Sri Lanka Q3 GDP seen expanded 8.0%; full year 8.1%

Sri Lanka’s Gross Domestic Product (GDP) is likely to have expanded 8.0 per cent in the third quarter from a year earlier, slowing from annual growth of 8.2 per cent in the second quarter of 2011, according to a Reuters poll revealed yesterday.

It said 10 analysts gave a range of estimates from 7.0 per cent to 8.3 per cent. The median forecast for full-year growth is 8.1 per cent, with estimates from 7.3 per cent to 8.3 per cent.    

Factors to watch

In the third quarter, private sector credit growth spiked to the highest levels in 16 years, or more than 33 per cent year-on-year, as the central bank kept interest rates low.

How far the island nation’s three per cent currency devaluation can hit the economic growth going forward.     

The contribution from Government services to growth, as the State has increasingly become a main actor in doing business instead of facilitating the private sector.

A possible Balance-Of-Payments (BOP) crisis this year. The Central Bank has already conceded that it will see much less-than-expected BOP surplus in 2011 from the original estimate of $ 775 million. In the first nine months of 2011, the trade deficit hit $ 6.7 billion, the highest level ever.

How far the Central Bank can defend the rupee by selling dollars. Since the three per cent rupee devaluation on 13 November, the Central Bank has pumped around $ 490 million to hold the exchange rate steady. It spent almost $ 2 billion this year through the end of September to hold back depreciation pressure.

 Any spikes in inflation due to higher import prices after the devaluation.

Pressure on the monetary policy rates. Since the devaluation, the yields in treasury bills have jumped between 92-147 bps, pressuring market interest rates. Analysts say the Central Bank’s intervention to defend the rupee has drained liquidity, resulting in interest rate hikes.

Foreign inflows. The Central Bank on 16 December increased the foreign holding limit on Government securities to 12.5 per cent from 10 per cent. Currency dealers say they have seen a gradual exit by foreign bond holders since the devaluation.     

Market impact

If the Central Bank will gradually stop defending the rupee due to depletion of the reserves. The monetary authority insists it will not stop.

Growth may not have an impact on the rupee and stock markets as the currency is being managed and the bourse has been muted with credit having been tightened up.

The Central Bank might continue with its low rate regime for 2012 to boost growth and encourage more private sector borrowing, mainly for investments and expansion.

Here are the poll forecasts for GDP data:



Note: Analysts from the following institutions participated: Commercial Bank of Ceylon, Hatton National Bank, SC Securities, Amana Bank, TKS Securities, People’s Bank, Standard Chartered Bank, Citi Bank and National Development Bank.     

* Frontier Research contributed only for the full-year GDP poll.