Sri Lanka Economics: Macrosphere - cēterīs paribus
While markets tumbled across the globe, Sri Lankan equities proved outperformers once again. The Colombo All Share Index actually rose 1.5% in the month of August as against the 10–15% fall in global equities. On the economic front, inflation has moderated further to 7% from 7.5% in July. Preliminary estimates suggest that the paddy crop is recording a bumper harvest, growing at 15% over the last year. The rising food supplies are likely to help cool off prices further in the near future. The central bank has kept rates unchanged in a bid to assert its pro-growth and investment-friendly policy. Our 2011 GDP growth forecast remains at 8.5%.
Inflation on a downward trajectory: Consumer price inflation, in the new 2006–07 series, moderated further in August to 7% YoY from 7.5% in July. Food inflation softened to 8.2% YoY from 9.3% in the preceding month and a 28-month high of 14.3% in April. Improving food supplies are likely to help cool off domestic inflationary pressures further in the near future. Core inflation, which had risen for six consecutive months, moderated significantly to 7.8% from 8.9% in July. The pass-through of the recent fall in international commodity prices into domestic prices also partly accounted for the lower core inflation—however, it is still above its 3-year average of 5.5%. Inflation at these higher levels is a major concern for the CBSL. However, headline inflation is likely to drop further going forward to 5% levels by the end of the year.
Macro-indicators going strong: During the first eight months of the year, tourist arrivals rose 35.2% YoY to 538k while earnings from tourism grew at a healthy rate of 50% YoY to US$ 450mn. Gross official reserves remained above the targeted level and stood at US$ 8.2bn as on 16 August, equivalent to 5.4 months of imports. Sri Lanka’s exports/imports for the month of June rose 32%/49% to US$ 815mn/1.66bn. Growth in exports was mainly led by the industrial sector, particularly textiles & garments (37%) and rubber products (114%). The annualized fiscal deficit ratio stood at 7.1% of GDP during January–May, down from 8.1% in January–April, and is on its way to meeting the budgeted target of 6.8%.
CBSL keeps interest rates unchanged: In last month’s monetary policy meet, CBSL held its repo and reverse repo rates steady at 7% and 8.5% respectively. Unlike most other emerging economies, this signals the CBSL’s bias towards growth vis-à-vis containing inflation. Broad money (M2) expanded at 20.7% YoY as of June 2011 mainly driven by the increased demand for credit from the Northern and Eastern provinces. Credit growth of 34.4% YoY as of June has been higher than earlier estimated.
Lending from investment fund commences: Commercial Bank (COMB) is lending LKR 1.5bn to the state-run Road Development Authority (RDA) to build world-class road infrastructure between Dambulla and Habarana in the north-central region. This marks the beginning of the bank’s long-term lending, sourced from an investment fund created with savings from tax cuts as per provisions made in the 2011 budget. The government had reduced VAT on financial services to 12% from 20% and tax on profits of financial institutions to 28% from 35% earlier.
Risks to our estimates: Although consumer price inflation has moderated in the new series, some of the risks to our estimates include: (a) implications of the 2009 war crime allegations, (b) a deteriorating growth outlook in western economies, (c) uncertainty over high crude oil prices, (d) a balance of payments crisis in the wake of depreciating currency and low interest rates.
We have a continuing coverage on the Sri Lankan economy, along with some large cap companies. Please let us know if you would like to discuss.
Thanks and Regards
Jay Shankar | Chief Economist - Director,
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