Sri Lanka, a story of hope says HSBC’s Global Research
Daily FT: Banking giant HSBC’s Global Research has declared that Sri Lanka is a story of hope and some progress in its battle to achieve stability followed by growth after suffering its worst economic crisis.
In its latest June 2023 commentary on Sri Lanka’s economics, Sri Lanka is pressing ahead with reforms and the economy should gradually recover from its 2022 lows. It acknowledged the progress on the macro stability front with economic activity recovering, inflation easing and external sector improving following Sri Lanka engaging in debt restructuring discussions with hopes to conclude before end 2023.
HSBC Global Research identified tourism and remittances as two growth engines which are “humming now.”
It noted that exports have improved a tad on a seasonally adjusted % m-o-m basis, after a weak 2022. It also expects inflation to moderate to single-digit by the end of 2023.
“A recovery is underway, but it is not yet broad-based. After a deep contraction in 2022, we expect the sequential momentum to turn positive. In annual terms, we believe the second half of 2023 is likely to report growth of c3.5% y-o-y. However, on a full-year basis, this figure is likely to remain in contraction territory in 2023 (HSBC estimate: -2.5% y-o-y, IMF: -3.1%, WB: -4.3%, CBSL: -2%),” the HSBC Global Research analysis said.
“We worry about the country’s growth potential which directly affects its debt sustainability. Sri Lanka’s potential growth rate had already fallen from 5% to 3% at the eve of the pandemic. This is partly because it has been battling challenges for a while now and hasn’t had a single normal year since 2017,” it noted.
“Years of underinvestment in productive capital have lowered the growth potential – gross fixed capital formation has fallen by 8ppt in the past four years. As Sri Lanka builds back, it will have to start from a sub-3% growth potential. The IMF’s GDP growth estimate of 3% in 2026 is in line with our expectation. The president, however, recently commented that the country needs to grow by 6% or higher by 2028 or 2029 to repay debt and develop. This, in our view, is a little too ambitious,” it added.
Following are excerpts from the HSBC Global Research commentary on Sri Lanka. The recently approved IMF program and the first meeting with the official bilateral creditors committee have kindled hopes of quick completion of the restructuring exercise. In recent media interaction, the president made assurances that restructuring talks will conclude before the end of 2023.
Sri Lanka has a total public debt (foreign and domestic currency) of $ 81.8 billion. As per the official statement, about 46% of this will be considered for debt treatment, which includes bilateral and private creditors, and T-bills held by the central bank. A voluntary domestic debt optimisation operation is also being envisaged, in which the government and its advisors will initiate consultations with major T-bonds holders. It is important to note that Sri Lanka has a diverse set of creditors with possibly different loan terms. Debt restructuring discussions with this diverse set of creditors could take time.
Meanwhile, some progress has been made on the macro stability front. The growth engines of tourism and remittances are humming now. Tourist arrivals started to look up in 1Q and are likely to rise more strongly in 4Q23 (the peak tourist season). Remittance inflows have recovered to their pre-pandemic five-year average, aided by the stabilisation of the LKR. Softness in global demand has resulted in weaker exports in 2H22. However, exports have improved a tad recently (on a seasonally adjusted sequential basis). That said, private sector credit remains particularly weak.
A recovery is underway, but it is not yet broad-based. After a deep contraction in 2022, we expect the sequential momentum to turn positive. In annual terms, 2H23 is likely to see growth but the full year figure may remain in contraction due to base effects.
Inflation is set to moderate to single-digit by the end of 2023 thanks to base effects, and tighter monetary and fiscal policy. The recent rupee appreciation and its likely pass-through effect are likely to accelerate the disinflation process in the next few months. As the structural reforms gain traction and the ongoing recovery gains momentum, we think the CBSL is likely to ease by another 5ppt over the next few quarters.
Sri Lanka’s economy has shown great resilience through the years and is once again on the growth path after facing the many challenges posed by the global pandemic and the economic crisis that followed. Despite the challenging economic conditions, most members of Sri Lanka’s private sector showed growth and profits, indicating economic resilience as well as the growth potential. The country’s geographical positioning in the Indian Ocean and the many trade agreements as well as trade concessions enjoyed by the country have also helped boost key economic sectors in the country, especially in the economic revival programme. Forecasts on Sri Lanka issued by many global financial institutions have stated that Sri Lanka is on the path to economic revival and that the country’s growth and business potential would see an increase in the coming months.
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