Sri Lanka’s economy will continue powering ahead over the comingyears on the back of sustained strong performance in the industrial andservices sectors (comprising 58.0% and 31.5% of GDP, respectively).
We have upgraded our real GDP growth forecast in 2014 and 2015to 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 itsstanding lending facility rate and standing deposit facility rate unchangedat 8.00% and 6.50%, respectively over the course of 2014and 2015, as inflation will remain relatively subdued and the strongeconomic growth momentum will likely continue over the comingquarters. That said, the central bank has room to cut rates shouldprivate sector credit growth remain weak and decelerate further.
We remain neutral on the Sri Lankan rupee, expecting the unit toremain fairly stable against the US dollar over the coming months,as the CBSL continues to anchor the currency. We believe that therupee will only depreciate slightly in 2015 and 2016, as a combinationof robust growth outlook and strong foreign inflows will suppress thedepreciatory pressure exerted from the country’s current accountdeficit. We forecast the currency to end 2015 at LKR132.00/USDfollowed by LKR133.00/USD in 2016.
We believe that the progress of fiscal consolidation in Sri Lanka willremain slow, which will keep the budget deficit at elevated levelsover the coming years. We maintain our forecast for the country’sfiscal 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 economicgrowth and improvements in its fiscal deficit.
We believe that visits by Chinese President Xi Jinping and JapanesePrime Minister Shinzo Abe on two separate occasions will furtherstrengthen ties with Sri Lanka, bolstering the country’s economicdevelopment over the coming years, through increasing foreigndirect investment and trade.
Major Forecast Changes
We have upgraded our real GDP growth forecast to 7.7% for 2014and 7.5% for 2015 from 7.1% and 6.6% previously on the back ofsustained 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 benigninflationary environment in the past few months, combined with disinflationarydynamics such as sluggish broad money supply growth,which remain in play in the country.