Macro Analysis /
Sri Lanka

Sri Lanka: Macro Outlook 2020 – Peddle to the floor; caution at the curb

    Asia Securities
    13 December 2019
    Published byAsia Securities

    Sri Lanka goes into 2020 with a change of guard following Gotabaya Rajapaksa’s convincing win at the Presidential elections. With Mahinda Rajapaksa as prime minister, the Rajapaksa brothers bring in improved investor and consumer sentiment and higher economic growth prospects for the new decade through a higher probability of a stronger political mandate.

    Some of the main events in Sri Lanka in 2020 will be the parliamentary elections (likely in April), 2020 budget (we expect this by April/May) and the possibility of provincial elections. In our view, the 2020 interim budget will be a key indication on the new government’s stance on propelling overall growth which has been muted over the past 3 years, averaging 3.6%. 

    The Rajapaksa government has already announced sweeping tax cuts to kick start the economy through higher consumer spending. In addition to the tax cuts, Rajapaksa has also offered more subsidies for farmers, and plans to renegotiate key deals like the Singapore-Sri Lanka FTA and actively support the LKR to ease debt repayment pressure. 

    We expect a looser fiscal policy in 2020 owing to the measures outlined by President Rajapaksa ahead of the elections, combined with a salary hike that will take place in Jan 2020 and already implemented revision to pensions. 

    Amidst this, while we expect monetary policy to loosen by 25bps in 1Q 2020 in order to further stimulate growth, we don’t expect rates to change for the remainder of the year. We forecast credit growth to at 15.0%-18.0% owing to a conducive investment environment in 2020.

    Full contents

    • GDP Growth to Reach 4.0% In 2020
    • A Low Interest Rate Environment will be Favorable for Investments 
    • Paddy Harvests Above 5-Yr Average; Other Crops to Recover in 2H 2020
    • Reservoir Levels have Improved, Supporting the Agri Sector
    • Leading Indicators Support Strong Growth Momentum for 2020
    • Fiscal Deficit to Widen on Tax Cuts
    • Demand Pull to Drive up Headline Inflation
    • Reserves to Dip on Higher Outflows
    • Reserves Averaged USD 7.5bn till November while the Currency was at USD/LKR 181.30
    • Bond Yields to Dip on Loose Monetary Policy
    • USD Bond Curve has Factored in the Impact of Fiscal Risk
    • The Spread Between USD and LKR Yields have Narrowed 
    • USD/LKR at 189.00 Depreciating 4.4% YoY
    • Trade Deficit to Widen on Higher Import Demand
    • Higher Debt Funding on The Cards