Sri Lanka: LKR deterioration a risk – Standard Chartered

Economists at Standard Chartered Bank met with investors who are concerned about weakening fundamentals amid wider fiscal deficit and large debt repayments on Sri Lanka’s economy. USD/LKR is trading at 181.459. 

Key quotes

“We estimate the 2019 fiscal deficit at 6.4% of GDP, although it could be lower given the deferral of spending from last year. Most clients see a risk that the 2020 deficit could breach 8% (the IMF estimates 7.9%).”

“Most investors expect Sri Lanka’s fundamentals to deteriorate during the pre election period, and to start improving from Q4-2020.” 

“Sharp Sri Lankan rupee (LKR) deterioration is seen as a risk if external stability concerns continue to rise with no new IMF programme in sight.” 

“The consensus view is that GDP growth will bounce back to the 3.5-4.0% range in 2020, given significant fiscal stimulus and the 150bps of monetary easing already delivered by the Central Bank of Sri Lanka (CBSL). We forecast growth at 4.0% this year.” 

“Most investors shared our view that the CBSL has limited room to cut policy rates further near-term given the risks this would pose to external-sector stability.”