The Sri Lankan rupee depreciated 2.0% in H115, and we expect the currency to weaken further against the US dollar over the coming quarters, to LKR135.00/USD and LKR138.00/USD by end-2015 and 2016, respectively. However, strong tourism earnings growth and a positive real interest rate environment will likely provide some support for the rupee.
As electoral politics once again take centre stage in Sri Lanka, fiscal consolidation efforts by the government will likely take a hiatus as politicians are likely to present populist manifestos in order to muster public support. As such, we maintain our expectation for the country's budget deficit as a share of GDP to come in at 5.3% in 2015, versus the government's forecast of 4.4%.
The CBSL will likely cut its benchmark interest rates again (by 75bps) over the coming months as a combination of low inflationary pressures and below-target economic growth provides incentive for the central bank to act. As inflation came in weaker than expected at 0.7% y-o-y in H115, we now forecast inflation to average just 1.0% in 2015, down from 3.0% previously.
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The forthcoming general election in Sri Lanka will have a significant impact on policymaking following the handover of executive power to parliament via the 19th Constitutional Amendment in April 2015.The outcome, which will likely depend on the level of collaboration between President Sirisena and former President Rajapaksa, will have considerable bearing upon business sentiment over the medium-term.
Sri Lanka's real GDP growth came in at 6.4% y-o-y in Q115, and will likely remain below 7.0% for the remainder of the year due to weak external dynamics, as well as political uncertainty. As such, we maintain our forecast for Sri Lanka's real GDP growth to come in at 6.5% for 2015.
Major Forecast Changes
As inflation came in weaker than expected at 0.7% y-o-y in H115, we now forecast inflation to average just 1.0% in 2015, down from 3.0% previously.
The Sri Lanka Country Risk Report helps businesses with market assessment, strategic planning and decision making to promote growth and profitability in Sri Lanka and is an essential tool for CEOs, Chairmen, Finance Directors/CFOs, Managing Directors, Marketing/Sales Directors with commercial interests in this emerging market..
An influential new analysis of Sri Lanka's economic, political and financial prospects through end-2017, just published by award-winning forecasters, Business Monitor International (BMI).
* Forecast the pace and stability of Sri Lanka's economic and industry growth through end-2017.
* Identify and evaluate adverse political and economic trends, to facilitate risk mitigation.
* Assess the critical shortcomings of the business environment that pose hidden barriers and costs to corporate profitability.
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