Growth uptick in Lanka expected in 2013 but risks remain: SCB

Standard Chartered Bank yesterday said the Sri Lankan economy was on a stronger footing heading into 2013, thanks to policy tightening measures implemented this year.

“We expect GDP growth of 7.2% in 2013, supported by a pickup in investment, strong remittance inflows and steady growth in tourism and construction sectors,” SCB said in its ‘Global Focus – 2013 – The Year Ahead’ publication released yesterday.

However, it said weak demand from Sri Lanka’s key export markets, the US and the EU, is likely to persist. “But we expect a modest improvement in 2013 as the global recovery gathers momentum. Domestic activity is likely to compensate for slower export growth,” the chapter on Sri Lanka in SCB’s Global Focus report said.

A large fiscal deficit and the possibility of higher food prices in international markets in H1-2013 triggered by drought in Europe and natural disasters in the US are key challenges. A potential oil-price shock also poses substantial risk to the balance of payments, SCB said, adding that higher oil prices could worsen Sri Lanka’s fiscal position. “Trade balance is likely to remain in deficit amid rising demand for investment goods to support growth,” it added.

SCB expects robust remittance inflows and tourism receipts to help narrow the current account deficit to 4.5% of GDP in 2013 from 6.1% in 2013.

SCB also said in 2013, the policy focus is likely to shift to supporting growth from tackling high inflation and credit growth.

“The most recent Central Bank statement expressed a clear intent to ease monetary policy given that credit growth has slowed, the trade balance has improved and inflation is expected to moderate by Q2-2013. We think this will give the Central Bank sufficient room to cut policy rates by 25 basis points in Q1-2013,” the report said.

Sri Lanka’s weak fiscal position was also emphasised saying higher debt interest payments and the increase in non-interest expenditure on wages and welfare spending this year have contributed to fiscal slippage.

“In 2013 steps to reduce current expenditure, broaden the revenue base and improve efficiency of SOEs will be needed to reduce public debt,” SCB said, adding that it estimates the fiscal deficit at around 6.5% of GDP against the Budget estimate of 5.8%.

With regard to the market’s outlook, SCB said as trade balance stabilises and capital inflows pick up on the back of improved investor sentiment, an appreciation pressure on the Rupee can be expected in 2013 taking USD-LKR to 126.50 by end 2013.

“We are constructive on the Government bond market in 2013 on the back of softening inflation, consequent monetary easing and the balanced demand-supply outlook,” SCB said.

It said although the Government plans to increase its reliance on domestic market borrowing to finance the fiscal deficit in 2013, its estimate of foreign commercial borrowing is conservative.

“Given the success of previous sovereign bond issues, we expect the government to continue with such issuance reducing domestic market borrowing. As such we remain neutral on T-bond duration as near term upside risks to inflation persist,” SCB said.