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Sri Lanka Business Forecast Report Q2 2013

  • Publication Date:February 2013
  • Publisher:Business Monitor
  • Product Type: Report
  • Pages:40
  • ISBN:176329

Sri Lanka Business Forecast Report Q2 2013


Core Views We have long cautioned that the political unassailability of the ruling United People's Freedom Alliance greatly increases the risk of government
overreach. Recent developments, such as the impeachment of the country's chief justice, have only bolstered our view. More than two and a half years after the EU decided to withdraw preferential tariff benefits to Sri Lanka, it appears that the country's exporters are now beginning to feel the economic squeeze. The ruling government's inadequate progress on the human rights front suggests to us that these privileges are unlikely to be reinstated any time soon. We do not see the island's economic growth turning up until H213 at the very earliest, implying that the ongoing slowdown will likely intensify in H113. We are keeping to our 5.4% full-year real GDP growth forecast for 2013. The island's economy is still feeling the pinch on multiple fronts, namely high credit costs, the weak Sri Lankan rupee, and the fragile state of developed markets. With price concerns gradually diminishing, we believe that the primary focus of the Central Bank of Sri Lanka (CBSL)'s policies over the coming 12 months will be economic growth. We are projecting 100 basis points of additional easing in 2013, taking the reverse repo rate to 8.50% by end-2013. Crucially, the CBSL's annual road map signals further loosening of monetary policy in the months ahead. Currency stability is likely to be the overriding theme for the central bank following a fairly volatile 2012. The CBSL explicitly expressed exchange rate stability as one of its policy priorities in its annual road map for the year ahead, reiterating its willingness to intervene. The government aims to narrow the fiscal deficit to 5.8% of GDP by end-2013. We believe there will be nothing revolutionary about how the government conducts its business this year, and that the amount of fiscal consolidation will very likely be minimal at best. While the country's overall business environment remains mediocre from a pan-Asian perspective, we cannot ignore the rapid and dynamic changes taking place in its regulatory framework, which indicate that its business environment is making significant strides. This is likely to help to sustain the country's foreign direct investment boom.

Major Forecast Changes We have toned down our expectations for further rupee strength and have set a conservative target of LKR126.00/US$ by end 2013, with the unit expected to average at LKR126.85/US$ for the year.
 

Key Risks To Outlook Risks To Completion Of Sri Lanka-India CEPA: Potential political stumbling blocks could stall the completion of the Comprehensive Economic Partnership Agreement (CEPA). These include the recurring
conflict between Indian fishermen and the Sri Lankan navy, the government's (perceived) lack of political reconciliation with the country's Tamil minority, and the likelihood of rising domestic protectionist sentiment at home. Upside Risks To Current Account Deficit: Even though the country's
concerted efforts at external rebalancing have started to take hold, we highlight that the overall process still faces a number of challenges. Risks include the potential for adverse global commodity price movements (especially that of oil prices), deeper weakness in the country's main export markets (the EU and the US), and political instability in its key sources of remittance inflows (the Middle East). Risks To Constructive Rupee Outlook: Similarly, risks to our rupee outlook remain weighted to the downside, with the most pertinent ones including a faster-than-expected economic recovery in Sri Lanka, continued stubbornness in global oil prices and a derailing of the expected bounce in global growth. Upside Risks To Inflation And Policy Rate Outlook: We remain cognisant of the potential for an improvement in global economic activity to elevate demand-driven inflationary pressure in the island. Furthermore, domestic food inflation could remain elevated for a long-than-expected period, as our Commodities team expects global food inflation to pick up in H113.
Executive Summary 5
Core Views 5
Key Risks To Outlook 5

Chapter 1: Political Outlook 7
SWOT Analysis 7
BMI Political Risk Ratings 7
Domestic Politics 8
Fiscal Consolidation: The Worst Is Yet To Come 8
Oli Renh, EU Commissioner for Economic and Monetary Affairs, conceded on January 29 that Spain's targets for cutting its fiscal deficit may have to be eased, after Spanish Budget Minister Cristobal Montoro signalled that the country almost certainly missed its goal of lowering the budget gap to 6 3% of GDP in 2012 Even if EU officials make a decision to relax the pace of Spain's budget consolidation, we believe fiscal austerity will continue presenting the country with a set of serious risks in 2013 and 2014, as public unrest and regional divisions build over the next few quarters
TABLE: POLITICAL OVERVIEW 8
Long-Term Political Outlook 10
Political Challenges Beyond The Recession 10
Spain's ongoing economic malaise has put several structural political issues into the spotlight Challenges over the next decade will include unemployment, demographic changes and constitutional questions

Chapter 2: Economic Outlook 13
SWOT Analysis 13
BMI Economic Risk Ratings 13
Economic Activity 14
Bleak Growth Outlook Getting Worse 14
With recently released estimates from the Instituto Nacional de Estadistica revealing that the Spanish economy contracted by 1 8% year-on-year in real GDP terms in Q412, we reiterate our dire outlook for the Spanish economy over the next few quarters (see our online service, November 26 2012, 'Bailout Would Provide Relief But Not A Cure') While markets reacted positively to the European Central Bank's offer to buy unlimited sovereign bonds through its Outright Monetary Transaction programme, with Spanish bond yields compressing significantly in H212, we believe this optimism is not warranted
TABLE: ECONOMIC ACTIVITY 14
Balance Of Payments 16
Current Account Rebalancing Accelerates 16
While the outlook for the Spanish economy remains bleak in 2013, the country's balance of payments position makes for better reading, with the current account registering its first surplus since 1998 in Q312 With exports continuing to outperform imports after the 2008 global financial crisis, we expect current account rebalancing to continue over a medium-term time horizon, forecasting the deficit to fall to 0 9% of GDP in 2013 and 0 3% in 2014
TABLE: CURRENT ACCOUNT 16
Monetary Policy 18
Inflationary Pressure To Continue Easing In 2013 18
In our last update, we suggested that an uptick in inflation in September was largely the result of a VAT hike filtering through the economy, arguing that the price pressures would prove to be a temporary dynamic that would give way to more subdued inflation over the medium term (see our online service, October 24 2012, 'VAT Hike Drives Inflation Hike') This view has played out so far, with the rate of growth of Spain's consumer price index falling from 3 5% y-o-y in October to 2 9% y-o-y in December Although inflation is currently above the European Central Bank's target of 2 0%, we remain below consensus in our expectations for 2013 average inflation, forecasting it to fall within range at 1 4%
TABLE: MONETARY POLICY 18
Banking Sector 19
Bad Loans Undermine Bank Stability 19
Recently released data from the Banco de Espana validate our view that the Spanish banking sector would continue to struggle in the latter-part of 2012 and into 2013 (see our online service, October 24 2012,'State Bailout Key To Sector Stability') While concerns that the weak state of lenders would contaminate Spa in's public finances led to an EU bailout for the country's banking system in July 2012,
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SPAIN Q2 2013
the banking sector looks set to continue labouring under a debt mountain stemming from the 2008 property market crash Bankia has announced plans to cut over 4,000 jobs by 2015 as a condition of the bailout programme, and we expect to see further job losses as other banks try to shrink balance sheets as a condition of the rescue

Chapter 3: 10-Year Forecast 21
The Spanish Economy To 2022 21
A Lost Decade Ahead 21
In order to correct for the massive imbalances built up during Spain's decade-long economic boom, the economy is now in the first stages of rebalancing that will result in a lower long-run growth potential Household spending in particular, which was the primary driver of growth since adoption of the euro, is set to temper significantly amid an environment of tighter credit conditions and deleveraging While an internal devaluation will help restore some of Spain's competitiveness over the long run, the process will prove long and painful Ultimately, compared with the levels of growth enjoyed since euro adoption, the next 10 years are likely to prove a lost decade for Spain
TABLE: LONG-TERM MACROECONOMIC FORECASTS 21

Chapter 4: Business Environment 23
SWOT Analysis 23
BMI Business Environment Risk Ratings 23
Business Environment Outlook 24
Institutions 24
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS 24
TABLE: BMI LEGAL FRAMEWORK RATING 25
Infrastructure 26
TABLE: LABOUR FORCE QUALITY 26
Market Orientation 27
TABLE: TRADE AND INVESTMENT RATINGS 27
Operational Risk 28
TABLE: G20 - ANNUAL FDI INFLOWS 28
TABLE: TOP EXPORT DESTINATIONS, 2001-2009 (US$MN) 29

Chapter 5: Key Sectors 31
Autos 31
TABLE: SALES, CBUS 32
Food & Drink 33
TABLE: FOOD CONSUMPTION INDICATORS - HISTORICAL DATA & FORECASTS, 2010-2017 34
TABLE: HOT DRINKS VALUE/VOLUME SALES - HISTORICAL DATA & FORECASTS, 2010-2017 36
TABLE: MASS GROCERY RETAIL SALES BY FORMAT - HISTORICAL DATA & FORECASTS, 2010-2017 38
Other Key Sectors 41
TABLE: INFRASTRUCTURE SECTOR KEY INDICATORS 41
TABLE: PHARMA SECTOR KEY INDICATORS 41
TABLE: DEFENCE AND SECURITY SECTOR KEY INDICATORS 41
TABLE: TELECOMS SECTOR KEY INDICATORS 42

Chapter 6: BMI Global Assumptions 43
Global Outlook 43
Brighter Outlook In 2013 43
TABLE: GLOBAL ASSUMPTIONS 43
TABLE: DEVELOPED STATES, REAL GDP GROWTH FORECASTS 44
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS (%) 44
TABLE: EMERGING MARKETS, REAL GDP GROWTH FORECASTS 45
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