Market Research Logo

Sri Lanka Country Risk Report Q2 2016

Sri Lanka Country Risk Report Q2 2016

Core Views

Given that the Sri Lankan economy is relatively small and open, theadministration’s balanced and pragmatic approach towards ethnicreconciliation on the island and foreign relations will be positive forgrowth over the medium- to long term. However, we believe thatthere will be several key challenges which will inhibit progress overthe near term.

The Central Bank of Sri Lanka (CBSL) is likely to keep its policy rateson hold over the coming months with a tightening bias in order tomanage the cost of refinancing for public debt, ensure price stability,and down play the risk of a balance of payment crisis.

Major Forecast Changes

Despite a likely recovery in the industrial sector over the comingquarters, we expect the Sri Lankan economy to face mountingheadwinds from a difficult global economic outlook, a high fiscaldeficit, and rising risks of a BoP crisis. As such, we have downgradedSri Lanka’s real GDP growth forecast for 2016 to 6.3%, from 6.7%previously, a stabilisation of growth in the economy (with growthestimated to come in at 6.2% in 2015).

We are bearish on the Sri Lankan rupee and expect the currencyto depreciate further to LKR152.00/USD by end-2016 (versus ourprevious forecast of LKR148.00/USD) due to persistent externalheadwinds, global economic uncertainties, rising inflationary pressure,and elevated levels of public indebtedness.

We are bearish on Sri Lanka’s fixed income market in 2016 asthe central bank could be forced to raise interest rates to preventa balance of payments crisis. Meanwhile, due to higher budgetexpenditures and a less optimistic revenue growth outlook, we nowforecast a budget deficit equivalent to 6.3% of GDP (up from ourprevious forecast of 5.8%), which will exert upside pressures onsovereign bond yields.


Executive Summary
Core Views
Major Forecast Changes
Key Risks
Chapter 1: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Growth To Remain Stable In 2016
Despite a likely recovery in the industrial sector over the coming quarters, we expect the Sri Lankan economy to face mounting
headwinds from a difficult global economic outlook, a high fiscal deficit, and rising risks of a BoP crisis.
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
Fiscal And Public Debt Outlook
Bond Market Under Fire As BoP, Fiscal Risks Mount
We are bearish on Sri Lanka's fixed income market in 2016 as the central bank could be forced to raise interest rates to prevent a
balance of payments crisis. Meanwhile, due to higher budget expenditures and a less optimistic revenue growth outlook, we now
forecast a budget deficit equivalent to 6.3% of GDP (up from our previous forecast of 5.8%), which will exert upside pressures on
sovereign bond yields.
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
TABLE: REVENUE MEASURES IN 2015
Structural Fiscal Position
Currency Forecast
LKR: Heading Weaker Amid Multiple Headwinds
We are bearish on the Sri Lankan rupee and expect the currency to depreciate further to LKR152.00/USD by end-2016 (versus our
previous forecast of LKR148.00/USD) due to persistent external headwinds, global economic uncertainties, rising inflationary pressure,
and elevated levels of public indebtedness.
TABLE: MAIN REVENUE AND EXPENDITURE
TABLE: BMI CURRENCY FORECAST
Outlook On External Position
TABLE: MAIN EXPORT AND IMPORT PARTNERS
TABLE: MAIN EXPORTS AND IMPORTS
TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
Monetary Policy
CBSL To Keep Rates On Hold Amid Mounting Fiscal Deficit
The Central Bank of Sri Lanka (CBSL) will likely keep its policy rates on hold over the coming months with a tightening bias in order to
manage the cost of refinancing for public debt, ensure price stability, and down play the risk of a balance of payment crisis.
Monetary Policy Framework
Chapter 2: 10-Year Forecast
The Sri Lankan Economy To 2025
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.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 3: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Moderate Approach Positive For Growth, But Challenges Remain
Given that the Sri Lankan economy is relatively small and open, the administration's balanced and pragmatic approach towards ethnic
reconciliation on the island and foreign relations will be positive for growth over the medium-to-long term. However, we believe that there
will be several key challenges which will inhibit progress over the near-term
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 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: OPERATIONAL RISK
Trade Procedures And Governance
TABLE: IMPORT & EXPORT DOCUMENTS
TABLE: TRADE PROCEDURES BREAKDOWN
TABLE: ASIA – TRADE PROCEDURES AND GOVERNANCE
Vulnerability To Crime
Chapter 5: BMI Global Macro Outlook
Global Macro Outlook
Downside Risks Gather Momentum
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
TABLE: MACROECONOMIC DATA & FORECASTS

Download our eBook: How to Succeed Using Market Research

Learn how to effectively navigate the market research process to help guide your organization on the journey to success.

Download eBook

Share this report