Downbeat economic forecasts to persist as COVID-19 takes toll

By Dilina Kulathunga  
Economists, analysts and researchers have joined the chorus in predicting mostly downbeat economic forecasts as the fallout from COVID-19 becomes far reaching with disrupted supply chains, absenteeism and closed factories and offices.

ICRA Lanka said the anemic growth in loans to the private sector will likely persist towards March after the poor performance in January, while the real economy could stagnate, despite the monetary and fiscal stimulus. 

“Weaker credit demand from the private sector is likely to persist, while the activities in the real economy may remain stagnant,” the rating agency, which is part of Moody’s Investors Service, said in its latest monthly economic update.

The Central Bank recently pared down its original growth projection for the economy from a range between 3.7 percent to 4.5 percent to a range of 3.5 percent to 4.0 percent for 2020. 
The rating agency expressed doubts as to whether the January rate cut could help pick up private credit growth—a key barometer of the economy’s health. 

“It is doubtful if the CBSL rate cut could help recover private credit demand in February, as global slowdown has had ripple effects on the local economy. Many central banks in the world were seen cutting key rates to combat the economic shocks coming from the coronavirus.” 

Monetary stimulus is less effective in containing pandemics, albeit it could provide some respite to help businesses to lower their financing costs at times of loss of business.  Also, it cannot restore supply chains which have been disrupted by the virus and bring people back to work. 

Both the government bond market and the equities market continued to bleed as nervous investors were seen finding refuge in safe havens. 

After an outflow of Rs.8.2 billion from the government securities market in the week ended March 4, Sri Lanka lost another Rs.5.9 billion last week, bringing total foreign outflows from the bond market in the last three weeks to Rs.25.5 billion.

Sri Lanka’s stock market rout continued throughout last week, with trading halted three times to avert a further fall.  

Sri Lankan stocks closed 2.89 percent or 144.82 points lower on Friday, bringing the All Share Price Index below its psychologically comfortable level of 5,000 to 4,874.73 points, an eight-year low. 

“Foreign outflow continued this week too from Sri Lanka’s capital market as they pulled out US$ 150 million from bonds and US$ 30 million from the stock market so far this year. 

Foreign bond holding has fallen by 53 percent from year-earlier and the current bond holding is only US$ 421 million,” said Charts.lk, a website which tracks stocks and bond movements in Sri Lanka daily.

However, regardless of COVID-19 fears, traffic at the Colombo port remains active with almost all terminals remaining occupied. The port handled over 1,700 import containers last Friday alone—an indication that there’s no shortage of supplies.  

According to analysts, once the pandemic passes, pent up demand in sectors such as leisure, travel and tourism, financial services could spur the economic growth, largely offsetting the virus impacts.