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Sri Lanka: Macro SL - CDB loan a boost for reserves; Vaccine rollout a positive

  • Activity continues momentum in April, prolonged localised lockdowns look to dampen momentum in the near-term
  • Currency regains ground by month end, following sharp depreciation
  • Reserves down to USD 4.1bn, USD 500mn loan finalisation to help boost position

The Sinhala and Tamil New Year season saw higher mobility in the country, with mobility data indicating continued momentum in economic activity. However, this was followed by a surge in positive COVID-19 cases, with the current daily total surpassing 1,000 new cases per day. In our view, a faster vaccination process combined with an expansion of ICU bed capacity will be crucial to ensure easing of lockdowns. At this point, we factor in minimal economic impact, and maintain our forecasts for 2021. Meanwhile, the finalisation of the USD 500mn loan facility with China Development Bank which followed the USD 1.5bn swap agreement with China was a much-needed boost to investor sentiment and overall reserves. However, lower USD liquidity continued to add pressure on the currency in April, with the spot rate recording a 0.4% MoM depreciation, reaching USD/LKR 196.76 (as of 29th April), while the monthly average was USD/LKR 199.75. Looking ahead, we forecast the currency at USD/LKR 203.00 – 205.00 for 2021, depreciating by 8.9% YoY. We expect overall GDP growth to reach 5.2% YoY in 2021, with economic activity picking up following the roll-out of the vaccine.

Activity continues momentum in April, prolonged localised lockdowns look to dampen momentum in the near-term; we maintain forecasts

Economic activity continued its upward trend for the fourth consecutive month in April, as the festive season activity boosted momentum. As such, footfall in retail and grocery premises improved, while residential stays continued to decline. Meanwhile, PMI data reached a 9-month high, reaching 67.0 points in March, up 7.6 index points from February, while business confidence also reached triple digit levels in February. However, the post-Sinhalese and Tamil New Year season saw a sharp rise in positive COVID-19 cases locally, as signs of the UK variant of the virus was detected in Sri Lanka. This has resulted in an increase in testing to 12,000 – 15,000 tests per day compared with ~5,000/day previously, which is a key positive. In our view, a faster vaccination drive combined with higher ICU bed capacity will be crucial to deter further lockdowns. We perceive the commencement of the second dose rollout to frontline workers a positive, and maintain our forecasts.

Currency regains ground by month end, following sharp depreciation

The monthly average USD/LKR continued to face pressure in April but recovered by month end. As such, the spot rate depreciated 0.1% MoM (2.1% deprecation MoM in March) on low USD liquidity. The currency ended the month at an average USD/LKR 197.29 (with the currency at USD/LKR 199.75 on the 29th), recovering from USD/LKR 200.02 recorded mid-April. The spot USD/LKR has depreciated ~5.1% YTD and looks to continue this trend amidst low inflows.

Reserves down to USD 4.1bn, USD 500mn loan finalisation to help boost position

Sri Lanka’s official reserves for March declined by USD 525mn, to end the month at USD 4.1bn, down 11.5% MoM (-46.1% YoY). According to Central Bank data, USD 910mn repayments (only foreign currency loans, securities, and deposits) were due during the month. As of end March, official reserves cover ~3.0 months of imports, down from 3.4 months in February. Looking ahead, we expect the USD 500mn loan agreement finalised in April to help boost reserves in the near-term. We perceive this a key positive amidst low reserves recorded in March.


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