Asia Securities forecasts dour economic effects from COVID-19; but expects benign inflation through 2020

The research team of Asia Securities has forecast that the COVID-19 pandemic’s toll on Sri Lanka’s economy to be dour through 2020 with many of its macroeconomic forecasts pointing to some daunting numbers.

The research team in their latest report parsed the developing situation and the numbers in three scenarios— the best case, worst case and the base case—of which even the base case was more conservative than some of the conservative estimates thus far.   As the most probable scenario, Asia Securities forecast a recession in Sri Lanka with the economy contracting by 4.0 percent to 5.0 percent in 2020. 

“However, the impact could change depending on how the outbreak evolves as there are several unknowns affecting forecasts at this point in time,” the report said. 

This is by far the worst forecast on Sri Lanka’s economic growth as many other forecasts fell between 1.5 percent to 3.0 percent contraction for 2020 despite the virus taking toll on most sectors of the economy. 

This is with the hope that Sri Lanka would return to semi-normalcy from May followed by gradual returning to business-as-usual thereafter albeit with some structural changes in the economy.

Meanwhile, Asia Securities forecast Sri Lanka’s fiscal deficit to expand to between 8.9 percent to 10.7 percent of GDP, trade deficit to expand to between 9.8 percent to 10.9 percent of GDP, a current account deficit of 5.3 percent to 6.8 percent of GDP with reserves sinking to between 3.2 to 3.8 months of import, all under their base case scenario. According to their base case, the rupee will shed its value against the dollar to between Rs.205 to Rs.212 by the end of 2020 with their worst-case scenario predicting a cross currency exchange rate of between Rs.215 to Rs.223. 

Contrary to others, Asia Securities expects the current account balance to come under pressure from low tourism and remittance income. 

Both First Capital Research and Softlogic Capital were of the view that import restrictions and low oil prices would bode well with the country’s external current account given Sri Lanka’s net importer status. 

A similar pattern was seen during the global recessions in 2001 and 2008, First Capital said backing its claim. 
However, Asia Securities is of the view that although expansion of the trade deficit could be contained to some extent due to similar reasons cited by others, the sharp fall in tourism earnings and remittance income could expand the current account deficit.

If there is a single sector that the pandemic had hit hardest, it is the travel and tourism sector. It is expected that cross border travel could take many months to return to pre-crisis levels.

However, the discovery of a vaccine or a fast producing antibody against the virus could rapidly alter the situation and the global economy could rebound faster than anticipated. 

The Asia Securities research team expects Sri Lanka’s tourism sector to pick up gradually from 4Q20 and remittance income to pick up from 3Q20 under its base case. 

Meanwhile, the inflation expectations, the only such macro-economic indicator with less worrying signs by Asia Securities, is forecast at 4.2 percent to 5.0 percent through 2020. 

Although there will be an increase in food inflation during April and May due to disruptions in to supply chains, the researchers expect that to ease thereafter. Low non-food inflation is also expected to drive down inflation until 3Q20. 

Asia Securities expects Sri Lanka’s debt-to-GDP to rise to between 85 to 93 percent due to higher funding requirements and rules out any international sovereign bond issuances but puts dollar purchases by the Central Bank at US$ 800 million to US$ 1.0 billion.