Economic activity remained in positive territory in January following the highs recorded in December. This momentum was reflected in primary data indicators like the PMI and BCI, with a continued positive momentum. While the Omicron variant remains a concern, we do not factor in any restrictions in the near term. Meanwhile inflationary concerns continued going into 2022, with headline inflation reaching 12.1% YoY in December as a result of elevated food inflation. With reserves at USD 3.1bn prior to the USD 500mn ISB repayment during the month, we see heightened pressure on the government to prioritise essential imports given the urgent need for higher fuel import volumes. We forecast overall growth to reach 3.8% - 4.0% YoY in 2022, with economic activity picking up following the roll-out of the vaccine, booster shots and easing of restrictions. We expect a sharp correction in the currency owing to the significant variance between official and parallel market rates and forecast the USD/LKR at 245.00 – 250.00 by year end. We factor in 1) low Dollar liquidity, 2) a potential debt restructuring and 3) high inflationary impact as key concerns for 2022.
Government announces a LKR 229bn fiscal stimulus package; fiscal deficit and inflation to face further pressure
At the start of the month, the government announced a LKR 229bn (approx. 1.4% of GDP) relief package targeted at the public sector. This was mainly to address the rising cost of essential food and medical items recorded in recent months. The measures also include guaranteed purchase prices for paddy if harvests are lower than 50% as results of the chemical fertilizer shortage materialized during the Maha season. These measures come as food inflation measured by the CCPI reached 22.1% YoY in December.
Yields on Government bonds move up following 50bps rate hike; 3M yields pick up
Government bond yields picked up during the month following the 50bps hike in key policy rates. The 1-year yields reached 8.44% by month end, compared with a high of 8.33% in December. Notably, 3-month yields remained higher than the 1-year, indicating an inverted yield curve. 3-month yields are currnetly at 8.49%. Looking ahead, given the lack of forex inflows amidst higher domestic refinancing, we expect this trend to continue. The latest auctions reflect the Central Bank’s preference for short tenure debt, with the 3-month bond issuances making up for most of the acceptance volume.
Mobility remains in positive territory albeit tapering down from December
January recorded a marginal easing of mobility since recording a strong momentum in footfall in December due to festive season. Despite concerns of the Omicron variant, movement into Retail and Grocery stores remained in positive territory. A key improvement was witnessed in mobility to workplaces as many organisations like government offices reopened and returned to in-person work during the month. This momentum was reflected in the Purchasing Manager Index which sustained its momentum in December 2021. Looking ahead while we do not factor in restrictions hindering economic activity, we expect mobility into spaces like Retail stores to taper down marginally owing to rising COVID-19 cases. However, we do not expect a significant impact on overall economic momentum.