Standard Chartered Bank (SCB) has upgraded Sri Lanka’s 2021 economic growth forecast to 4.5% from 3.5% earlier whilst noting recent initiatives have eased near-term external financing concerns though medium-term debt sustainability remains challenging.
In its latest economic alert on Sri Lanka, SCB Global Research said the upward revision in GDP growth forecast was due to the better-than-expected high-frequency data.
It said faster rollout of vaccines and improved global growth (especially in the US and EU) are likely to support growth in 2021. “Stronger-than-expected activity in Q4 2020 likely continued in Q1 2021. Q4 2020 GOP growth was better than our estimate of 1.3%,” SCB Global Research said.
It expects the growth momentum to continue in 2021, even as it maintains its medium-term growth forecast given the impact of COVID-19 on the services sector, especially tourism (which accounted for almost 5% of Sri Lanka’s GOP in 2019).
“We see growth closer to 4.5% in our medium- to long-term steady-state analysis. This is slightly above the average annual growth rate in the five years before the pandemic, but below 2010-14 levels. The Government’s debt overhang has left limned fiscal space for public investment,” it added.
SCB Global Research also said confirmation of $ 1.5 billion swap line with China alleviates near-term external financing concerns and the new Special Drawing Rights (SDR) allocation could further add to foreign exchange reserves in the near-term. However, it said Sri Lanka’s medium-term debt sustainability concerns remain on low foreign exchange reserves and high external debt servicing.
Stale Minister of Finance recently announced the confirmation of the $ 1.5 billion swap line agreement with the People’s Bank of China (PBoC), “significantly alleviating market concerns over 2021 external financing”.
“We think the arrangement, along with possible new general allocation of Special Drawing Rights
(SDRs), will help boost reserves near-term and meet 2021 external financing needs,” added the SCB Global Research Economic Alert on Sri Lanka done by Standard Chartered Bank India Economist - South Asia Saurav Anand and Standard Chartered Bank (Singapore) Ltd. Head of Sovereign Strategy - East Shankar Narayanaswamy.
It revised Sri Lanka’s end-2021 FX reserves forecast based on the new announcement and sees FX reserves in the range of $ 3.4-4.7 billion by end-2021 versus the earlier forecast of $ 3-4 billion, depending on the extent of capital flows in the rest of the year.
It said gross FX reserves of Sri Lanka stood at $ 4.55 billion in February (around three months of import cover). “That said, beyond 2021, Sri Lanka has $ 4-5 billion of Government external debt service obligations annually until 2025, leading to continued external financing pressure,” SCB Global Research added.
It said financing these obligations would depend on the resumption of tourism revenues and higher FDI flows. It was also noted that the increased trade deficit from higher oil prices for Sri Lanka is offset by higher remittances.
“We remain comfortable with our Current Account deficit forecast of 1.4% of GDP in 2021. The trade deficit will likely be higher at $ 7.1 billion (versus $ 6.5 billion earlier), driven by higher oil prices. We recently released our 2021 average Brent forecast to $ 65 per barrel from $ 49 per barrel. However, a higher trade deficit will likely be balanced by an increase in remittances estimated at $ 8 billion (from $ 7.5 billion earlier). We expect import restrictions to continue in 2021, given the need to conserve FX reserves,” SCB Global Research said.
It also said lower-than-expected tourism receipts are a key risk to its view. It assumes higher tourism revenue of $ 1.4 billion in 2021 (compared to $ 1 billion in 2020), with a recovery expected in H2 2021. “Sri Lanka has the fastest pace of vaccinations in South Asia currently; this speedier rollout could boost tourism in H2 2021. The trade deficit could widen if imports increase on higher consumed-led demand driven by improved growth prospects,” SCB Global Research added.
(FT)