First Capital moves needle a bit as economic reopening delayed on prolonged lockdowns

• Forecasts economy to contract 1.4%, deviating previous growth forecast of 2.4%
• Estimates year-end reserves at US $ 5.5bn; cuts private credit growth forecast to negative 1.5% 

Sri Lanka’s economy is expected to contract by an estimated 1.4 percent in 2020, the first time since the economy shrank in 2001, while First Capital Research recalibrated its earlier assessment to a dourer scenario, as the lockdowns prolonged and the full reopening of the economy was delayed by at least a month from the earlier expectations.

Early in April, the research house projected the economy to claw back from at least the third quarter and to register a 2.4 percent growth for the full year. 

But the extended lockdowns had soured that outlook and prompted the research team to weigh on their next scenario, which pointed to a contraction in the economy.

“Some countries like Sri Lanka and Myanmar have gone beyond a lockdown action into a complete shutdown by means of curfew, with only a few selected essential services working at an early stage of the spread. 

This has proved to be successful so far. But we are yet to see the end of it,” the research firm stated in early April. 

However, as the lockdowns continued beyond April, the analysts changed their tone and sounded bit more negative.

The second scenario assumed “sporadic new cases” of COVID-19 time to time, prompting the government to close down areas and continue curfew for extended periods, with new cases reducing significantly by early June. This now looks more realistic. 

“Massive surge in positive patients requires revisiting outlook,” First Capital said after the new infected cluster was found in late April, at a navy camp, when things were poised for a gradual reopening of the economy. 

The analysts therefore termed the lockdowns as a failed strategy to combat the virus, purely looking from the economic standpoint.  

Meanwhile, as the economy is set to shrink, First Capital further revised down its private growth target to a negative 1.5 percent for 2020, from 6.0 percent, which was revised last month from what appeared to have the potential to reach 15 percent at the beginning of the year for the full year. 

While the researchers reiterated that the decline in the fuel import bill would, for the most part, offset the decline in foreign earnings from apparel, tourism and remittances, they said that it would have the potential to, “steeply improve the current account deficit for 2020”.  “However, lack of FDI and limited borrowing options may result in a substantial BOP deficit,” First Capital said, estimating that the year-end foreign reserves at US $ 5.5 billion. 
 

Although lesser than US $ 7.2 billion levels at present, this should comfort everyone as First Capital had arrived at this figure after taking into account all the foreign debt repayments and other liabilities for the year and in the middle of a pandemic.