Overall, growth accelerated since the second quarter, with all three sectors recording growth ranging from 0.4% – 3.3%. For the 9M 2019, growth was at 2.6% YoY.
Meanwhile the Central Bank concluded the final monetary policy meeting for the year, chaired by the new Governor, Professor W D Lakshman. Key policy rates were left unchanged during the meeting, in-line with our expectations, following the fiscal loosening policies implemented by the newly elected government in November. Amidst this backdrop, Fitch ratings downgraded Sri Lanka’s Sovereign rating to Negative. Fitch further stated that the move from a revenue based fiscal framework has created policy uncertainty amidst high external debt repayments in 2020. Looking ahead, we expect the recent stimulus package to boost overall growth momentum, specially through higher consumer activity, but our main concern remains to be the upcoming debt repayments in 2020.
The average USD/LKR recorded a 0.4% MoM depreciation in December (as at 27th December), breaking its 2-month appreciating trend.
The YTD appreciation now stands at 0.8%, with the currency ending the month at an average of USD/LKR 181.20, in-line with our forecast of USD/LKR 181.00 for the year.
In our view, the depreciation was mainly due to government bond inflows of USD 89mn during the month until the 24th of December (compared with an outflow of USD 55mn in November).
Net foreign outflows YTD stood at USD 293.6mn by the week ending 27th December 2019 (compared with USD 204mn at the end of November 2019), as outflows were recorded, breaking its 2-month inflow trend. As such, the government bond market recorded a USD 89mn outflow during the month indicating higher uncertainty stemming mainly from the fiscal stimulus package and Fitch rating downgrade during the month. Meanwhile, 1-year government bond yields were broadly in-line with our forecast of 8.50% for 2019, coming in at 8.45% by end December.