Macro Analysis /
Sri Lanka

Sri Lanka Monthly Macro Round-Up

    Lakshini Fernando
    Asia Securities
    6 June 2019
    Published by

    A month on since entering a state of emergency, security remains tight preventing the likelihood of a second wave of attacks. Expedited diplomatic negotiations has resulted in six countries including India, China and Germany announcing reversals to adverse travel warnings. While this is positive, we still expect tourism to take a period of 15-18 months to reach pre-attack level activity. 

    Meanwhile, the Central Bank of Sri Lanka (CBSL) is looking to raise a further US$2.0bn to make up for an expected shortfall on reserves due to low tourism earnings and low foreign investments. Options include a US$1.5bn ISB issuance as well as policy-based guarantee via the World Bank. To address low credit growth and overall lackluster GDP, the CBSL introduced a policy rate cut of 50bps, the effects of which will be felt in H2 CY 19e, in our view. This was in line with our estimates and as such, we continue to expect GDP growth of 2.5% yoy in CY 19e on consumer spending slowdown and LKR to depreciate 4.9% to end at LKR185.00 by CY 19e on current account weakness.

    CBSL cut rates by 50bps to spur credit growth; in line with our expectations. At the third MPR on 31 May, both the SLFR and SDFR rates were cut by 50bps, in line with our expectations. We note that this is the first policy rate cut to be announced since April 2018, where SDFR and SLFR were cut by 25bps. As such, the new SDFR stands at 7.50%, and SLFR at 8.50%. Our key takeaways are: 1) rate cut in anticipation of significant economic slowdown, impact to materialise in H2 CY 19e, 2) credit growth hits low points on elevated market lending rates, and 3) inflation expected to remain stable on slowing aggregate demand. While we are positive on the CBSL’s move of loosening monetary policy, we maintain our forecasts as it was already factored in.

    Six countries including India, China, Switzerland, Germany, and Sweden lift adverse travel warnings with the US, Australia and the UK expected to follow soon. With the government expediting discount offers and promotional campaigns, tourism remains on track to reach pre-attack levels in 15-18 months, in our view. We continue to expect arrivals of 1.7mn for 2019 to generate tourism receipts of US$3.2bn.

    Largest net outflows in FX reserves tied to external debt financing payments. Sri Lanka had a debt bill of US$5.9bn due in 2019. However, based on our recent discussion with the CBSL, we can confirm that a majority of these payments have already been made. However, accounting for net decline in tourism earnings, the CBSL expects a US$2.0bn shortfall from its previous US$8.2bn reserves target for end-2019. To make up for the short fall, the CBSL hopes to raise an additional US$2.0bn in funds. The Cabinet has already approved an ISB issuance of US$1.5bn. Additionally, Sri Lanka has access to a policy-based guarantee via the World Bank which allows it to raise funds within global capital markets using the World Bank credit rating.