China swap will boost SL’s near-term reserves: StanChart

• Revises up SL’s foreign reserves forecast to US $ 3.4-4.7bn by end-2021
• Raises GDP growth forecast to 4.5%, from earlier 3.8%

In an about-turn, Standard Chartered Bank (StanChart) upgraded its outlook on the Sri Lankan economy, after the country received the approval from China’s Central Bank for a US $ 1.5 billion equivalent currency swap arrangement. 

According to the research arm of the Asia-tilted lender, the swap will alleviate the near-term external financing concerns of the country, as it will boost the short-term reserves and help meet the external financing needs in 2021. 

“We think the arrangement, along with the possible new general allocation of Special Drawing Rights (SDRs), will help boost reserves near-term and meet 2021 external financing needs,” said Saurav Anand and Shankar Narayanaswamy, the two authors to their new economic alert released post the swap announcement. 

This is an about-face from their less than four weeks ago view on the Sri Lankan economy, where they made a strong case for the country to seek the International Monetary Fund support in a report titled ‘Sri Lanka - Coming down to the wire’. 

In that report too, StanChart made reference to the US $ 1.5 billion swap line, where they raised concerns about the delay in approving the facility by the People’s Bank of China. 
“We revise our end-2021 FX reserves forecast based on the new announcement. We now see FX reserves in the range of US $ 3.4-4.7 billion by end-2021 (versus our earlier forecast of US $ 3-4 billion), depending on the extent of capital flows in the rest of the year,” the new report said. 

“We raise our 2021 GDP growth forecast to 4.5 percent (from 3.8 percent), given better than expected high-frequency data,” it added. 

The change in forecast appears to be due to Sri Lanka’s better than expected growth reported in the fourth quarter of 2020, which StanChart thinks will transcend into the first quarter of 2021. 

Global economies are already looking past the pandemic, except for some parts of Western Europe and the United States, where the double mask wearing new US President appears to be making all the wrong moves, such as raising taxes.  

“We see growth closer to 4.5 percent in our medium-to-long-term steady-state analysis. This is slightly above the average annual growth rate in the five years before the pandemic but below 2010 - 14 levels,” StanChart said, adding that the debt overhang could however limit the fiscal space for higher public investments.

Meanwhile, StanChart expects the increased trade deficit from higher oil prices to be offset by higher remittances. However, lower than expected tourism receipts is considered as a key risk to their view on the economy.     

“We assume higher tourism revenue of US $ 1.4 billion in 2021 (compared to US $ 1 billion in 2020), with a recovery expected in H2-2021,” the report noted.