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.
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.
Major Forecast Changes
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. As such, we have downgraded Sri Lanka's real GDP growth forecast for 2016 to 6.3%, from 6.7% previously, representing a stabilisation of growth in the economy (with growth estimated to come in at 6.2% in 2015).
We are bearish on the Sri Lankan rupee and expect the currency to depreciate further to LKR152.00/USD by end-2016 (versus our previous forecast of LKR148.00/USD) due to persistent external headwinds, global economic uncertainties, rising inflationary pressure, and elevated levels of public indebtedness.
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 are now forecasting a budget deficit equivalent to 6.3% of GDP (up from our previous forecast of 5.8%), which will exert upside pressures on sovereign bond yields.
The CBSL could be forced to return to capital controls if the country once again sinks into a full-fledged balance of payments crisis, but this will likely be a method of last resort given that the central bank had refrained from doing so in the past despite moderate BOP shocks.
|Nominal GDP, USDbn||74.9||77.2||77.2||81.3|
|Real GDP growth, % y-o-y||7.4||6.2||6.3||6.4|
|Consumer price inflation, % y-o-y, eop||2.1||2.0||3.0||3.0|
|Exchange rate LKR/USD, eop||131.21||144.25||152.00||156.56|
|Budget balance, % of GDP||-6.0||-6.2||-6.4||-6.2|
|Current account balance, % of GDP||-2.7||-3.2||-3.8||-3.4|
The Sri Lanka Country Risk Report helps businesses with market assessment, strategic planning and decision making to promote growth and profitability in Sri Lanka and is an essential tool for CEOs, Chairmen, Finance Directors/CFOs, Managing Directors, Marketing/Sales Directors with commercial interests in this emerging market..
An influential new analysis of Sri Lanka's economic, political and financial prospects through end-2017, just published by award-winning forecasters, Business Monitor International (BMI).
- Forecast the pace and stability of Sri Lanka's economic and industry growth through end-2017.
- Identify and evaluate adverse political and economic trends, to facilitate risk mitigation.
- Assess the critical shortcomings of the business environment that pose hidden barriers and costs to corporate profitability.
- Contextualise Sri Lanka's country risks against regional peers using BMI's country comparative Risk Ratings system.
- Evaluate external threats to doing business in Sri Lanka, including currency volatility, the commodity price boom and protectionist policies.
BMI provides our fully independent 5-year forecasts for Sri Lanka through end-2017 for more than 50 economic and key industry indicators. We evaluate growth, and also forecast the impact of economic management.
Economic Outlook Contents
The Sri Lanka Country Risk Report features BMI's forecasts with supporting analysis for 2013 through to end-2017, set against government views and BMI's evaluation of global and regional prospects.
Key Areas Covered:
- Full 10-year forecasts with data - for key macroeconomic variables including GDP (real growth and per capita), population, inflation, current account balance and the exchange rate.
- BMI's comprehensive Risk Ratings system - rates each country worldwide for economic and political risk, and rates the business environment, within a global and regional context.
- Economic Activity - real GDP growth, employment, inflation, consumption (retail sales and confidence).
- Balance of Payments - trade and investment, current and capital account.
- Monetary Policy - interest rate trends (bank lending and deposit rates) and inflation (producer price and consumer price).
- Exchange Rate Policy - currency controls, foreign investment flows, exchange rates and foreign exchange reserves.
- Fiscal Policy - macroeconomic strategy and policies, government finance and tax reforms.
- Foreign Direct Investment - approvals, inflows and climate.
- External Debt - debt profile (short and long-term plus public and private sector exposure).
- Global Assumptions - forecasts for each year to end-2017 covering: major commodities, growth in key regions, inflation, and interest and exchange rates, in the United States, Japan, China and the eurozone.
- Rely upon BMI's 100% independent forecast scenarios for Sri Lanka and underlying assumptions - we take no advertising and are privately-owned.
- Exploit the benefits of BMI's comprehensive and reliable macroeconomic database on Sri Lanka, sourced and fully maintained by BMI from an extensive network of private sector, government and multilateral contacts.
- Gain key insights into the current and future direction of government economic policy, which could significantly affect your company's business prospects, from BMI's team of analysts and economists.
What are the political risks to doing business in Sri Lanka over the next 5-years?
BMI's Sri Lanka country Risk Ratings evaluate the short- and medium-term threats to political stability.
Political Outlook Contents
- SWOT Analysis for the Sri Lankan Market - Political Strengths, Weaknesses, Opportunities and Threats facing Sri Lanka.
- Political Stability and Risk Assessment - BMI's Risk Ratings assess explicit short- and long-term risks to political stability; latest ratings, rankings and trends for Sri Lanka's risk are compared with regional and global averages.
- Current Administration and Policy-making BMI assesses the threats to the continuity of economic policy, and likely changes to the business operating environment.
- Benchmark Sri Lanka's risk profile against its neighbours, the global and regional average, allowing easy comparison of risks between key business markets.
- Identify, evaluate and anticipate political and security risks to the business environment, and to your company's current operations and future plans.
- Gain valuable insights into government and policy-making, through BMI's specialist team of analysts and economists, and their network of private and public sector sources.
Business Environment Risk Ratings with SWOT Analysis - Business environment Risk Ratings for Sri Lanka, benchmarked against ratings for regional neighbours.
Country Competitiveness - Competitiveness of Sri Lanka's business operating environment in supporting corporate growth and profitability, compared with regional neighbours.
Business Environment Contents
- Domestic Environment - Transparency, cronyism and corruption; labour market flexibility; corporate tax burden; interest rate levels; sophistication of banking sector and stock market; levels of business confidence; infrastructure and IT.
- Foreign Direct Investment - Analysis of foreign investment regime; foreign ownership laws; attractiveness of business environment to foreign investors.
- Foreign Trade - Analysis of trading environment, government trade policy, liberalisation measures, tariffs and membership of trade areas.
- Assess your company's evolving exposure to country specific operational and business risks, using BMI's in-depth analysis of the legal and regulatory business environment.
- Understand your market's comparative strengths and weaknesses in the key areas of commercial infrastructure and business institutions, using BMI's proprietary global Business Environment Risk Ratings.