HSBC paints gloomy economic outlook for Sri Lanka

• Cuts growth outlook to 2.7%, slowest since 2001 citing policy and political issues
• Says recovery unlikely until key elections held to end current political impasse
• Notes that recent concerns over national security likely to be a further drag on growth recovery

Painting a rather bleak outlook, HSBC Global Research this week stated that any recovery in the Sri Lankan economy is unlikely until the much anticipated Presidential and Parliamentary polls are held to end the current policy and political impasse.  

Extreme weather patterns and political crisis over the last three years have resulted in the economic growth moderating to 3.2 percent in 2018 from 5.0 percent in 2015. 
“To begin with, we were not expecting a sharp acceleration in growth in 2019,” said the Asia-tilted global lender giving the Sri Lankan economy a downbeat estimate of 2.7 percent growth for this year, down from the previous estimate of 3.4 percent. 

The bank estimates a growth of 3.2 percent for 2020, revised down from 3.7 percent previously.  The subdued view of the Sri Lankan economy by HSBC contrasts with a recent note by First Capital Research, a Colombo-based research house which said the economy would experience a faster turnaround during the remainder of the year with the low interest rates acting as a springboard.

HSBC is of the view that uncertainty surrounding policy and politics during the election season would weigh on economic activities. 

“Investment activity tends to remain subdued, led by weak private participation. And the recent bombings and concerns over national security are likely to be a further drag on growth recovery,” HSBC Global Research said in their latest report on Asian economies. 

“Weak sentiment and survey results signal a weak outlook for industry while low tourist arrivals are likely to be a drag on services, particularly tourism, and allied sectors,” it added. 
Although the authorities recently expressed confidence that the tourism industry is seeing a faster recovery than expected, HSBC reminded that April, May and June are typically months with low arrivals and urged seasonality to be kept in mind while reading tourist arrivals data over the next few months. 

“It is important to note that it may take some time before the impact on tourism becomes clear. It is only by July/August that we will get to know if there are signs of major weakness in this sector.

Shares hover near 11-week closing high; rupee firmer

REUTERS: Sri Lankan shares closed slightly firmer yesterday, hovering near an 11-week closing high hit last week, as investors bought banking stocks ahead of a key policy rates announcement later this week. 

The benchmark stock index hit its highest close since April 18 on Friday, buoyed by the government’s decision to launch a US$2.2 billion Japan-funded Light Railway Transit (LRT) project and some other stalled infrastructure projects, brokers said. The index ended up 0.18 percent at 5,514.40 yesterday. It rose 2.67 percent last week, notching its second consecutive weekly gain. However, it is down 8.9 percent so far this year. 

Shares in Melstacorp Ltd rose 6.4 percent, while DFCC Bank PLC ended 9.52 percent firmer. 

Stock market turnover was Rs.550.1 million in line with this year’s daily average of about Rs.542.2 million. Last year’s daily average came in at Rs.834 million. 

Foreign investors sold a net Rs.63.8 million worth of shares yesterday, extending the year-to-date net foreign outflow to Rs.6.97 billion, the index data showed.

The government’s launch of central highway and light railway projects helped lift hopes that the country’s transformation would result in a faster economic growth rate, stockbrokers said.
Sri Lanka is unlikely to hit its full-year economic growth target of 3-4 percent following Easter Sunday bombings and a Reuters poll has forecast growth to slump to its lowest in nearly two decades this year.

Meanwhile, the currency closed firmer at 175.70/80 per dollar, compared with Monday’s close of 176.05/15, as dollar sales by banks surpassed importer greenback demand. The rupee rose 0.17 percent last week, and is up 3.93 percent so far this year.

The rupee dropped 16 percent in 2018 and was one of the worst-performing currencies in Asia.

The island nation raised US $2 billion via 5-year and 10-year sovereign bond sales last month, tapping global capital markets for the second time in three months.

Foreign investors sold a net Rs.3.93 billion worth of government securities in the week ended July 3, extending the year-to-date net foreign outflow to Rs.22.4 billion, the Central Bank data showed.

The Central Bank cut its key interest rates on May 31 to support a faltering economy as overall business and consumer confidence slumped following deadly bomb attacks in April.