Sri Lanka Business Forecast Report Q3 2009

Publication Date	May 2009
Publisher	Business Monitor
Product Type	Report
Pages	56
ISBN Number	1746-580X
Product Code	BMI03898

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Summary

Despite Military Victory, Economy To Slow Sharply Despite its status as a frontier market, Sri Lanka will not escape the global downturn unscathed, and we envisage difficult economic challenges in 2009. Growth will come in far 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 a durable peace will be a formidable task. That said, we expect the economy to rebound strongly from 2011 as a gradual stabilisation of the security situation feeds into higher levels of tourism and investment.

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 has already been felt through weaker exports, foreign direct investment and remittances, which we expect to have a negative impact on private consumption growth. 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 2.2% in 2009, and picking up thereafter to reach 4.3% 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 half 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 international 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 the 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 protectionist and less business-friendly economic policy than his predecessor.

Content

Executive Summary
- Despite Military Victory, Economy To Slow Sharply
Chapter 1: Political Outlook
- SWOT Analysis
- BMI Political Risk Ratings
- Domestic Politics
- Civil War Ending As Humanitarian Crisis Intensifies
- Despite growing calls from the international community for an immediate ceasefire, we see little chance that the
- government or the Tamil Tigers will rest until the conventional phase of the war is concluded.
Chapter 2: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Ratings
- Economic Activity
- Avoiding Recession, But Not A Sharp Downturn
- Although Sri Lanka is unlikely to experience an outright recession this year, the effect of the global downturn on its
- economy is proving to be more severe than previously envisaged.
- Monetary Policy
- New Direction But No Improvement Guaranteed
- Although the rapid decline of inflation in recent months has permitted the Central Bank of Sri Lanka to adopt the more
- conventional monetary policy tool of interest rate targeting, we do not believe the bank will be any more effective than it
- has been in the past at ensuring price stability.
- Exchange Rate Policy
- Free Float Becoming A Reality
- While talks between Sri Lankan authorities and the IMF have yet to yield a tangible result, we believe that an
- agreement is imminent, and that it will have a significant impact on the outlook for the rupee.
- Investment Outlook
- Long-Term Equity Outlook Remains Positive
- While we expect the domestic political situation to continue weighing on Sri Lankan equities in the short term, we believe
- the long-term outlook will above all be a function of global credit and risk conditions, as well as the country's long-run
- growth potential.
Chapter 3: 10-Year Forecast
- The Sri Lankan Economy To 2018
- After The Downturn, Strong Recovery
- Assuming the government manages to broker a durable peace agreement with the Liberation Tigers of Tamil Eelam (LTTE,
- Tamil Tigers), we would expect to see robust rates of growth from 2011, allowing Sri Lanka to reduce poverty and make
- progress on its Millennium Development Goals.
Chapter 4: Special Report
- The Outlook For Global Banking
- Business Environment Rating Outlook
Chapter 5: Business Environment
- SWOT Analysis
- BMI Business Environment Risk Ratings
- Business Environment Outlook
- Institutions
- Infrastructure
- Market Orientation
- Operational Risk
Chapter 6: BMI Global Assumptions
- Global Outlook
List of Tables
- Table: Political Overview
- Table: ECONOMIC ACTIVITY
- Table: MONETARY POLICY
- Table: EXCHANGE RATE POLICY
- Table: Long-Term Macroeconomic Forecasts
- Table: LOAN-TO-DEPOSIT RATIOS, Selected States
- Table: LOAN GROWTH (% CHG Y-O-Y), Selected States
- Table: COMMERCIAL BANKING BUSINESS ENVIRONMENT RATINGS, SELECTED STATES
- Table: BMI BUSINESS AND OPERATIONAL RISK RATINGS
- Table: BMI LEGAL FRAMEWORK RATINGS
- Table: Asia, FDI Annual Inflows
- Table: BMI TRADE RATINGS
- Table: Top Export Destinations
- Table: GLOBAL ASSUMPTIONS
- Table: GLOBAL ASSUMPTIONS - LONG-TERM FORECASTS
- Table: Developed States, Real GDP Growth Forecast
- Table: EMERGING MARKETS, REAL GDP GROWTH FORECAST
- Table: Commodities
- Table: GLOBAL & REGIONAL REAL GDP GROWTH