EIU - November 2018
Sri Lankan Economy
CBSL cuts SRR and Raises Deposit and Lending Rates: The Central Bank of Sri Lanka (CBSL) reduced the Statutory Reserve Ratio (SRR) applicable on all rupee deposit liabilities of commercial banks by 1.5% to 6% with the purpose of easing the liquidity deficit in the banking system. In order to neutralize the impact of this reduction and maintain its neutral policy stance, the CBSL decided to increase the Standing Deposit Facility Rate (SDFR) by 0.75% to 8% and the Standing Lending Facility Rate (SLFR) by 0.5% to 9%.
Moody’s Downgrade Sri Lanka: Moody’s downgraded Government of Sri Lanka’s foreign currency issuer and senior unsecured ratings to B2 from B1 and changed the outlook to stable from negative citing the current political turmoil in the country. The CBSL in response has reiterated that the country’s macroeconomic fundamentals has not deteriorated to warrant such a change.
LKR Continues to Slide: Amidst the political instability since 26 October 2018, the LKR has weakened 3.8% against the USD so far (as at 26 November 2018). Foreign outflows of LKR 36.9 Bn from the local bond and equity markets have contributed to this pressure over the last four weeks. Asian and emerging market currencies which were previously under stress have recovered in the last four weeks while some have strengthened against the US dollar amidst an improvement in global financial market conditions.
Sri Lanka rises to 100th Position in the Doing Business Index: Sri Lanka advanced 11 positions to reach the 100th position in World Bank’s 2019 Doing Business Index. The rise came on the back of four reforms which included improvements construction, tax payments and contract enforcement.
Government’s Overall Budget and the Primary Balance in Check: During the first eight months of 2018, Government’s overall budget deficit declined to 3.5% of the estimated GDP from 4% in the same period in 2017, as the reduction in government expenditure was higher than the decline in government revenue. The primary account recorded a surplus of 0.4% of GDP.
Western Province’s Share of Provincial GDP declined in 2017: Western province continued to hold the largest share of the country’s nominal GDP. However, compared to 2016, its share in GDP declined in 2017, contributing to narrowing of regional disparity.
External Trade: The trade deficit narrowed by 1% (Y-o-Y) as the rise in export income outpaced the growth in expenditure in August 2018. Tourism earnings registered a marginal growth while workers’ remittances declined. The Balance of Payment recorded an outflow during August 2018 due to the withdrawal of foreign investments from both the stock market and government securities and continued debt service payments.
Global Oil Prices Plunges: Oil prices plummeted amid concerns about rising global supplies and growing fears of an economic slowdown. Brent oil slipped in third week to its lowest level since October 2017 and has recorded a slump of 32% from its peak in early October 2018.
Stronger than–expected Export Growth in China: China reported stronger than-expected exports for October 2018 with a 15.6% growth compared to the same period in 2017. Analysts forecasted for a modest slowdown (11%) for October mainly due to the US-China trade war.
India’s Growth to slow down in 2019: As per the “Global Macro Outlook 2019-20 report by Moody’s Investor Services, the Indian economy will expand at 7.4% in 2018, but the growth will slow down to 7.3% in 2019 as domestic demand eases on higher borrowing costs due to rising interest rates.
Brexit Deal Uncertainty Continues: The UK Prime Minister Theresa May’s announced a Brexit deal in November which saw cabinet resignations and speculation of a leadership challenge. The UK stock market and the pound slipped lower immediately after the announcement but has seen an increased level of volatility, since then.