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Sri Lanka Business Forecast Report Q1 2015

  • November 2014
  • -
  • Business Monitor International
  • -
  • 40 pages

Core Views

S ri Lanka’s economy will continue powering ahead over the coming years on the back of sustained strong performance in the industrial and services sectors (comprising 58.0% and 31.5% of GDP, respectively). We have upgraded our real GDP growth forecast in 2014 and 2015 to 7.7% and 7.5%, respectively (from 7.1% and 6.6% previously).
We maintain that the Central Bank of Sri Lanka (CBSL) will keep its standing lending facility rate and standing deposit facility rate unchanged at 8.00% and 6.50%, respectively over the course of 2014 and 2015, as inflation will remain relatively subdued and the strong economic growth momentum will likely continue over the coming quarters. That said, the central bank has room to cut rates should private sector credit growth remain weak and decelerate further. We remain neutral on the Sri Lankan rupee, expecting the unit to remain fairly stable against the US dollar over the coming months, as the CBSL continues to anchor the currency. We believe that the rupee will only depreciate slightly in 2015 and 2016, as a combination of robust growth outlook and strong foreign inflows will suppress the depreciatory pressure exerted from the country’s current account deficit. We forecast the currency to end 2015 at LKR132.00/USD followed by LKR133.00/USD in 2016.

We believe that the progress of fiscal consolidation in Sri Lanka will remain slow, which will keep the budget deficit at elevated levels over the coming years. We maintain our forecast for the country’s fiscal deficit to narrow modestly to 5.0% of GDP in 2015 from 5.4% in 2014 and 5.9% in 2013. We also expect the country’s public debtto- GDP ratio to continue on its long-term downtrend, reaching 74.6% in 2015 from 76.3% in 2014, due to the country’s rapid economic growth and improvements in its fiscal deficit.
We believe that visits by Chinese President Xi Jinping and Japanese Prime Minister Shinzo Abe on two separate occasions will further strengthen ties with Sri Lanka, bolstering the country’s economic development over the coming years, through increasing foreign direct investment and trade.

Major Forecast Changes

We have upgraded our real GDP growth forecast to 7.7% for 2014 and 7.5% for 2015 from 7.1% and 6.6% previously on the back of sustained strong performance in the industrial and services sectors. We have downgraded our forecasts for consumer price inflation (CPI) to average 4.5% from 5.1% in 2014 on the back of a benign inflationary environment in the past few months, combined with disinflationary dynamics such as sluggish broad money supply growth, which remain in play in the country.

Table Of Contents

Sri Lanka Business Forecast Report Q1 2015
Executive Summary 5
Core Views 5
Major Forecast Changes 5
Key Risks To Outlook 5
Chapter 1: Political Outlook 7
SWOT Analysis 7
BMI Political Risk Index 7
Foreign Policy 8
Stronger Ties With China And Japan To Boost Trade And FDI 8
Visits by Chinese President Xi Jinping and Japanese Prime Minister Shinzo Abe on two separate occasions will further strengthen ties
with Sri Lanka, bolstering the country's economic development over the coming years, through increasing foreign direct investment and
trade.
TABLE: POLITICAL OVERVIEW 8
Long-Term Political Outlook 9
Major Challenges In Coming Decade 9
We expect Sri Lanka to continue on a path towards increased accountability in politics over the coming decade. While the end of armed
conflict with Tamil separatists provides an opportunity for politics to evolve, we maintain that tensions between the Tamil minority and
the Sinhalese majority are likely to remain a major political issue for the foreseeable future.
Chapter 2: Economic Outlook 13
SWOT Analysis 13
BMI Economic Risk Index 13
Economic Activity 14
GDP To Remain Robust In 2014 And 2015 14
Sri Lanka's economy will continue powering ahead over the coming years on the back of sustained strong performance in the industrial
and services sectors. We have upgraded our real GDP growth forecast to 7.7% for 2014 and 7.5% for 2015 (from 7.1 % and 6.6
%previously).
TABLE: Economic Activity 14
Fiscal Policy 15
Public Debt-To-GDP Ratio To Tumble 15
Sri Lanka's public debt-to-GDP ratio has been on a long-term downtrend, falling to 78.1% in 2013 from 103.2% in 2001. We expect this
decline to continue, reaching 76.3% in 2014 and 74.6% in 2015, due to the country's rapid economic growth and improvements in the
government's fiscal deficit. While foreign debt accounts for approximately half of total public debt and GDP, we do not think that it is a
huge risk for the country.
TABLE: Fiscal Policy 16
Monetary Policy 17
Continued Rate Hold Ahead 17
The Central Bank of Sri Lanka (CBSL) will keep its standing lending facility and deposit rate on hold at 8.00% and 6.50%, respectively,
over 2014 and 2015, choosing to employ other measures to boost credit growth amid a growth-inflation sweet spot. That said, the
central bank has room to cut rates should private credit growth decelerate further.
TABLE: Monetary Policy 18
Currency Forecast 18
LKR: Small Depreciation In 2015 18
We remain neutral on the Sri Lankan rupee, expecting the unit to remain relatively stable against the USD over the coming months as
the central bank anchors the currency. We believe that the rupee will only depreciate slightly in 2015 and 2016, as a combination of
robust growth outlook and strong foreign inflows will suppress the depreciatory pressure exerted from the country's current account
deficit.
TABLE: CURRENCY FORECAST 19
TABLE: Current Account 19
Chapter 3: 10-Year Forecast 21
The Sri Lankan Economy To 2023 21
A Constructive Long-Term Outlook 21
Sri Lanka's economy has performed solidly following the end of a quarter-century of civil war in 2009, and we believe the island is well
placed to sustain this momentum over the coming decade. While there are lessons to be learnt from its recent bout of overheating,
the reintegration of resources (particularly labour) into the formal economy and a deepening of financial markets bode well for faster
economic expansion over the medium term. We are confident that real GDP growth can average a healthy annual clip of 6.6% over the
coming 10 years.
TABLE: Long-Term Macroeconomic Forecasts 21
Chapter 4: Operational Risk 23
Operational Risk Index 23
Operational Risk 24
TABLE: Operational Risk 24
Transport Network 25
TABLE: Transport Network Risks 26
Economic Openness 29
TABLE: Economic Openness 30
TABLE: Product Exports (USDmn unless otherwise noted) 31
TABLE: Top 5 Trade Partners and Product Imports (USDmn unless otherwise noted) 32
Chapter 5: Key Sectors 33
Telecommunications 33
TABLE: Telecoms Sector - Mobile - Historical Data and Forecasts 33
TABLE: Telecoms Sector - Wireline - Historical Data and Forecasts 34
Other Key Sectors 37
TABLE: Pharma Sector Key Indicators 37
TABLE: Food and Drink Sector Key Indicators 37
Chapter 6: BMI Global Assumptions 39
Global Outlook 39
Reality Check: Uncertainty Reigns 39
Table: Global Assumptions 39
Table: Developed States, Real GDP GrowtH, % 40
Table: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, % 40
Table: Emerging Markets, Real GDP Growth, % 41

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