Macro Analysis /
Sri Lanka

Sri Lanka: Macro Roundup - September 2022

  • CBSL commences creditor discussions; IMF Board agreement a crucial factor

  • GDP: 2Q reflects impact from multiple headwinds; 2H 2022 to improve faster than our initial expectations

  • Mobility remains consistent on the back of continuous fuel supply

Asia Securities
30 September 2022
Published byAsia Securities

Economic activity continued to improve in September as fuel supply was managed through the QR system. However, the power cuts were increased during the month as a result of breakdowns in the key power plants. While we do not believe these have a significant impact on activity for the moment, any further extensions could dampen momentum in the coming months. A key highlight during the month was the Government and CB’s initial status update to private bond creditors, a crucial step towards the debt restructuring discussions. Fresh concerns of a domestic debt restructure emerged, given Sri Lanka’s requirement to bring down its debt pressure within a short period of time. We maintain our view that the govt will continue to focus on SoE restructuring including guaranteed debt, while the domestic debt restructuring will be a last resort. Against this backdrop, inflationary pressure continued, with headline inflation reaching 64.3% YoY in August. Notably on a MoM basis, price levels grew at a slower pace for the second consecutive month. We maintain our 2022 GDP expectations of a 7.5% - 9.0% YoY contraction. We emphasise that a strong reform plan and a stable political backdrop is key to mitigating the economic impact.

CBSL commences creditor discussions; IMF Board agreement a crucial factor

The first investor presentation to Sri Lanka’s private creditors took place during the month. While the Central Bank outlined the current status of IMF discussions, an expected timeline for the conclusion of restructuring by end 3Q 2023 comes in-line with our views and timeline presented in April 2022, in our report titled “Debt Restructuring Outcomes; The Road Ahead”. A key positive following the call was the Government and Central Bank’s clear timeline for the restructuring process combined with better than expected macro stability by 2024 given the restructuring process at play.

GDP: 2Q reflects impact from multiple headwinds; 2H 2022 to improve faster than our initial expectations

Data released by the Department of Census and Statistics showed that the Sri Lankan economy contracted 8.4% YoY in 2Q 2022, following the 1.6% YoY contraction recorded in 1Q 2022. For 1H 2022, the economy has contracted 4.8% YoY. This came in better than our expectation of a double-digit contraction for the quarter given the multiple headwinds faced. The two quarters of consecutive contraction indicates that Sri Lanka is officially in a recession. We expect this to reflect a V-shaped recovery, with 4Q 2022 looking to improve faster than expected barring any fuel and electricity disruptions.

Mobility remains consistent on the back of continuous fuel supply

Mobility levels across sub-groups remained consistent during the month with footfall around workplaces improving significantly predominantly due to continuous fuel supply. Our near-term concerns denting mobility are, 1) payment delays in procuring fuel, leading to a supply overhaul, and 2) extended power cuts which will likely compel offices to switch back to remote-work impacting the ongoing recovery momentum in economic activities following the social unrest that was seen a few months ago.