HSBC tips Sri Lanka’s external trade to grow exponentially

Global banking giant HSBC is upbeat on Sri Lanka’s external trade, predicting exponential growth above global average over the next 15 years.

In its October 2011 dated HSBC Trade Connections Trade Forecast Quarterly Update, HSBC said Sri Lanka’s external trade would grow in volume terms by 105% by 2025 and value wise by 83% to $ 36 billion from the current $ 19.7 billion, which is only 0.01% of the world trade at end 2010.  The forecast predicts Sri Lanka’s share of world trade will increase to 0.07% by 2025, representing an increase in total trade value and an annualised growth rate of between 7 and 7.65% in the next two years. Apart from the low base, the key reason for optimism on the external trade front according to HSBC is Sri Lanka that is emerging from a political crisis that has limited growth through trade for a number of years. ”The post-crisis regeneration will be fuelled by trade and the forecast predicts an annualised growth of 5.8% over the next five years – faster than is average for the world as a whole,” the HSBC update said.

“This is a rapid pace of internationalisation and involves new trade corridors and new emerging sectors, especially in manufacturing and mining. Businesses will need to grow their international activities at this rate in order to keep up with the pace of change,” the global bank emphasised.

Commenting on the forecast, HSBC Sri Lanka’s Head of Corporate Banking Chamira Wijetilleke said: “The post-war optimism promises significant growth in the near term, with trade playing a key role. Sri Lanka remains well positioned in the context of rapidly growing trade within the South Asian and Asia Pacific countries, as a trading partner as well as a key investment destination.”

The HSBC update said India, Singapore, China, Iran and the UK are Sri Lanka’s top five trading partners and trade with all of them is predicted to grow in volume terms over the next 15 years.

For example, India, which represented $ 3.1 billion in value terms in 2010, will represent $ 5.1 billion in 2025. Trade with China will grow from $ 1.3 billion in 2010 to $2.5billion in 2025.

Trade with Iran is set to grow, fuelled by exports of tea, and imports of petrol and oil. In the near term trade with the Philippines, Brazil and Vietnam will grow the fastest. Of these, Brazil is the largest in terms of volume, representing just $ 0.6 billion now but growing to $ 1.0 billion in 2015.

Brazil, Singapore and China are core emerging trade corridors for Sri Lanka. For example, export trade with Brazil is primarily in textiles and clothing, and it is forecast this will grow by 12% over the period. What is interesting, however, is that it is also predicted growth in exports of manufactured products at 12%, suggesting that Sri Lanka is developing supply chain links with Brazil as well.

Trade with China is import-driven and the largest sector is agricultural commodities, which it is forecast will grow by 7.99% annualised over the period. However, exports of agricultural commodities and iron and steel to China from Sri Lanka are also forecast to grow, by 10.27% and 11.31% respectively.

Singapore is a major exporter of petrol and oil to Sri Lanka, but it is predicted that imports of agricultural commodities through Singapore will increase by 12.22% while exports of clothing to Singapore will increase by 10.53%.

The upbeat forecast for the future is however after external trade is estimated to slow by 9.9% over the next 12 months. “This is unsurprising given the speed with which trade seemed to recover in 2010 when it grew by 24.8%,” HSBC added.

Sri Lanka’s dominant export sectors are commodities and clothing. Tea is its largest export, while the next four biggest products are all clothing. Its primary import sectors are oil, petrol, cars, knitted fabrics and sugar cane, demonstrating that Sri Lanka is very reliant on imports to fuel its trade and development.

Exports of tea and women’s lingerie had reached their pre-crisis levels by the end of 2010, but only export trade to Italy (largely in clothing) has reached levels seen prior to the global downturn. “Because of this vulnerability to global markets, it is predicted that Sri Lanka’s growth in trade will slow by 9.9% over the next 12 months,” the report added.

Sri Lanka’s economy is forecast to grow by 8.5% in 2011. It has been experiencing quarterly growth from 7.9% in Q1 2011 to 8.2% in Q2. Manufacturing output has been increasing throughout the year (by 11.1% in Q2 2011) and Foreign Direct Investment has also increased to $ 236 million. The return to peace in the country and post crisis reconstruction is fuelling growth, and trade will be a critical part of that over the next 15 years.

With regard to the global outlook, HSBC’s new trade forecast is predicting that world trade will grow by 73% in the next 15 years, with merchandise trade volumes in 2025 hitting $43.6trillion compared to today’s $ 27.2 trillion. To achieve this growth, the trade forecast is predicting that companies across the world will increase their trade activity by a combined 3.9% between 2011 and 2025. The trade forecast anticipates that the spotlight will be on Egypt, India, China, Indonesia and Brazil to drive world trade growth during this period.

This is reflected in HSBC’s Trade Confidence Index, which reveals that businesses around the world believe that China will continue to be a source of key trading opportunities over the next six months, with Latin America, South East Asia, and the Middle East also featuring strongly.

Despite an overall dip in global trade confidence, businesses in Indonesia, Saudi Arabia, Egypt and the UAE are particularly optimistic about the future, showing a positive uplift in confidence on the first half of 2011.

On a global scale, the majority of respondents (84%) anticipate either an increase in international trade or consistent levels of international business activity over the next six months. For businesses trading internationally or starting to trade internationally, the combined global outlook provides a positive view of future business opportunities, with new trade corridors opening.