The Sri Lankan economy grew by 2.7% YoY in 3Q 2019, coming in 0.5pp above our forecast of 2.2% for the quarter. The continued negative impact following the Easter Sunday attacks was evident in the services sector, while the industries sector picked up owing to improved growth momentum in manufacturing and construction. Meanwhile, the agri sector showed signs of the impact from adverse weather conditions experienced in most part of the island. Looking ahead, we expect the economy to recover from the slowdown in 2H 2019, particularly in the services sector owing to 1) the 100bps policy rate cut implemented by the Central Bank so far 2) improved sentiment following the Presidential elections, 3) stimulus package introduced in November and 4) salary hike expected in January 2020. We continue to expect a consumer-led growth recovery in 2020 owing to a conducive growth environment combined with improved investor and consumer sentiment. As such, we forecast 2020 GDP growth of 4.0% YoY, improving to 4.4% YoY in 2021 and 5.0% YoY in 2022.
Growth comes in above our forecast; industries sector exceeds our expectations
According to data released by the Department of Census and Statistics, Sri Lanka’s 3Q 2019 GDP growth came in at +2.7% YoY, above our forecast of 2.2% YoY owing to higher than anticipated activity in the industry sector. We note that 2Q 2019 growth was revised downwards from 1.6% YoY to 1.5% YoY during the quarter. Overall, growth accelerated since the second quarter, with all three sectors recording growth ranging from 0.4% YoY – 3.3% YoY. For the 9M 2019 overall growth is at 2.6% YoY.
The continued adverse impact of the Easter Sunday attacks was evident in the services sector, which recorded a growth of 2.8% YoY (compared with the 2-year average of 3.9%). However, we perceive the sequential improvement from 2Q 2019 (of 1.6% YoY, the lowest second quarter growth since 2010), as a positive. We also expect this momentum to pick up, mainly through financial services given the loose monetary policy stance taken during the quarter by the Central Bank.
The highest negative impact from the attacks within the services sector was seen in the “accommodation and F&B activities” which recorded a -7.5% YoY growth (-9.9% YoY in 2Q 2019, +5.6% YoY in 3Q 2018). This was mainly due to the negative impact on the tourism sector, which according to the Central Bank was a loss of USD 900mn.
We note that during the quarter under review, inflation measured by the CCPI index decelerated, to average 3.9% YoY compared with 5.2% YoY in 3Q 2018. Given that inflation has remained above the growth rate in 3Q CY19, the de-growth environment, which was evident in the past quarters, remain.