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Sri Lanka Country Risk Report Q2 2015

Sri Lanka Country Risk Report Q2 2015

Core Views

Maithripala Sirisena’s victory in Sri Lanka’s seventh presidentialelection held on January 8 2015, which ended Mahinda Rajapaksa’sreign dating back to November 2005,signals a major change in thecountry’s political reform. On the international front, this paves theway for a rapprochement with the West, improving relations withIndia and marginally reducing reliance on China over the comingyears.

Sri Lanka’s economy will continue powering ahead over the comingyears on the back of sustained strong performance in the industrialand services sectors (comprising 58.0% and 31.5% of GDP, respectively).

We maintained our real GDP growth forecast of 7.5%in 2015.

The Central Bank of Sri Lanka (CBSL) will keep its standing lendingfacility rate and standing deposit facility rate unchanged at 8.00% and6.50%, respectively over the course of 2015, as inflation will remainrelatively subdued and the strong economic growth momentum willlikely continue over the coming quarters. That said, should creditgrowth to the private sector decelerate further, the central bank couldease interest rates.

We remain neutral on the Sri Lankan rupee in the near-term, expectingthe unit to remain fairly stable against the US dollar overthe coming months, as the CBSL seeks currency stability throughmarket intervention. We believe that the rupee will depreciate slightlyin 2015 and 2016, as the central bank accumulates reserves tomaintain a competitive currency and reduce external vulnerability.

We forecast the currency to end 2015 at LKR135.00/USD followedby LKR138.00/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 forecast the country’s fiscal deficit as ashare of GDP to come in at 5.3% in 2015, versus 5.0% previously,narrowing modestly from 5.9% in 2013. We also expect the country’spublic debt-to-GDP ratio to continue on its long-term downtrend,reaching 76.3% in 2015 from 78.1% in 2013, due to the country’srapid economic growth and improvements in its fiscal deficit.

Major Forecast Changes

We have downgraded Sri Lanka rupee forecast to end LKR135.00/USD in 2015 and LKR138.00/USD in 2016 from LKR132.00/USDand LKR133.00/USD previously, on the back of general weaknessamong emerging market currencies as well as the central bank’saim to accumulate reserves.

We have downgraded our forecasts for fiscal deficit as a share ofGDP to 5.3% in 2015, versus 5.0% previously, as the governmentproposed a rather populist interim budget in late January, fulfilling theproposals outlined by President Maithripala Sirisena’s presidentialelection manifesto.


Executive Summary
Core Views
Major Forecast Changes
Key Risks To Outlook
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Sirisena's Victory To Usher In Political Change
Maithripala Sirisena's victory in Sri Lanka's recent presidential election, which ended Mahinda Rajapaksa 's reign dating back to
November 2005, will usher in political change in Sri Lanka. Domestically, we expect Sirisena to fulfil his key campaign promises such
as the abolishment of the executive presidential system with unlimited power and a shift to a parliamentary system, as he will achieve
the two-thirds majority required to amend the constitution. On the foreign policy front, relations with the West and India should improve,
while reliance on China for aid and investment should marginally decrease.
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 over
the coming decade, and greater economic reforms. 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 Activity
Positive GDP Print Reaffirms Our Optimistic Growth Outlook
A sustained expansion in the industrial and services sectors will continue to drive strong economic growth in Sri Lanka over the coming
years. We are maintaining our real GDP growth forecast of 7.7% in 2014 and 7.5% in 2015. That said, a significant slowdown in the
Chinese economy could lead to a decline in investment and tourism, undermining growth.
TABLe: Economic Activit y
Fiscal Policy
Interim Budget Reaffirms Slow Fiscal Consolidation
Sri Lanka's interim 2015 budget has a greater focus on increasing welfare spending and ad-hoc revenue enhancing measures, as the
government led by President Maithripala Sirisena fulfils his campaign promises. As such, we are now less optimistic about the country's
fiscal consolidation, and are forecasting the budget deficit as a share of GDP to come in at 5.3% in 2015 (versus 5.0% previously).
TABLE: Fiscal Polic y
Monetary Policy
Long Hold Ahead Amid 'Goldilocks' Economy
The Central Bank of Sri Lanka (CBSL) will keep its standing lending facility rate and standing deposit facility rate at 8.00% and 6.50%,
respectively, through 2015 as the economy remains in a 'goldilocks' period of low inflation and robust growth. That said, should credit
growth to the private sector decelerate further, the central bank could ease interest rates.
TABLE: Monetar y Polic y
Exchange Rate Policy
LKR To Depreciate Further
The Sri Lankan rupee enjoyed relative stability in 2014, and we remain neutral on the unit over the coming months as the central bank
seeks currency stability through market intervention. The combination of general weakness among emerging market currencies and
depreciatory pressures from reserve accumulation by the central bank will see the rupee depreciate to LKR135.00/USD in 2015. That
said, the weakness will not be excessive as increased foreign capital inflows will lend some support.
TABLE: BMI CURRENCY FORECAST
TABLE: Current Account
Chapter 3: 10-Year Forecast
The Sri Lankan Economy To 2024
A Constructive Long-Term Outlook
Sri Lanka's economy has performed solidly following the end of a quarter-century of civil war in 2009, and we believe the island is well
placed to sustain this momentum over the coming decade. While there are lessons to be learnt from its recent bout of overheating,
the reintegration of resources (particularly labour) into the formal economy and a deepening of financial markets bode well for faster
economic expansion over the medium term. We are confident that real GDP growth can average a healthy annual clip of 6.6% over the
coming 10 years.
TABLE: Long -Term Macroeconomic Forecasts
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: Operational Risk
Availability Of Labour
TABLE: Asia - Availabilit y Of Labour Risk
TABLE: Labour Force Emplo yment By Sector ('000)
TABLE: Table Of Top 10 Source Countries For Migrant Workers
Crime Risk
TABLE: Asia - Crime
TABLE: Crime Statistics
Chapter 5: Key Sectors
Pharmaceuticals & Healthcare
TABLE: Pharmaceutical Sales , Historical Data And Forecasts
TABLE: Healthcare Expenditure Trends , Historical Data And Forecasts
TABLE: Government Healthcare Expenditure Trends , Historical Data And Forecasts
TABLE: Private Healthcare Expenditure Trends , Historical Data And Forecasts
Other Key Sectors
Table : Telecoms Sector Key Indicators
Table : Food and Drink Sector Key Indicators
Chapter 6: BMI Global Assumptions
Global Outlook
Weaker EMs To Weigh On Growth
Table : Global Assumptions
Table : Developed States , Real GDP Growt H, %
Table : BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
Table : Emerging Markets , Real GDP Growth , %

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