Macro Analysis /
Sri Lanka

Sri Lanka macro roundup: September 2019

    Lakshini Fernando
    Asia Securities
    30 September 2019
    Published by

    IMF and CB get active; election fever heats up

    The second quarter GDP growth data was released during the month, where overall growth came in at 1.6% YoY, 0.1pp above our forecast. The services sector was impacted the most following the Easter Sunday attacks. Amidst this slow growth environment, the Central Bank (CB) issued a directive to all banks by imposing lending caps, of at least 200bps lower than the current rate. Meanwhile, the total liquidity shortage averaged at LKR 39bn during the month, compared with a surplus of LKR 1.7bn in August. In our view, the shortage was mainly on the back of higher demand from banks during the month. The LKR witnessed some pressure, recording a 1.1% MoM depreciation on the back of low inflows. A faster than anticipated depreciation of the currency during the month, and low foreign inflows forecast for the rest of 2019 lead us to our currency forecast revision from USD/LKR 179.00 to USD/LKR 181.00. However, with import demand continuing to grow at a slow pace, and slow credit growth momentum, we expect less near-term pressure on the LKR. Meanwhile, the UNP nominated Mr. Premadasa as their presidential candidate during the month, bringing an end to months of speculation. Looking ahead, we expect the presidential nominations to help ease political uncertainty to some extent. However, we continue to expect policy uncertainty to remain heightened. We forecast 2019 GDP growth of 2.5% YoY (below the Central Bank’s forecast of 2.7%). We forecast growth of 3.8% YoY in 2020. We continue to expect reserves to come in at USD 8.0bn for 2019, covering ~4.8 months of imports.

    2Q GDP comes broadly in-line with our forecast; services show impact of 4/21

    Sri Lanka’s 2Q 2019 GDP growth came in at 1.6% YoY, marginally above our forecast of 1.5% YoY. Overall, growth decelerated from the 3.7% YoY recorded in 1Q 2019, with all three sectors recording growth ranging from 1.0% YoY - 1.6% YoY. For 1H 2019 overall growth came in at 2.6% YoY. The negative impact of the Easter Sunday attacks was evident in the services sector, which recorded the lowest second-quarter growth of 1.6% since 2010. The highest impact within the services sector was seen in the “accommodation and F&B activities” which recorded a decline of 9.9% YoY.

    IMF passes staff-level agreement despite Government shortfalls

    The sixth review of the 4-year IMF Extended Fund Facility (EFF) concluded with a staff-level agreement in place despite the Government falling short of the end June fiscal target, in-line with our expectations. Following this agreement, if approved by the IMF board, we expect the next tranche to be disbursed by November. According to the IMF, the June targets were missed by a large margin owing to a sharp fall in revenue collections and high government spending as a result of repaying arrears in capital projects, especially construction-related projects.

    CB imposes lending caps for banks to stimulate growth

    The CB announced lending caps on all LKR-denominated loans offered by Licensed Commercial Banks (LCBs) in late September. Accordingly, LCBs are directed to reduce lending rates on all LKR loans and advances by at least 200bps by 15th October compared to the rates applicable as of 30th April 2019. In addition, banks are required to reduce the average weighted prime lending rates (AWPR) by 150bps as of 01st November and by 250bps by 27th December, using the rates as of 26th April 2019 as a baseline.