Possible recession in eurozone likely to worsen SL’s forex woes

• Fitch Ratings says eurozone recession could negatively affect SL’s export and tourism sectors
• Says drop in Russian gas supply to Europe indicates strong possibility of recession in eurozone
• “Any shock to external demand in Sri Lanka is likely to exacerbate pressure stemming from its already acute shortage of foreign exchange”- Fitch Ratings
• Forecasts prospects of a drop-off in outbound European tourism, if Europe falls into a recession

Fitch Ratings this week warned that Sri Lanka’s export and tourism sectors are likely to take a hit from the possible recession in the eurozone and it could further exacerbate the country’s actuate foreign exchange shortage.

“A recession in Europe, which is becoming more likely, would increase external strains and growth challenges for some vulnerable non-European sovereigns, including several in north Africa and south Asia that have high export exposure to the EU,” Fitch Ratings said on Wednesday.

It highlighted that the recent sharp drop in gas export volume from Russia to Europe has raised the likelihood of gas rationing, making a technical recession in the eurozone an increasing possibility.

For the first five month of the year, the European Union (EU) accounted for over a quarter of Sri Lanka’s merchandise export earnings. In the period, Sri Lanka’s merchandise exports to the EU (excluding the United Kingdom) grew by 4.84 percent year-on-year to US $ 1.19 billion, as the second largest export region for the country behind the United States.

“Exports to the EU are also substantial for a number of South Asian markets, including Bangladesh, at 38 percent, Pakistan, 26 percent and Sri Lanka, 24 percent. Any shock to external demand in Sri Lanka is likely to exacerbate the pressure stemming from its already acute shortage of foreign exchange and the supply-chain disruption confronting exporters,” Fitch Ratings cautioned.

In addition, recession fears are also looming in the United Kingdom, which remains Sri Lanka’s second largest single export destination.

Meanwhile, the global rating agency weighed in on prospects of a drop-off in outbound European tourism, if Europe falls into a recession, which could likely to impact Sri Lanka’s struggling 
tourism industry.

“This could hold back tourism recoveries after the COVID-19 pandemic in markets that have traditionally seen a large share of European arrivals. Europeans have also traditionally formed a large share of arrivals in Asian EMs, including the Maldives and Sri Lanka and accounted for close to 40 percent of arrivals in Thailand in 5M22,” it added.

Apart from the United Kingdom, the European countries such as Germany and France are among top 10 source markets for Sri Lanka tourism.  For the first 10 days of July, the United Kingdom ranked as the largest tourist traffic generator for the country, followed by India and France.