestic protectionist sentiment at home, and New Delhi´s political ineffectiveness.
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, deeper weakness in the country´s main export markets, and political instability in its key sources of remittance inflows
Downside Risks To Policy Rate Outlook: The weakening economy and the fact that the Sri Lankan rupee has started to stabilise on the back of the moderation of the country´s external imbalances suggests to us that there is a risk that the central bank decides to stay away from further policy rate hikes.
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