Sri Lanka Country Risk Report

Providing comprehensive data and in-depth analysis of political, financial and economic risk.

Report includes: BMI's Core Views, 10-year Forecasts, BMI's Economic Risk Index, Political Stability and Risk Index, Long-term Political Outlook, Operational Risk Index, SWOT Analysis and Structural Economic Sections

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  • Understand and measure the political, business environment and operational risks to your company
  • Gain insight on emerging trends that could support, strengthen or disrupt your activities in the market
  • Benefit from 10-year macroeconomic forecasts and insight into the structural characteristics of the economy
  • Get the long-term political outlook and explore possible scenarios for change
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Sri Lanka Country Risk Report
Product Price
$1,195.00

Core Views

  • The Sri Lankan economy is likely to face multiple headwinds over the near-term arising from a volatile agricultural sector, a poor consumer outlook, as well as rising risks of a balance of payments crisis. However, the industrial sector is likely to recover over the coming quarters on the back of a more stable political climate. As such, we forecast Sri Lanka's economy to grow at 4.8% in 2016, marking a stabilisation of growth from 2015.

  • The Sri Lankan government will have to agree to austerity measures imposed by the IMF in order to secure a USD1.5bn bailout as the country faces risks of a balance of payments crisis. Under the conditions of the bailout, the government will likely have to reduce its budget deficit to 5.4% of GDP by end-2016. In addition, the CBSL will be forced to raise interest rates and devalue the currency in order to build a foreign reserves buffer. However, we believe that the government will face difficulty in making short-term adjustments to its budget due to political gridlock and high interest costs.

  • The election of President Maithripala Sirisena in January 2015 and the UNP's victory in the August general election have been positive for socio-political and economic reforms in Sri Lanka. However, we note that the loose coalition arrangement (which is made up of two parties from opposite ends of the political spectrum) is highly susceptible to political gridlock, and will be a risk to the policy-making process in the country. At the same time, there is also a possibility that the Joint Opposition could gain traction due to defections from the Unity Government. Accordingly, we have dialled back the Short-Tem Political Risk Index Score to 71.5, from 72.3 previously.

Major Forecast Changes

  • The rupee will likely face further downside pressure over the coming months due to persistent capital outflows and the requirement to build up a foreign reserves buffer under the IMF's guidance. This informs our expectation for the unit to weaken to LKR155.00/USD by end-2016, versus our previous forecast of LKR152.00/USD. Nevertheless, the currency will likely stabilise and average LKR156.10/USD in 2017 as investor confidence gradually recovers.

  • The CBSL will likely adopt a more aggressive monetary tightening stance in order to slow credit and money supply growth. In addition, higher interest rates are also necessary for the CBSL to build up a foreign reserves buffer (in line with IMF demands). As such, we expect the central bank to hike its benchmark deposit and lending facility rates by 50bps to 7.00% and 8.50%, respective, in H216.

Key Risks

  • If the government fails to secure the IMF bailout, there could be a rapid deterioration in investor confidence, leading to an acceleration in capital outflows. In this case, the Sri Lankan rupee could overshoot the LKR155.00/USD mark.

  • While we do not expect the CBSL to introduce strict capital controls, it seems likely that the monetary authority will impose more regulations to govern the flow of foreign currency.

Macroeconomic Forecasts (Sri Lanka 2014-2017)
Indicator 2014e 2015e 2016f 2017f
National Sources/BMI
Real GDP growth, % y-o-y 4.9 4.8 4.8 5.4
Nominal GDP, USDbn 79.1 82.4 80.8 84.0
Consumer price inflation, % y-o-y, eop 2.1 2.8 3.0 3.0
Exchange rate LKR/USD, eop 131.21 144.25 155.00 157.32
Budget balance, % of GDP -5.7 -7.1 -6.5 -6.4
Current account balance, % of GDP -2.5 -2.4 -2.0 -2.0
Executive Summary
5
Core Views
5
Major Forecast Changes
5
Key Risks
5
Chapter 1: Economic Outlook
7
SWOT Analysis
7
BMI Economic Risk Index
7
Economic Growth Outlook
8
Growth To Remain Stable In 2016
8
GDP By Expenditure Outlook
9
TABLE: GDP GROWTH FORECASTS
9
TABLE: PRIVATE CONSUMPTION FORECASTS
9
Fiscal And Public Debt Outlook
10
Bond Market Under Fire As BoP, Fiscal Risks Mount
10
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 Headwinds
13
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 & FINANCIAL ACCOUNT BALANCE
15
Monetary Policy
16
CBSL To Keep Rates On Hold Amid Mounting Fiscal Deficit
16
Monetary Policy Framework
17
Chapter 2: 10-Year Forecast
19
The Sri Lankan Economy To 2025
19
A Constructive Long-Term Outlook
19
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 Remain
22
TABLE: POLITICAL OVERVIEW
22
Long-Term Political Outlook
23
Major Challenges In Coming Decade
23
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 & 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 Momentum
37
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 & FORECASTS
41

Assess your risk exposure in Sri Lanka with our 100% independent forecasts assessing the pace and stability of this key market. Backed by trusted data from BMI Research's 52 million data point economic forecast model, this report will allow you to measure political, economic, business environment and operational risks in Sri Lanka with confidence.

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