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Sri Lanka Business Forecast Report Q3 2013

Sri Lanka Business Forecast Report Q3 2013 - new country guide report published

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2014-02-19 08:40:04 - Sri Lanka Business Forecast Report Q3 2013 - a new country guide report on

Recent developments, such as the impeachment of a chief justice and the government´s inaction on political reconciliation with the Tamil minority, have only bolstered our view that the political unassailability of the ruling United People´s Freedom Alliance greatly increases the risk of government overreach.

Sri Lankan exporters are feeling the effects of the EU´s decision to withdraw preferential tariff benefits to Sri Lanka. The ruling government´s inadequate progress on the human rights front suggests that these privileges are unlikely to be reinstated any time soon.

We expect weakness through H113 and are maintaining our forecast for 6.4% full-year real GDP growth in 2013.

Economic tailwinds such as falling global oil prices and loose monetary policy from the central bank are likely to see



economic conditions improve in the latter half of the year.

We believe the Central Bank of Sri Lanka (CBSL) will focus on economic growth over the coming quarters. We are projecting 100 basis points worth of additional easing in 2013, taking the reverse repo rate to 8.50% by end-2013. Crucially, the CBSL´s annual road map signals further loosening of monetary policy in the months ahead.

While we continue to expect further rupee strength, currency stability is likely to be the overriding theme after a fairly volatile 2012.

The CBSL explicitly expressed exchange rate stability as one of its policy priorities in its annual road map, reiterating its willingness to intervene if need be.

The government aims to narrow the fiscal deficit to 5.8% of GDP by end-2013; however, we believe the amount of fiscal consolidation will likely be minimal at best. That said, the government´s recent decision to hike electricity tariffs bodes well for the country´s shortto- medium term fiscal position.

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.

Major Forecast Changes

The extreme pace of disinflation and a slowdown in broad money supply growth has led us to downgrade our consumer price inflation projections. We now forecast inflation to average 6.5% in 2013, down from 7.5% in 2012.

We have marginally upgraded our end-2013 rupee target to LKR123.00/US$.

On the back of the government´s latest decision to hike electricity tariffs, we have marginally upgraded Sri Lanka´s fiscal deficit projection to 6.0% for the year.

Key Risks To Outlook

Risks To Completion Of CEPA: Potential political stumbling blocks could stall the completion of the Sri Lanka-India Comprehensive Economic Partnership Agreement. These include the recurring conflict between Indian fishermen and the Sri Lankan navy, the government´s (perceived) lack of political reconciliation with the Tamils, and New Delhi´s seemingly hardening stance against Colombo.

Upside Risks To Current Account Deficit: Even though the country´s concerted efforts at external rebalancing have started to take hold, the overall process still faces a number of challenges. Risks include the potential for adverse global commodity price movements (especially of oil prices), continued or renewed 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).

Risks To Constructive Rupee Outlook: Similarly, risks to our rupee outlook remain weighted to the downside, with the most pertinent including a faster-than-expected economic recovery in Sri Lanka, continued stubbornness in global oil prices and a derailing of the expected bounce in global growth.

Upside Risks To Inflation And Policy Rate Outlook: We remain cognisant of the potential for an improvement in global economic activity to elevate demand-driven inflationary pressure. Domestic food inflation could remain elevated for a longer-than-expected period of time, as our Commodities team expects global food inflation to pick up in H113.The price of this market report covers 4 quarterly reports on this sector. This quarterly report will be downloadable instantly as a PDF document, with the 3 remaining reports delivered at regular intervals throughout the year.

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Mike King
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