QUICK TAKE | Outlook 2016 Global & Sri Lanka Economy

Reading Time: 5 Min.

GLOBAL
Outlook

Slowdown in China and associated spillovers on emerging markets (especially Asia)

Tricky adjustment to a higher interest rate environment (need to watch pace of US Fed rate)
Weaknesses in key EMs - Russia and Brazil both now in recession
Impact of low commodity prices mixed - exporters adversely affected and purchasing power falls;
importers gaining from low import bill
High outflows from emerging markets - 2015 was first time in 27 years that EMs saw net outflows of
capital. In Q3 2015 investors pulled out US$ 52 bn from EM equity and bonds
SRI LANKA

Growth
Outlook
Analysis

5.5%
2016 growth will have to come from the investment side as consumption-led growth has little headroom
more to grow; as borrowing rates edge up, import demand narrows alongside a depreciating rupee.
Agriculture would contribute to H1 GDP growth as good harvest is predicted
Although Q4 2015 data are not out yet, we believe that Q4 would have grown at around 6.3-6.5%, giving
the full year 2015 at just above 5%.
Recent growth was driven by handful of sectors - Financial services, wholesale & retail trade, personal
services, construction, transport and warehousing. All are non-export, domestic economy, and nearly all
(except construction) are services.


Inflation
Outlook
Analysis

Budget Deficit
Outlook
Analysis

Rupee
Outlook
Analysis

These cannot sustain high growth over the medium-term - Small domestic market + these sectors do not
promote productivity improvements and economic dynamism

4.5-5.0%
Core inflation has begun edging up; LKR depreciation will drive higher import prices
Continued low oil prices (topping $40/barrel at most) will continue to help; full benefit not enjoyed due
to lack of pricing formula
Food prices unlikely to see sharp rises in H1
6.5%
Above GoSL forecast of 5.9%; but government strategy can be to postpone some planned/promised
(Budget 2016) capital expenditure items
Possible IMF programme would have implications on fiscal management
Govt targets of raising tax-GDP ratio to 16.4% still well below median for B-rated sovereign debt: 21.4% risk of a ratings downgrade (or at least a ratings outlook change)
Heavy reliance on import trade taxes; problematic in a depreciating LKR era
Foreign borrowings will be trickier in 2016 higher global interest rate environment, fund pullouts from
emerging markets (already 1/3rd drop in foreign bond-holdings)
Depreciates closer to LKR 150
Comparator country currencies in the region have depreciated around the same or more. Will also be
driven by further Yuan depreciation
Key will be how much of the adjustment borne by the currency sliding vs. by expending reserves. So far,
burden of adjustment has been placed disproportionately on foreign reserves

External Sector
Outlook
Analysis

Monthly exports at US$ 900 million; remittance inflows continue to slow down; FDI inflows from
projects getting underway (Port City, Sampur, Chinese SEZ, etc)
Improvements in US economy will help exports
Lacklustre performance in EU will continue to affect exports, but can be helped by regaining GSP+ (but
unlikely to happen soon)
Exports not growing, remaining stagnant at around US$ 800 mn each month for last 2 years. Negative
YoY monthly export growth on average in 2015
Remittance inflows falling is a critical concern, it finances 1/3rd of SL import bill. Middle East oil price
crisis is a key driver of the slowdown. 50% of remittances come from the Middle East