Sri Lanka Business Forecast Report Q2 2009

Publication Date	February 2009
Publisher	Business Monitor
Product Type	Report
Pages	60
ISBN Number	not applicable
Product Code	BMI03431

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Summary

Economy To Slow, Despite Political Stability Potential Despite its status as a frontier market, Sri Lanka will not escape the global downturn unscathed, with difficult economic challenges expected for 2009. Growth will come in below trend, the current account and fiscal deficits will continue to widen, and the level of public debt will remain elevated.

While we foresee an improvement in the political situation pending a victory of the armed forces over the rebel Liberation Tigers of Tamil Eelam (LTTE, Tamil Tigers), achieving peace will be a formidable task. That said, our core scenario of a moderate economic slowdown and tentative return of political stability is far from disastrous, especially when compared to the difficulties being faced in other Asian markets.

While our long-term outlook for the Sri Lankan economy remains broadly positive, the ongoing deterioration of global economic conditions has led us to revise our growth forecasts for 2009 and 2010 downward. The impact of the global crisis will be felt in the first instance through slowing exports, but also through declining foreign direct investment and remittances. Although government spending will provide a modest boost to the economy, the precarious state of public finances will limit the scale of such expenditures. Nevertheless, we foresee growth coming at 4.8% in 2009, and picking up thereafter to reach 5.9% in 2010.

On the political front, 2009 will see a tentative return to stability with the campaign against the Tamil Tigers expected to wrap up in the first months of the year. However, we caution that the rebels' fundamental objectives are unchanged, and that they could continue to plan terrorist attacks. Furthermore, the government will come under increasing pressure to broker a political resolution that addresses the grievances of the Tamil minority. Nonetheless, it will need to balance this pressure against the demands of Sinhalese nationalist majority on which it will rely to gain re-election in 2010, or even 2009 if elections are brought forward.

Despite the government's progress in subduing the rebels, which should ease security concerns, the underlying issues affecting Sri Lanka's business environment are mostly unchanged. These problems include corruption in the judiciary (and particularly in the contract-bidding process) as well as inadequate physical infrastructure. Although the government is pressing ahead with its infrastructure programme, it relies on increasingly scarce foreign funding to do so. More broadly, the business environment is unlikely to see a significant improvement under President Mahinda Rajapaksa, who has been pursuing a more nationalistic and less business-friendly economic policy than his predecessor.

Content

Executive Summary
- Economy To Slow, Despite Political Stability Potential
Chapter 1: Political Outlook
- SWOT Analysis
- BMI Political Risk Ratings
- Domestic Politics
- Beyond The War, Political Challenges Linger
- The rapid military gains of the Sri Lankan army since the capture of Kilinochchi, professed capital of the
- Liberation Tigers of Tamil Eelam, suggest that the governments long-running campaign against the rebels is
- drawing to a close
- TABLE: POLITICAL OVERVIEW
Chapter 2: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Ratings
- Economic Activity
- Downturn Until 2010, Strong Recovery Thereafter
- While our long-term outlook for the Sri Lankan economy remains broadly positive, the ongoing deterioration of
- global economic conditions has led us to revise our growth forecasts for 2009 and 2010 downward
- TABLE: ECONOMIC ACTIVITY
- Monetary Policy
- Central Bank On A Loosening Trajectory
- While the Central Bank of Sri Lankas decision to slash its reverse repurchase penal rate by 200bps is an
- indication of the authorities mounting concerns about the economy, we see little chance that monetary policy
- alone will be able to lift growth in 2009 to the 6.0% targeted by the bank
- TABLE: MONETARY POLICY
- Exchange Rate Policy
- Rupee At Risk Of Further Depreciation
- We foresee the Central Bank of Sri Lanka pursuing a policy of gradual rupee depreciation as the currency comes
- under pressure from an elevated current account deficit and an increasingly expansionary monetary policy
- TABLE: EXCHANGE RATE POLICY
- External Debt
- Can A Debt Crisis Be Avoided?
- Sri Lankas external debt position is looking precarious, and with the continued deterioration of international
- financing conditions, we see a significant risk that the authorities will need to seek some form of external
- assistance
- TABLE: FOREIGN DEBT
Chapter 3: 10-Year Forecast
- The Sri Lankan Economy To 2018
- The Futures Bright. Eventually
- Assuming the government manages to broker a durable peace agreement with the Liberation Tigers of Tamil
- Eelam, we would expect to see strong growth over the 2013-18, allowing Sri Lanka to reduce poverty and make
- progress on its Millennium Development Goals
- TABLE: LONG -TERM MACROECONOMIC FORECASTS
Chapter 4: Special Report
- China
- A Seismic Upheaval In 2009?
- One of the biggest and least discussed wild cards that could rear its head in 2009 is dramatic political
- upheaval in China
- United States
- Europe
- Big Trouble For European Banks In 2009
- The deteriorating global macroeconomic outlook, high levels of leverage, and a broken business model will
- combine to spell trouble for the financial services sector in 2009
- TABLE: Banks Leverage Ratios
- TABLE: Assets As % of Home Country GDP
- TABLE: Assets As % of Home Country GDP When Eurozone Is Considered Home Country
- TABLE: Exposure As % of Tot al Exposure To Region
- TABLE: Banks Foreign Exposure (US$ mn)
- TABLE: Exposure As % of National GDP
Chapter 5: Business Environment
- SWOT Analysis
- BMI Business Environment Risk Ratings
- Business Environment Outlook
- TABLE: BMI BUSINESS AND OPERATIONAL RISK RATINGS
- Institutions
- TABLE: BMI LEGAL FRAMEWORK RATINGS
- Infrastructure
- Market Orientation
- TABLE: MIDDLE EAST & AFRICA ANNUAL FDI INFLOWS
- TABLE: BMI TRADE RATINGS
- TABLE: TOP EXPORT DESTINATIONS
- Operational Risk
Chapter 6: BMI Global Assumptions
- Global
- Global Contraction On The Cards In 2009
- TABLE: GLOBAL ASSUMPTIONS
- TABLE: GLOBAL AND REGIONAL REAL GDP GROWTH, % CHG Y-O-Y
- Economic Activity
- TABLE: DEVELOPED STATES, REAL GDP GROWTH FORECASTS
- TABLE: EMERGING MARKETS, REAL GDP GROWTH FORECASTS
- TABLE: DEVELOPED MARKET EXCHANGE RATES
- Monetary Policy
- Commodities
- TABLE: EMERGING MARKET EXCHANGE RATES