Sri Lanka Country Risk Report Q2 2020
We at Fitch Solutions have revised our forecast for real GDP growth in Sri Lanka to 2.9% and 3.5% in 2019 and 2020, from 2.7% and 3.3% respectively, previously, following Q319’s 2.7% y-o-y growth print (versus 1.6% in Q219), which signals that the economy is recovering at a faster pace from the Easter Sunday bombings on April 21 2019 than we had previously anticipated. The tourism sector will continue to recover, and will be a key driver of services growth over the coming quarters. We believe that political uncertainty will soon recede following the parliamentary election which will likely take place in March 2020, boding well for investment in the industrial sector.
We at maintain our forecast for the Sri Lankan rupee to average LKR186/USD in 2020, compared to an average of LKR178/USD in 2019, as renewed risk-off sentiment and narrowing real interest rate differentials with the US is likely to place depreciatory pressure on the unit. Furthermore, the country’s depleting foreign reserves will limit the Central Bank of Sri Lanka’s ability to support the rupee over the coming months. We also maintain our forecast for the rupee to average LKR193/USD in 2021 as the currency continues to face depreciatory pressures from high USD-dominated debt repayments and elevated inflation relative to the US.
We have revised down our Short-Term Political Risk Index score of Sri Lanka to 59.2 out of 100, from 61.7 previously. Gotabaya Rajapaksa’s victory at the presi-dential election on November 16 poses risks to policy continuity, as we expect to see both constitutional and non-constitutional reversals in policy direction. We believe that a snap general election is likely, which will see President Gotabaya Rajapaksa appointing his brother and also former President Mahinda Rajapaksa to be his prime minister.
Risks to our GDP forecast is weighted to the downside. Given that Rajapaksa brothers have allegedly committed human rights violations during the final days of the civil war, we see a risk of Sri Lanka being removed from the EU’s Generalised Scheme of Preferences (GSP+) which has been in place to promote trade relations. Sri Lanka was removed from the GSP+ in 2010 due to unsatisfactory implementation of UN human rights conventions and was reinstated in 2017 following the fall of the Rajapaksa family from Sri Lanka’s political scene.
Risks to our rupee forecast is to the downside. A continued spread of the 2019 novel coronavirus (2019-nCoV) to Sri Lanka could see tourist arrivals plunge just when the tourism sector is recovering from the Easter Sunday bombings on April 21 2019. This would weigh on Sri Lanka’s growth and prompt the CBSL to cut its policy rates, which would further compress real interest rates and undermine the attractiveness of Sri Lankan assets.
Learn how to effectively navigate the market research process to help guide your organization on the journey to success.Download eBook