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Sri Lanka Country Risk Report Q1 2016

Sri Lanka Country Risk Report Q1 2016

Core Views

Following the re-election of the United National Party in August polls, and the return of political stability, Sri Lanka's economy will likely see a slight pickup in growth over the coming quarters. As such, we maintain our forecast for Sri Lanka's GDP to come in at 6.5% in 2015, and 6.7% in 2016.

The formation of a national unity government will be constructive for Sri Lanka's foreign policy and Sinhalese-Tamil reconciliation. While the consensus resolution adopted by Colombo and the international community indicates that progress will continue to be made, we believe that the reconciliatory process will continue to be a challenging one.

Major Forecast Changes

The Central Bank of Sri Lanka (CBSL) will likely keep its policy rate on hold over the coming months as it remains hamstrung by the country's rising fiscal deficit, high public debt-to-GDP ratio, weakening current account balance and depreciating currency. Meanwhile, in order to ease downwards pressure on its foreign reserves, the CBSL devalued the unit by 2.2% on September 7. We now forecast the rupee to weaken further against the dollar, taking the exchange rate to LKR142.00/USD by end-2015, down from our previous forecast of LKR135.00/USD.

The depreciation of the Sri Lankan rupee will likely provide some level of support for the island nation's trade position over the coming quarters. Coupled with strong growth in the tourism sector and steady inflows of remittances, these factors will likely prevent the current account deficit from widening too much. As such, we have revised our forecast for Sri Lanka's current account deficit to come in at 3.1% of GDP in 2015, and 3.4% in 2016, versus our previous forecasts of 3.4% and 3.7%, respectively.

Sri Lanka's government debt as a share of GDP will likely rise in 2015 as a result of irresolute fiscal consolidation, a poor financial system, and weak economic growth. Largely as a result of more populist policymaking, we forecast Sri Lanka's budget deficit to widen to 6.2% of GDP in 2015, and 5.8% in 2016.


Executive Summary
Core Views
Major Forecast Changes
Key Risks
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Positive Move Towards Reconciliation But Challenges Abound
The formation of a national unity government will be constructive for Sri Lanka's foreign policy and Sinhalese-Tamil reconciliation. While
the consensus resolution adopted by Colombo and the international community indicates that progress will continue to be made, we
believe that the reconciliatory process will continue to be a challenging one.
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Major Challenges In Coming Decade
Maithripala Sirisena's election to the presidency in January 2015 will set Sri Lanka on a path of increased political accountability and
greater economic reforms over the coming decade. 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 2: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Growth To Improve With Political Stability
Following the re-election of the United National Party in August, and the return of political stability, Sri Lanka's economy will likely see a
slight pickup in growth over the coming quarters. As such, we maintain our forecast for Sri Lanka's GDP to come in at 6.5% in 2015, and
6.7% in 2016.
GDP By Expenditure Outlook
TABLE: ECONOMIC ACTIVITY
Fiscal Policy And Public Debt Outlook
Government Debt To Rise As Deficit Widens
Sri Lanka's government debt as a share of GDP will likely rise in 2015 as a result of irresolute fiscal consolidation, a poor financial
system, and weak economic growth. Largely as a result of more populist policymaking, we forecast Sri Lanka's budget deficit to widen to
6.2% of GDP in 2015, and 5.8% in 2016.
Structural Fiscal Position
TABLE: FISCAL POLICY
Monetary Policy
Rupee Still Under Pressure Following Surprise Devaluation
The Central Bank of Sri Lanka will most likely keep its policy rate on hold over the coming months as it remains hamstrung by the
country's rising fiscal deficit, high public debt-to-GDP ratio, weakening current account balance and depreciating currency. Meanwhile,
in order to ease downwards pressure on its foreign reserves, the CBSL devalued the unit by 2.2% on September 7. We now forecast
the rupee to weaken further against the US dollar, taking the exchange rate to LKR142.00/USD by end-2015, down from our previous
forecast of LKR135.00/USD.
Monetary Policy Framework
TABLE: MONETARY POLICY
External Trade And Investment Outlook
Rupee Depreciation To Support Current Account Slightly
The depreciation of the Sri Lankan rupee will likely provide some level of support for the island nation's trade position over the coming
quarters. Coupled with strong growth in the tourism sector and steady inflows of remittances, these factors will likely prevent the current
account deficit from widening too much. As such, we have revised our forecast for Sri Lanka's current account deficit to come in at 3.1
%of GDP in 2015 and 3.4% in 2016, versus our previous forecasts of 3.4% and 3.7% respectively.
TABLE: CURRENT ACCOUNT
Structural External Position
TABLE: MAIN EXPORT AND IMPORT PARTNERS
TABLE: MAIN EXPORTS AND IMPORTS
Chapter 3: 10-Year Forecast
The Sri Lankan Economy To 2024
A Constructive Long-Term Outlook
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. Although overheating remains an ongoing risk for the
economy, the reintegration of resources (particularly labour) into the formal economy and a deepening of financial markets bode well for
robust economic expansion over the medium term. As such, we are expecting Sri Lanka's real GDP growth to average 6.5% over the
next 10 years.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: OPERATIONAL RISK
Education
TABLE: ASIA - EDUCATION
TABLE: GRADUATES OF TERTIARY EDUCATION ('000)
Government Intervention
TABLE: ASIA - GOVERNMENT INTERVENTION
TABLE: PERSONAL INCOME TAX BRACKETS
TABLE: TAX HOLIDAYS ACCORDING TO INVESTMENT MADE
Chapter 5: BMI Global Macro Outlook
Global Outlook
Exit The Dragon
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %

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