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Sri Lanka Country Risk Report Q2 2016

  • February 2016
  • -
  • Business Monitor International
  • -
  • 41 pages

Core Views

Given that the Sri Lankan economy is relatively small and open, theadministration’s balanced and pragmatic approach towards ethnicreconciliation on the island and foreign relations will be positive forgrowth over the medium- to long term. However, we believe thatthere will be several key challenges which will inhibit progress overthe near term.The Central Bank of Sri Lanka (CBSL) is likely to keep its policy rateson hold over the coming months with a tightening bias in order tomanage the cost of refinancing for public debt, ensure price stability,and down play the risk of a balance of payment crisis.

Major Forecast ChangesDespite a likely recovery in the industrial sector over the comingquarters, we expect the Sri Lankan economy to face mountingheadwinds from a difficult global economic outlook, a high fiscaldeficit, and rising risks of a BoP crisis. As such, we have downgraded Sri Lanka’s real GDP growth forecast for 2016 to 6.3%, from 6.7%previously, a stabilisation of growth in the economy (with growthestimated to come in at 6.2% in 2015).We are bearish on the Sri Lankan rupee and expect the currencyto depreciate further to LKR152.00/USD by end-2016 (versus ourprevious forecast of LKR148.00/USD) due to persistent externalheadwinds, global economic uncertainties, rising inflationary pressure,and elevated levels of public indebtedness.We are bearish on Sri Lanka’s fixed income market in 2016 asthe central bank could be forced to raise interest rates to preventa balance of payments crisis.

Meanwhile, due to higher budgetexpenditures and a less optimistic revenue growth outlook, we nowforecast a budget deficit equivalent to 6.3% of GDP (up from ourprevious forecast of 5.8%), which will exert upside pressures onsovereign bond yields.

Table Of Contents

Sri Lanka Country Risk Report Q2 2016
Executive Summary 5
Core Views5
Major Forecast Changes5
Key Risks5
Chapter 1: Economic Outlook 7
SWOT Analysis 7
BMI Economic Risk Index 7
Economic Growth Outlook 8
Growth To Remain Stable In 20168
Despite a likely recovery in the industrial sector over the coming quarters, we expect the Sri Lankan economy to face mounting
headwinds from a difficult global economic outlook, a high fiscal deficit, and rising risks of a BoP crisis
GDP By Expenditure Outlook 9
TABLE: GDP GROWTH FORECASTS9
TABLE: PRIVATE CONSUMPTION FORECASTS9
Fiscal And Public Debt Outlook 10
Bond Market Under Fire As BoP, Fiscal Risks Mount10
We are bearish on Sri Lanka's fixed income market in 2016 as the central bank could be forced to raise interest rates to prevent a
balance of payments crisis Meanwhile, due to higher budget expenditures and a less optimistic revenue growth outlook, we now
forecast a budget deficit equivalent to 63% of GDP (up from our previous forecast of 58%), which will exert upside pressures on
sovereign bond yields
TABLE: GOVERNMENT CONSUMPTION FORECASTS 10
TABLE: FIXED INVESTMENT FORECASTS 10
TABLE: NET EXPORTS FORECASTS 10
TABLE: REVENUE MEASURES IN 2015 11
Structural Fiscal Position 12
Currency Forecast 13
LKR: Heading Weaker Amid Multiple Headwinds13
We are bearish on the Sri Lankan rupee and expect the currency to depreciate further to LKR15200/USD by end-2016 (versus our
previous forecast of LKR14800/USD) due to persistent external headwinds, global economic uncertainties, rising inflationary pressure,
and elevated levels of public indebtedness
TABLE: MAIN REVENUE AND EXPENDITURE 13
TABLE: BMI CURRENCY FORECAST 14
Outlook On External Position 15
TABLE: MAIN EXPORT AND IMPORT PARTNERS 15
TABLE: MAIN EXPORTS AND IMPORTS 15
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE 15
Monetary Policy 16
CBSL To Keep Rates On Hold Amid Mounting Fiscal Deficit16
The Central Bank of Sri Lanka (CBSL) will likely keep its policy rates on hold over the coming months with a tightening bias in order to
manage the cost of refinancing for public debt, ensure price stability, and down play the risk of a balance of payment crisis
Monetary Policy Framework 17
Chapter 2: 10-Year Forecast 19
The Sri Lankan Economy To 2025 19
A Constructive Long-Term Outlook19
Sri Lanka's economy has grown strongly since the conclusion of the 26 year-long civil war in 2009, and we believe that the island is well
placed to sustain its economic growth momentum over the coming years
TABLE: LONG-TERM MACROECONOMIC FORECASTS 19
Chapter 3: Political Outlook 21
SWOT Analysis 21
BMI Political Risk Index 21
Domestic Politics 22
Moderate Approach Positive For Growth, But Challenges Remain22
Given that the Sri Lankan economy is relatively small and open, the administration's balanced and pragmatic approach towards ethnic
reconciliation on the island and foreign relations will be positive for growth over the medium-to-long term However, we believe that there
will be several key challenges which will inhibit progress over the near-term
TABLE: POLITICAL OVERVIEW 22
Long-Term Political Outlook 23
Major Challenges In Coming Decade23
Maithripala Sirisena's election to the presidency in January 2015 will set Sri Lanka on a path of increased political accountability over
the coming decade and greater economic reforms Sirisena's biggest political challenge will be to reconcile the Tamil minority with
the Sinhalese Buddhist majority However, this will not be easy and tensions between the two groups will persist for the foreseeable
future
Chapter 4: Operational Risk 27
SWOT Analysis 27
Operational Risk Index 27
Operational Risk 28
TABLE: OPERATIONAL RISK 28
Trade Procedures And Governance 29
TABLE: IMPORT and EXPORT DOCUMENTS 29
TABLE: TRADE PROCEDURES BREAKDOWN 29
TABLE: ASIA - TRADE PROCEDURES AND GOVERNANCE 30
Vulnerability To Crime 31
Chapter 5: BMI Global Macro Outlook 37
Global Macro Outlook 37
Downside Risks Gather Momentum37
TABLE: GLOBAL ASSUMPTIONS 37
TABLE: DEVELOPED STATES, REAL GDP GROWTH, % 38
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, % 38
TABLE: EMERGING MARKETS, REAL GDP GROWTH, % 39
TABLE: MACROECONOMIC DATA and FORECASTS 41

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