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Sri Lanka Business Forecast Report Q3 2009

Published by: Business Monitor International

Published: May. 15, 2009 - 56 Pages


Table of Contents


Executive Summary
Despite Military Victory, Economy To Slow Sharply
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Ratings
Domestic Politics
Civil War Ending As Humanitarian Crisis Intensifies
Despite growing calls from the international community for an immediate ceasefire, we see little chance that the
government or the Tamil Tigers will rest until the conventional phase of the war is concluded.
Table: Political Overview
Chapter 2: Economic Outlook
SWOT Analysis
BMI Economic Risk Ratings
Economic Activity
Avoiding Recession, But Not A Sharp Downturn
Although Sri Lanka is unlikely to experience an outright recession this year, the effect of the global downturn on its
economy is proving to be more severe than previously envisaged.
Table: ECONOMIC ACTIVITY
Monetary Policy
New Direction But No Improvement Guaranteed
Although the rapid decline of inflation in recent months has permitted the Central Bank of Sri Lanka to adopt the more
conventional monetary policy tool of interest rate targeting, we do not believe the bank will be any more effective than it
has been in the past at ensuring price stability.
Table: MONETARY POLICY
Exchange Rate Policy
Free Float Becoming A Reality
While talks between Sri Lankan authorities and the IMF have yet to yield a tangible result, we believe that an
agreement is imminent, and that it will have a significant impact on the outlook for the rupee.
Table: EXCHANGE RATE POLICY
Investment Outlook
Long-Term Equity Outlook Remains Positive
While we expect the domestic political situation to continue weighing on Sri Lankan equities in the short term, we believe
the long-term outlook will above all be a function of global credit and risk conditions, as well as the country’s long-run
growth potential.
Chapter 3: 10-Year Forecast
The Sri Lankan Economy To 2018
After The Downturn, Strong Recovery
Assuming the government manages to broker a durable peace agreement with the Liberation Tigers of Tamil Eelam (LTTE,
Tamil Tigers), we would expect to see robust rates of growth from 2011, allowing Sri Lanka to reduce poverty and make
progress on its Millennium Development Goals.
Table: Long-Term Macroeconomic Forecasts
Chapter 4: Special Report
The Outlook For Global Banking
TABLE: LOAN-TO-DEPOSIT RATIOS, Selected States
TABLE: LOAN GROWTH (% CHG Y-O-Y), Selected States
TABLE: COMMERCIAL BANKING BUSINESS ENVIRONMENT RATINGS, SELECTED STATES
Business Environment Rating Outlook
Chapter 5: Business Environment
SWOT Analysis
BMI Business Environment Risk Ratings
Business Environment Outlook
TABLE: BMI BUSINESS AND OPERATIONAL RISK RATINGS
Institutions
TABLE: BMI LEGAL FRAMEWORK RATINGS
Infrastructure
Market Orientation
Table: Asia, FDI Annual Inflows
Table: BMI TRADE RATINGS
Table: Top Export Destinations
Operational Risk
Chapter 6: BMI Global Assumptions
Global Outlook
TABLE: GLOBAL ASSUMPTIONS
TABLE: GLOBAL ASSUMPTIONS - LONG-TERM FORECASTS
Table: Developed States, Real GDP Growth Forecast
Table: EMERGING MARKETS, REAL GDP GROWTH FORECAST
Table: Commodities
TABLE: GLOBAL & REGIONAL REAL GDP GROWTH

Abstract

Despite Military Victory, Economy To Slow Sharply

Despite its status as a frontier market, Sri Lanka will not escape the global downturn unscathed, andwe envisage difficult economic challenges in 2009. Growth will come in far below trend, the currentaccount and fiscal deficits will continue to widen, and the level of public debt will remain elevated.While we foresee an improvement in the political situation pending a victory of the armed forcesover the rebel Liberation Tigers of Tamil Eelam (LTTE, Tamil Tigers), achieving a durable peacewill be a formidable task. That said, we expect the economy to rebound strongly from 2011 as agradual stabilisation of the security situation feeds into higher levels of tourism and investment.

While our long-term outlook for the Sri Lankan economy remains broadly positive, the ongoingdeterioration of global economic conditions has led us to revise our growth forecasts for 2009 and2010 downward. The impact of the global crisis has already been felt through weaker exports,foreign direct investment and remittances, which we expect to have a negative impact on privateconsumption growth. Although government spending will provide a modest boost to the economy,the precarious state of public finances will limit the scale of such expenditures. Nevertheless, weforesee growth coming at 2.2% in 2009, and picking up thereafter to reach 4.3% in 2010.

On the political front, 2009 will see a tentative return to stability with the campaign against theTamil Tigers expected to wrap up in the first half of the year. However, we caution that the rebels’fundamental objectives are unchanged, and that they could continue to plan terrorist attacks. Furthermore,the government will come under increasing international pressure to broker a politicalresolution that addresses the grievances of the Tamil minority. Nonetheless, it will need to balancethis pressure against the demands of the Sinhalese nationalist majority on which it will rely to gainre-election in 2010, or even 2009 if elections are brought forward.

Despite the government’s progress in subduing the rebels, which should ease security concerns,the underlying issues affecting Sri Lanka’s business environment are mostly unchanged. Theseproblems include corruption in the judiciary (and particularly in the contract-bidding process) aswell as inadequate physical infrastructure. Although the government is pressing ahead with itsinfrastructure programme, it relies on increasingly scarce foreign funding to do so. More broadly,the business environment is unlikely to see a significant improvement under President MahindaRajapaksa, who has been pursuing a more protectionist and less business-friendly economic policythan his predecessor.

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