Macro Analysis /
Sri Lanka

Sri Lanka: Covid-19 impact on key macro indicators

  • We expect a currency depreciation of close to 14.0%

  • 1-yr bond yields to trend up in 2H 2020f on higher government borrowing

  • Fiscal deficit close to 10.0% of GDP

Sri Lanka: Covid-19 impact on key macro indicators
Asia Securities
16 April 2020
Published byAsia Securities

Following on from our GDP analysis, we focus on the impact of COVID-19 on other key macro variables. We look at a similar scenario-based angle, with the following probabilities assigned to each scenario

  • Scenario 1 (Base case) 60- 75% probability
  • Scenario 2 (Best case) 5-10% probability
  • Scenario 3 (Worst case) 10-20% probability

We analsyse the below indicators:

  • USD/LKR
  • 1 yr Government bond yields
  • Reserves (months of imports)
  • Fiscal deficit of GDP)
  • Trade deficit of GDP)
  • Current account deficit of GDP)
  • Headline inflation (CCPI)
  • Debt/GDP

Our analysis indicates that the key impact areas are: 

  1. High fiscal deficit with low government revenue, despite curbing expenditure.
  2. Weakening LKR/USD rate owing to large outflows, soft inflows and a strengthening USD.
  3. The current deficit as a result of significantly low tourism revenue and remittances. 
  4. Higher debt/GDP on higher funding requirement.

Although we see a worsening trade balance, the temporary import restrictions (we expect these to last 3-5 months in our base case) and low global oil prices (December futures at ~USD 38.00 bbl) to help contain the trade deficit to some extent this year, amidst significantly low export demand.

On the reserves front, while we expect some support from foreign funding (especially IMF funding and new multilateral/ bilateral loans), our base case forecasts lead to reserves weakening to 3.2-3.8 months of imports owing to slow forex inflows from remittances and tourism.

On the positive, we expect inflation to taper down in 2020 as a result of lower demand-side pressure. We factor in periods of high food inflation but, expect the overall impact to result in low inflation for 2020.