sri lanka macro | economics & policy macro roundup: … securities - macro... · continuation...

1

This report is strictly for direct recipients from Asia Securities. Redistribution of this report is strictly prohibited. Please see page 17 for

analyst & company certification and important disclosures

SRI LANKA MACRO | ECONOMICS & POLICY REVIEW | 28 JUNE 2019

Macro Roundup: June 2019 FX reserves reinforced to weather current account headwinds

Isuri Munasinghe [email protected] +94 11 772 2036 Lakshini Fernando [email protected] +94 11 772 2045

Key highlight for the month of June was the successful raising of a USD 2.0bn International Sovereign Bond (ISB) to strengthen reserves. Nevertheless, given the impending weakness in the current account due to a slowing tourism earnings, remittances, investment outflows and delayed inflows, we believe the funds will act more as a buffer to maintain reserves position on YoY basis, rather than improve. 1Q CY19 GDP growth came in at 3.7% YoY (1.8% YoY 4Q CY18) on the back of recovering liquidity conditions recouping activity in construction sector, bumper Maha harvest although slow credit growth in 1Q CY19 (prior to 21/4 attacks) weighed down services. Month of July is expected to see substantial fiscal injections into the economy via a LKR 2,500 wage increase and revisions to pensions schemes. Food inflation entered positive territory although continued subsidising of Auto diesel fuel will look to curtail volatility, in our view. Monthly trade balance continues to decline, although at a slowing pace following the lifting of import restrictions. We continue to expect GDP growth of 2.5% YoY in CY19E and LKR to depreciate 4.9% from current levels to end CY19E at LKR 185.00 on current account weakness. 1Q GDP rises to 3.7% on construction uptick and agri; financial add drag According to data released by the Department of Census and Statistics, Sri Lanka’s 1Q CY18 GDP growth came in at +3.7% YoY (+4.0% YoY in 1Q CY18). No revisions were made for previous quarters. Both the agri and industrial sectors, which account for over 38.1% of GDP showed noteworthy improvement, although services (57.4% of GDP) recorded a slowdown due to lower private sector credit growth, adding drag on overall growth. We believe some relief from the liquidity shortage that prevailed over 4Q CY18 supported growth in construction sector while a bumper harvest supported the agri sector recovery. However, overall dampened investor sentiment and business outlook led to low credit growth in the quarter, adding drag. We note that headline inflation as measured by the CCPI index, edged to 4.0% YoY. CBSL raises USD 2.0bn to strengthen reserves ahead of debt maturities The Government issued two USD-denominated sovereign bonds on 24th June 2019, one with a 5-year term raising USD 500mn and another 10-year raising USD 1.5bn. The issuance comes under a bill passed in parliament in June allowing the CBSL to raise of LKR 480bn equivalent from either local of foreign sources, specifically to meet debt repayments of USD 3.0bn p.a. over 2020-2029. This, comes as per the provisions under the new Active Liability Management Act passed in 2018. With the CBSL set to complete three ISB issuances in 2019 and stepped up local treasury borrowing, we expect GoSL debt to reach ~90.0% of GDP (82.9% of GDP for 2018). Adverse travel warnings fully lifted; group travel to pick up from October 2019 We note that all adverse travel advisories from major source markets, including the US, have been lifted to a level 2 US or equivalent. However, this is still below the advisory rating prior to April’s attacks (level 1 US or equivalent). While the new advisories continue to recommend travelers to exercise increased caution, they do not prevent international tour operators from carrying out trips in Sri Lanka. Our channel checks indicate that the larger international tour operators such as Kouni and Thomas Cook have reopened bookings to Sri Lanka with deep discounts offered until December 2019, although TUI is yet to reopen bookings to Sri Lanka.

Key indicators Month in review

Previous month

Previous year

YoY (%) MoM (%) CY19E

Headline inflation (%) – May 5.0 4.5 4.0 +1.0pp +0.5pp 4.8

Average LKR/USD – June 176.57 176.41 159.07 +11.0 +0.1 185.00

12M government bond yield (%) – June 8.83 9.07 9.41 -58bps -24bps 10.60

Budget deficit (LKR bn) – 4Q CY18 164 251 174 -5.9 -34.8 740

Trade deficit (USD mn) – Apr 798 592 999 -20.1 +34.8 9,164

FX reserves (months of imports) - May 3.9 4.1 4.8 -18.5 -5.0 3.9

Source: CBSL, MoF, DoCS, Asia Securities

Data releases - July

• 12th July – MPR

• 2nd week - FX reserves

• 3rd week – Ext. sector May

• 21st – NCPI

• 31st – CCPI

2

This report is strictly for direct recipients from Asia Securities. Redistribution of this report is strictly prohibited. Please see pages 20 and

21 for analyst & company certification and important disclosures

Roundup Summary • 1Q GDP rises to 3.7% on construction uptick and agri; financial add drag

• CBSL raises USD 2.0bn to strengthen reserves ahead of debt maturities

• Adverse travel warnings lifted; group travel to pick up from October 2019

• Fuel prices – Auto diesel remains subsidised post June price revisions

• Key policy rates – 50bp rate cut introduced to spur credit growth

• Current account weakness to challenge LKR appreciation in 2H CY19E

• FX reserves at USD 6.7bn to cover ~3.9 months of imports

• Short-end of the yield curve improves on increased liquidity

• Inflation edges up as food prices enter inflationary territory

• Fiscal sector – CY18E budget deficit falls short on lower revenue collection

• External sector – Trade deficit improves on lower fuel and gold imports

• Current account – Tourism earnings down 70.0% following 21/4 events

• Policy update – Pension anomaly revisions to see salary hikes of upto LKR 20,000

1Q GDP rises to 3.7% on construction uptick and agri; financial add drag According to data released by the Department of Census and Statistics, Sri Lanka’s 1Q CY18 GDP growth came in at +3.7% YoY (+4.0% YoY in 1Q CY18). We note that no revisions were made for previous quarters. Both the agri and industrial sectors which account for over 38.1% of GDP showed noteworthy improvement, although services recorded a steep slowdown due to a credit sector decline, adding drag on overall growth (57.4% of GDP). We believe some relief from the liquidity shortage that prevailed over 4Q CY18 coupled supported growth in construction sector while a bumper harvest supported the agri sector recovery. However, overall dampened investor sentiment and business outlook led to low credit growth in the quarter, adding drag. We note that headline inflation as measured by the CCPI index, edged up to 4.0% YoY.

Headline inflation edges up and growth picks up from 4Q CY18 slowdown

Source: CBSL, DoCS, Asia Securities

3.9 3.5

1.8

3.7

4.1

5.2

3.2

4.0

2Q18 3Q18 4Q18 1Q19

GDP growth (%) CCPI (%)

3



Contribution from industries picks up compensating for financial slowdown

Source: DoCS, Asia Securities

Favourable weather conditions in 2018 continued to bode well for the Agri sector in 1Q CY19 growing 5.5% YoY. Main growth drivers were the coconut sector (+35.6 YoY), Animal production (+9.4% YoY), and Growing of fruits (8.1% YoY). Growing of rice remained robust, increasing 13.1% YoY coming on top of a strong base (+63.0% YoY 1Q CY18) thanks to a bumper Maha harvest. However, adding drag on growth was maze cultivation that was negatively impacted by the Fall Army Worm outbreak, reflected by a 12.9% YoY decline in Growing of Cereal; this was the third consecutive quarter of declines. Growing of tea also experienced a marginal decline of 1.7% YoY largely due to slow productivity and slow rate of regrowth in the crop. Looking into 2019, delayed monsoons in the North and East does pose a threat to the continuation of Sri Lanka’s agri recovery. The Eastern province contributes roughly 26.0%-29.0% of rice production (pre-drought levels 2015/2016) while the North contributes ~11.0% of the Maha season production. The bumper Maha harvest early 2019 should sustain consumption demand for the remainder of the year, adding less pressure on inflation and continuing to reduce import dependency. However, further delay of rains in 2019 could see growth flatlining in the 2020 Maha season. Nevertheless, the impact is likely to be far less than what was experienced in 2016/2017, in our view. However, the more significant impact comes from tourism decline post East Sunday attacks, which has already led to a significant decline in demand for animal products as well as of fruits and vegetables, in our view. These trends are likely to clip argi income recovery from 2Q CY19 onwards, adding drag on any tailwinds from other export-oriented agri goods. Industrials bounces back on recovery in construction and petroleum refining The industries sector bounced back to record 3.0% YoY in 1Q CY19, following a decline in 4Q CY18 (-3.6% YoY), largely driven by a 6.9% YoY growth in construction sector and a steep climb in the Manufacturing of coke and refined petroleum (+94.8% YoY). This was followed by a 5.8% YoY growth in mining and quarrying activity. Manufacturing of F&B and tobacco saw loss of momentum to 2.3% YoY (+7.2% YoY in 4Q CY18, 5.6% YoY in 1Q CY18) as did manufacturing of textiles to 1.9% YoY (+3.7% YoY in 4Q CY18 and +5.0% YoY in 1Q CY18). Looking ahead, the dampened business outlook and investor sentiment following Easter Sunday attacks and persistent political uncertainty will, in our view, see to dampen momentum gained within the sector in 1Q CY19. While the construction sector’s liquidity crisis in 4Q CY18 is now gradually being resolved and interest rate cuts have been introduced to spur credit growth, we see very little motivation for capital formation to maintain growth momentum, and thus expect the industry to lose momentum from 2Q CY19E onwards. The budget for 2019 indicated a pick-up in housing and infrastructure development by the government under election geared programs such as Gamperaliya. However,

6.9 7.1 7.0 7.0 7.0

31.424.8 26.1 22.8

31.2

57.260.8 58.2

54.8

57.4

4.7 7.6 9.016.0

4.6

1Q CY18 2Q CY18 3Q CY18 4Q CY18 1Q CY19

Agri Industries Services Taxes less subsidies

Favourable weather

conditions secure

sixth consecutive

quarter of growth in

agri

Construction picks

following negative

growth in 4Q CY18

4



we don’t expect it to be sufficient to trigger a strong recovery in growth. We continue to expect the apparel and textile manufacturers to experience challenging operating environment amidst trade wars and Brexit uncertainty adding pressure on global growth. This has already been witnessed in the EU markets, in line with our expectations. The services sector saw a dip in momentum to 4.1.% YoY in 1Q CY19 (+4.3% YoY in 4Q CY18, 5.5% YoY 1Q CY18) largely due to a slowdown in the financial services (9.8% YoY vs. 12.6% YoY in 4Q CY18 and 12.1% YoY 1Q CY18) owing to a slowdown in credit growth over the quarter. We note that the slowdown was significant for both the private and public sectors. Wholesale and retail activity saw a sequential bounce back (4.4% YoY) although still below 1Q CY18 levels (6.4% YoY). With tourism facing significant setbacks, following Easter Sunday attacks, we believe services sector will be under significant pressure. However, with a 50bp rate cut introduced in May 2019, credit growth could pick up on working capital loans and public sector borrowing in the run upto elections and to fund a widening budget deficit, given slow government revenue growth. We maintain our GDP growth forecast at 2.5% following the impact from Easter Sunday attacks. We continue to expect the revision to pension schemes, LKR 2,500 increase to public sector salaries, savings rebates under the Samurdhi scheme, on top of an agri recovery, to be a temporary catalyst for a pickup in consumer spending in the second half of CY19E. However, from a sector perspective, it is our view that the economic impact from a tourism slowdown will be felt by fresh and animal produce, consumer, retail and banking. Our expectation on each sector is as follows.

Expectation

Agri

Agri is expected to increase its contribution to growth in CY19E following a bumper paddy harvest experienced beginning of 2019. Our channel checks confirm that the paddy harvesting (‘Maha’ season) was unaffected by the attacks. However, owing to the noteworthy decline in tourism activity, we expect the demand for fresh food retail to experience a marginal impact. This, we believe, will partially offset tailwinds from a bumper harvest and slow down overall agri sector recovery.

Industries

We expect 2Q to reflect a temporary impact on manufacturing, from a) slowdown in consumption on account of the state of emergency and b) temporary order cancellations on security and delivery concerns. However, we expect activity to normalize by 4Q CY19. With government spending set to be revised to prioritise tourism and defense, along with maintaining fiscal balance, we expect to see less funds allocated to infrastructure projects.

Services

Impact from tourism will directly impact services earnings. Furthermore, we expect the cautious business sentiment following heightened security concerns to weigh down credit growth and increasing impairment charges which is likely to reflect on Banking sector earnings for the next two quarters (2Q and 3Q CY19E).

Source: Asia Securities

Top 10 contributors to growth (%) 1Q18 2Q18 3Q18 4Q18 1Q19

Financial Services 16.7 22.4 21.4 42.4 15.8

Construction (7.3) 4.2 8.8 (41.8) 14.0

Wholesale and retail trade 18.2 14.8 16.2 15.8 14.0

Other personal service activities 15.8 12.1 12.7 19.4 13.3

Coke and refined petroleum products (5.3) 1.1 1.2 0.2 8.3

Growing of Oleaginous Fruits (2.8) 0.6 1.8 8.1 5.5

Transport 9.2 7.5 4.2 22.5 5.1

Food, beverages & Tobacco products 10.3 6.6 6.2 19.7 4.6

Mining and quarrying (0.6) (1.1) (0.7) (21.7) 4.2

Real estate 9.1 7.4 5.4 3.7 3.8

Source: Department of Census and Statistics, Asia Securities

Impact from terrorist

attacks to be felt by

agriculture,

consumer, retail and

banking, in addition

to tourism.

5



CBSL raises USD 2.0bn to strengthen reserves ahead of debt maturities The Government has issued two USD-denominated sovereigns bonds on 24th June 2019, one with a 5-year term raising USD 500mn and a 10-year raising USD 1.5bn. the rates and credit rating on the bonds, in comparison to previous issuances are given below. The issuance comes under a bill passed in parliament in June allowing the CBSL to raise of LKR 480bn equivalent from either local of foreign sources, specifically to meet debt repayment of USD 3.0bn p.a. over 2020-2029.

5-Year ISB 10-Year ISB

Apr-18 Mar-19 Jun-19 Apr-18 Mar-19 Jun-19

Rate (%) 5.75 6.85 6.35 6.75 7.85 7.55

Moody's rating B1 B2 B2 B1 B2 B2

Funds raised (USD bn) 1.25 1.00 0.50 1.25 1.40 1.50

Spread against US treasury yield (bp) 315 441 459 397 521 553

Source: CBSL, Media reports, ASEC

While the rates on the latest issuance are below that of the 5-year (50bp below) and 10-year (30bp below) issuance conducted in March 2019, we note that the spreads against US treasuries have increased. Given the sovereign rating downgrade last November from B1 to B2 (Moody’s), rates are still significantly higher than the April 2018 issuance (110bp above for both 5-year and 10-year bonds). We note that the sequential improvement is more a reflection of the dovish monetary policy outlook currently prevailing in the global bond markets. The most recent US Federal Reserve meeting indicated possibility of a rate cut ahead considering slower than anticipated US GDP growth for 2019. According to media reports, CBSL will look to raise an additional USD 2.5bn from foreign markets later in 2019. Sources, other than ISBs, available to Sri Lanka include the following;

• The World Bank has offered a policy-based guarantee which allows Sri Lanka to raise funds within global capital markets using the World Bank credit rating.

• Samurai bonds, although this remains a low priority given the added expense incurred of converting JPY denominated bond into USD.

• USD 3.1bn worth of bilateral SWAPs have been negotiated and are on standby in an emergency.

• Sri Lanka also has the option to trigger an emergency extension to funds under the current Extended Fund Facility with the IMF, if needed.

The USD 2.0bn issuance will look to partially compensate for USD 1.6bn loss in anticipated tourism earnings for 2019 (ASEC estimates) and USD 700mn loss in FDI inflows for 2019 (BOI estimates). This comes on top of YTD capital outflow from both equity and bond markets and decline in remittances. We expect the issuance to raise Sri Lanka’s FX reserves position to 4.8 months of imports temporarily but deteriorate to 3.9 months of imports by CY19E end on current account weakness. With a majority of CY19E’s external debt repayments covered (~65.0% based on CBSL Governor’s comments), the next ISB payment is not due till October 2020, leaving some room for the CB to raise additional funds in the event of a capital flight. However, the probability of a second wave of significant capital outflow, as was witnessed end CY18, is low in our view given weakened yield conditions in developed markets. With the CBSL set to complete three ISB issuances in 2019 and stepped up local treasury borrowing, we expect GoSL debt to reach ~90.0% of GDP (82.9% of GDP for 2018 official data).

Sequential

improvement in ISB

yields more a

reflection of the

dovish monetary

policy outlook

globally

6



Adverse travel warnings lifted; group travel to pick up from October 2019 We note that all adverse travel warnings from major source markets, including the US, have been lifted to a level 2 US or equivalent. However this remains below our advisory rating prior to April’s attacks (level 1 US or equivalent). While the new advisories continue to recommend travelers to exercise increased caution, they don’t prevent international tour operators from carrying out trips in Sri Lanka. We note that of the larger international tour operators such as Kouni and Thomas Cook have reopened bookings to Sri Lanka with deep discounts offered until December 2019 although TUI is yet to reopen bookings to Sri Lanka. Based on our analysis, we expect arrivals to pick up momentum from August 2019 onwards, driven by deep discounts to main source markets such as India and China. We expect the aggressive promotional activity conducted by SLTPB to help resurrect tour group bookings from other key source markets (e.g.: Europe) from October 2019 onwards. However, we continue to expect 2019 arrivals to close in ~27.0% below that of 2018 on slow pick up in the ‘Free Independent Traveler’ segment. We expect arrivals to reach pre-attack levels by FY20/FY21 peak season. Fuel prices – Auto diesel remains subsidised post June price revisions According to media reports, the Ministry of Finance announced an increase to fuel prices. Accordingly, current fuel prices are as follows;

Fuel type Old

price New price

LKR change

% change

Jun-18 LKR

change

YoY change

(%)

92 octane petrol (1 ltr) 135.00 138.00 3.00 +2.2 137.00 1.00 +0.7

95 octane petrol (1 ltr) 164.00 164.00

- 0.0 148.00 16.00 +10.8

Lanka auto diesel (1 ltr) 104.00 104.00

-

- 109.00 -5.00 -4.6

Super diesel (1 ltr) 136.00 136.00

- 0.0 119.00 17.00 +14.3

Source: CPC, media reports, Asia Securities

Since the last fuel price revisions in May 2019, global oil prices, as measured by Brent spot 30-day average, had fallen 6.2% MoM as prices dropped from a high of USD 72.00/bbl to a low of USD 60.63/bbl within the first week of June. The drastic drop follows news of stepped up tensions between the US and its trade partners Mexico and China and the increased likelihood of a global economic slowdown. Meanwhile the LKR/USD had remained steady since May with the 30-day spot average experiencing a marginal depreciation, down 0.6% (YTD appreciation +2.9%). Although the fuel prices are down significantly MoM, the LKR 3.00 increase for 92 Octane is, in our view, a correction made to compensate for the lack of an increase in the last two months and reduce the subsidy burden on government expenditure. Moreover, we believe that the non-revision of higher-grade fuels will help to compensate the losses from Auto diesel which continues to be subsidised. Since then however, Brent prices have picked up to USD 65.78/bbl after reaching five-month low of USD 59.97/bbl mid-June on news of lower than expected US crude inventory and escalating tensions with Iran. Nevertheless, the 30-day moving average remains is down 6.1% MoM while the LKR/USD has remained relatively stable, depreciating only 0.1% MoM. Despite the decline in oil prices over the month under review, we expect the government to maintain fuel prices in July to maximise profits from higher grade fuels and compensate for losses incurred on lower grade fuels Auto diesel and 92 Octane that are currently retailed at a discount.

The government

partially subsidises

fuel prices to maintain

inflation targets

Lift to adverse travel

advisories to push group

tour arrivals for the

remainder of 2019

7



Key policy rates – 50bp rate cut introduced to spur credit growth The CBSL reduced the SLF rate by 50bps during the second MPR, in-line with our expectations. According to the Monetary Policy Committee (MPC), this was due to 1) lagging global economic trends and dovish monetary policy stance, 2) slow credit growth and 3) additional economic impact due following Easter Sunday attacks. The MPC further stated that the CBSL expects the rate cut to help bring down elevated commercial lending rates. According to the MPC, high market lending rates, sluggish growth in economic activity, subdued business confidence, along with a delay in government payments to projects contributed to the decline in credit growth. Private sector credit growth fell to 9.9% YoY (12-month high 16.2% YoY November 2018) while SoE credit growth edged down to 24.9% (12-month high of 40.9% YoY Oct 2018), in April. It was noted that, despite measures such as implementing deposit ceiling rates, liquidity injections and downward rating of government securities, AWPLR has remained relatively stable.

Private sector credit

Source: CBSL, Asia Securities

The CBSL noted that the pickup in inflation over CY19 YTD was partly due to a lagging impact from the LKR depreciation factored into cost of goods. However, the CB expects inflation to remain stable on subdued aggregate demand and believes that the recent acceleration will be temporary. Our key takeaways are: 1) Rate cut in anticipation of significant economic slowdown, impact to materialize in 2H CY19E, 2) credit growth hits low points on elevated market lending rates, and 3) Inflation expected to remain stable on slowing aggregate demand.

-2.6 0.8

4.8

8.5

19.722.6

27.1

40.9 41.7 40.7

34.631.0

24.9

15.3 15.3 15.1 14.9 14.7 14.3 15.4 16.1 16.2 15.9 14.8 13.6

9.9

Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19

YoY public sector credit growth (%) (RHS)

Private sector credit

growth remains low,

largely on the back of

low business

confidence

8



Current account weakness to challenge LKR appreciation in 2H CY19E The current 30-day average spot rate stood at LKR 176.57 with the June YTD appreciation sitting marginally weaker compared to May (3.5% in June vs. 3.7% in May 2019). The LKR was largely supported by FX inflows driven by the ISB issuance completed late June as well as a depreciation in the USD against peer currencies; the USD depreciated 1.4% against the EUR following the US Federal reserve announcing the possibility of rate cuts in CY19E. However, net capital outflows, particularly equity outflows (USD 35.7mn net outflow June YTD) as well as the significant lack of tourism earnings (-70.0% YoY in May) continued to add pressure.

LKR YTD appreciation loses momentum in June


We expect a significant decline in tourism earnings and workers remittances as well as a lack of FDIs and other capital inflows to continue to challenge the YTD appreciation of the LKR. The improvement in the trade balance, on account of slower consumer demand as well as lower fuel and gold imports is currently limiting the downside risk. However, with the lift to restrictions on non-essential imports in March, we expect a sequential improvement to imports incrementally shaving off some of the tailwind. As such, we continue to expect the YTD appreciation in the LKR to be challenged in 2H CY19E. One positive is the likelihood of US Fed rate cuts in 2019 which should prevent further strengthening of the USD. Accordingly, we expect LKR/USD spot 30-day average to depreciate to LKR 185.00 by December 2019, although at a much slower rate compared to CY18. Effectively, we expect 4.8% depreciation from the current 30-day spot average. FX reserves at USD 6.7bn to cover ~3.9 months of imports Sri Lanka’s official reserves position for May ended at USD 6.7bn, down 6.7% MoM (-23.2% YoY). We believe the weakness was driven by a lack of inflows from both investments and tourism earnings coupled with a slight sequential pick up in imports following the lift to import restrictions on non-essential goods in March 2019. Official reserves now cover ~3.9 months of imports. This is below that of April (~4.1 months of imports), however still above the 12-month low witnessed in January and February 2019 (~3.4 months of imports). Foreign currency reserves were down 7.9% MoM (-25.9% YoY). According to media sources, the CB has completed a majority of the debt payments due for 2019. However, lack of inflows from investments and tourism earnings will continue to add pressure on reserves. As such, we expect the USD 2.0bn ISB issuance in June to strengthen reserves to ~4.8 months of imports by June end but deterorate thereafter to 3.9 months of imports by CY19E end, on significant current account headwinds.

-20

-16

-12

-8

-4

0

140.00

150.00

160.00

170.00

180.00

190.00

May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19

(%)LKR/USD

LKR/USD (LHS) YoY Dep'n (RHS)

June YTD appreciation

of the LKR sitting

marginally weaker

compared to May

Latest USD 2.0bn ISB

issuance to strengthen

reserves to ~4.8

months of imports,

temporarily

9



Reserves edge down to USD 6.7bn covering ~3.9 months of imports in May


Short-end of the yield curve improves on increased liquidity Net foreign outflows YTD peaked at USD 86.3mn by the week ending 5th June 2019 following the announcement of a statutory rate cut of 50bp on 31st May 2019. However, the markets have recovered since attracting a net inflow of USD 6.8mn over the last two weeks ending the YTD net outflow at USD 79.5mn (week ending 19th June 2019). Yields continued to improve in the shorter end of the curve on increased liquidity on low credit growth, with the 12-month treasury bill improving 24bp MoM (58bp YoY). We note that the Sri Lanka yield curve is regaining curvature since reaching near flatness on heightened short-term political risks following the constitutional crisis in October and lack of liquidity, the combined effects of which pushed up the short end of the yield curve. As such we, revise down our 12-month treasury yield forecast to 8.50% for CY19E, from a previous 10.60%.

Yield curve regains its shape


Nevertheless, heightened political risks continue to weigh on sentiment and investors continue to take a wait-and-see position on Sri Lanka. This is emphasized by the lack of capital inflow momentum despite noteworthy improvement in security risks post the Easter Sunday Attack. The impact on tourism earnings does raise Sri Lanka’s external financing risk in the medium term. However, we note that the short-term risks are well managed with a stronger reserves position compared to the beginning of the year and external debt obligations for 2019 largely met.

4.8 5.0 4.5 4.6

3.8 4.2

3.7 3.7 3.4 3.4

4.3 4.1 3.9

8.89.2

8.4 8.6

7.2

7.9

7.0 6.9

6.1 6.0

7.67.2

6.7


Months of imports Reserves (USD bn)

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

3M 6M 12M 2Y 5Y 6Y 8Y 10Y 15Y 20Y 30Y

%

19th June 2019 20th June 2018 22nd May 2019

Yields continued to

improve in the shorter

end of the curve on

increased liquidity

10



Inflation edges up as food prices enter inflationary territory Inflation measured by the Colombo Consumer Price Index (CCPI) for May edged up 0.5pp sequentially to 5.0% YoY. The spike was largely due to food commodities recording its first positive inflation in seven months, reversing its ability to partially offset non-food inflation. According to the Department of Census and Statistics, contribution from non-food inflation remained steady sequentially at 4.8% (4.8% in April) while contribution from food commodities jumped to 0.2% (-0.3% in April). Food commodities recorded inflation in seven months, coming in at 0.8% YoY in May as the high base effect which drove significant food deflation 2H CY18 was fully tapered out, in line with our expectations. An increase in prices for vegetables and seafood largely contributed to the rise. However, non-food inflation remained steady, sequentially at 6.8% YoY (6.8% YoY in April) as the subsidising of low-grade fuels helped maintain stability in inflation, in our view. In fact, contribution to non-food inflation from transport edged down to 0.8% (0.9% April). Island-wide inflation, as measured by the National Consumer Price Index (NCPI), edged down 10bps MoM in May to come in at 3.5% YoY, largely due to a sequential step down in contribution from non-food inflation. Non-food inflation contributed to 3.7% (4.2% in April) of YoY inflation, while food inflation contributed -0.2% (-0.6% in April). However, the 12-month moving average continued to increase, up 10bp MoM to ended at 2.0% YoY in May. On a MoM basis, NCPI was up 1.1% MoM compared to 0.7% MoM in April.

Inflation picks up on first YoY increase in food prices in seven months


The increase to big ticket household expenditure for 2019 such as utilities, housing, and education coupled with food prices hitting inflationary territory, we expect inflation to face some upward pressure. As such, we expect December CY19E to see higher headline inflation compared to CY18. However, while the government continues to administer a fuel pricing formula, our calculations show a substantial subsidy on low grade fuels, especially Auto diesel which is widely used for transport of public and goods. This, we believe, will help to curtail inflation volatility whilst easing pressure from other non-food and food inflation. As such, we expect headline inflation to come in at 4.8% and 12M rolling average forecast at 4.7% in CY19E. This still comes below the mid-point of the CBSL’s expectation of 4.0-6.0% although on par with the IMF estimate of 4.8% YoY and higher than that of CY18. We expect CY20E inflation to pick up to 5.0% YoY, the mid-point of the target band set by the Central Bank.

-4

0

4

8

May-18 Aug-18 Nov-18 Feb-19 May-19

(%)

Food inflation Non-food inflation CCPI

Food commodities

recorded its first

inflation in seven

months

11



Fiscal sector – CY18 budget deficit falls short on lower revenue collection CY18 fiscal deficit amounted to LKR 761bn, or ~5.3% of GDP (compared with 5.5% of GDP for CY17), although in absolute terms, up by 3.7% YoY. This, we note is above our estimate of 4.9% and the government’s original target of 4.5% due to slower than anticipated growth in revenue collection. Government revenue as % of GDP dipped to ~14.1% of GDP (14.5% in CY17), largely due to tax revenues dipping to 11.9% of GDP (12.6% of GDP in CY17). Meanwhile, non-tax revenue picked up by 29.2% YoY for the period under review, accounting for 1.4% of GDP (up from 1.2% of GDP in CY17). For CY18, tax revenue accounted for 84.5% of total revenue compared to the 86.5% for CY17, while non-tax revenue accounted for 10.3% compared with 8.3% for CY17. The significant increase in non-tax revenue, we believe, was due to a recovery in income collected from state-owned business enterprises following a year of low profits in 2017. In relation tax-revenue, however, we feel the significant hike on vehicle import duties in August 2018, especially for vehicles with an engine capacity of 1,000cc and below, coupled with 200% LTV margins on import LCs in September, resulted in the 8.1% YoY decline in taxes collected from external trade, and thus, the 70bp YoY decline in tax-revenue as % of GDP. Overall expenditure was up by 4.5% YoY in CY18, amounting to ~19.4% of GDP (compared with 20.1% of GDP for CY17), indicating a slight improvement on fiscal consolidation efforts. Interest payments continued to be the highest area of expenditure for the government, with LKR 852bn of payments recorded in CY18, up by 15.8% YoY during the period under review. It is noteworthy that, Government expenditure on salaries and wages picked up by 5.6% YoY during the year, amounting to LKR 697bn, the second largest recurrent expenditure component for the government, ahead of subsidies and transfers (LKR 473bn). Meanwhile, public investments declined by 4.9% YoY during CY18 to LKR 625bn indicating the government’s continued efforts to maintain fiscal consolidation was concentrated on curtailing large capital expenditure. However, on a positive note, the GoSL has been successful in recording a primary surplus of 0.6% in CY18, compared to a breakeven in CY17, indicating that the debt burden continues to be the single most significant draw back for Sri Lanka to reach budget surplus.

As a percentage of GDP, the budget deficit declined in 4Q 2018

Source: MoF, Asia Securities

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

1Q CY17 3Q CY17 1Q CY18 3Q CY18

(%) of GDP(%) of GDP

Revenue (LHS) Expenditure (LHS) Overall deficit (RHS)

Increase in LTVs for imports and duty hike on vehicles result in loss of volume, leading to lower tax revenue collected from external trade

GoSL investments take the brunt of the burden of fiscal consolidation efforts

12



External sector – Trade deficit improves on lower fuel and gold imports January-April trade deficit declined 38.3% YoY to USD 2,458mn largely due to a USD 1,353mn YoY decline in imports and further supported by a USD 170mn YoY uptick in exports, April YTD. Declines were wittnessed across all segments of imports in April although a fall in fuel and gold volumes accounted for ~89.0% of the decline in absolute value terms. Nevertheless, Sri Lanka’s terms of trade continued to deteriorate, declining 5.4% YoY in April due to a decline in exports prices relative to price of imports. Exporters capitalised on the LKR depreciation to bolster competitve pricing and win volumes. As such, export volume index moved up +9.5% YoY although at the cost of export price index falling 8.3% YoY resulting in the rather flat growth in exports (+0.4% YoY). Nevertheless, signs of end market slowdown on the back as a result of slowing global economic growth began reflect in April.

Garment and Textile recorded a 5.6% growth April (9.9% YoY April YTD)

driven by higher demand from US and other non-traditional markets

(China, Brazil, Australia and Canada). However, EU markets UK, Italy,

Germany and France recorded declines according to CBSL.

Agri continued to decline, down 7.0% YoY in April (-2.2% YoY April YTD)

largely due to a decline in tea exports (-9.7% YoY) and spices (-11.0%

YoY). Tea saw a decline in both volumes and auction prices. Exports from

coconut and coconut by-products remained marked a 5.3% YoY growth.

April saw petroleum products increase 13.7% YoY, which partially offset

the YTD weakness (-3.6% YoY April YTD) driven by an increase in both

price and volume for bunker and aviation fuel.

Source: CBSL, ASEC

April saw imports decline 11.0% YoY despite the lift to restrictions on non-essential goods in March 2019. However, we do note that a bulk of the decline is due to a drop in imports of fuel and gold followed by vehicle imports that are impacted by heavy duty increase in both 2018 and 2019. We also note that the YTD decline in imports are starting to taper down; the import bill declined 11.0% YoY April 2019 vs. 27.6% YoY in February 2019 confirming our view that imports should show a sequential increase following a lift to restrictions.

F&B goods continued to decline largely due to a 95.3% YoY decline in

rice imports as the bumper paddy harvest removed Sri Lanka’s

dependency on imported rice. Declines were also witnessed in seafood

and confectionary goods although partially offset by a 77.8% YoY

increase in dairy products.

Total fuel import bill declined 9.7% YoY as the CPC continued to favour

crude import volumes (+10.1% YoY) over refined petroleum (-6.8% YoY).

The decline was also supported by Coal, down 99.7% YoY.

Vehicle imports declined 69.7% YoY in April largely due to a YoY volume

decline of 1000cc category, Hybrid vehicles and EVs following the

increase in duties for the vehicle types in 2018. We believe the further

increase in vehicle duties in March 2019 to have an added impact.

Investment goods experienced a marginal growth (+2.4% YoY) although

largely driven by a 61.1% YoY growth in transport equipment. Contrary to

March, April saw a decline in building materials (-16.5% YoY) and

machinery (-2.7% YoY). This sits in line with our expectation that the

March uptick was short lived following April events. While a low interest

rate environment could stimulate construction activity, low investment

sentiment will outweigh this, in our view.

Source: CBSL, ASEC

Two successive

increases in vehicle

duties supports 69.7%

YoY decline in vehicles

imports in April

EU markets UK, Italy,

Germany and France

recorded a decline in

demand for Garment

and Textile, according

to CBSL.

13



Decline in fuel and gold volumes dominates import decline; price impact sees flat exports YoY


We expect exports to grow, although at low single digit levels given that the decline in prices are offsetting volume growth, substantially. Sri Lanka does stand to benefit from the China-US trade war, as Chinese producers seek new manufacturing hubs outside of the respective countries although this is should appear with lag; any initial wave of demand will be absorbed by more price competitive locations, such as Bangladesh, Vietnam and East Africa in our view. Instead however, we believe that the China-US trade war, coupled with Brexit uncertainty and the resulting slowdown in Sri Lanka’s exporter end-markets pose a bigger threat. With regards to imports, we note that trade restrictions were lifted in March for non-essential goods which could lead to an uptick to make up for lost inventory since September 2018. However, two successive increases in vehicle duties (August 2018 and March 2019) coupled with low consumer confidence should maintain low demand and overall import discipline. Additionally, with a decline in tourism activity, CBSL estimates a USD 0.30 drop in imports for every USD 1.0 in tourism earnings lost, adding further relief on the trade balance. Taking into account the additional tailwinds on imports for 2019, coupled with steady export earnings, we expect Sri Lanka’s trade balance to normalise to 10.9% of GDP in CY19E (previous 11.6% of GDP) and maintain same in CY20E.

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

Apr-18 Jun-18 Aug-18 Oct-18 Dec-18 Feb-19 Apr-19

USD mn

Exports Imports

US-China trade war is a

threat rather than an

opportunity for Sri

Lanka’s export market

14



Figures in USD mn Apr-18 Mar-19 Apr-19 YoY (%) MoM (%) 4M CY18 4M CY19 YoY (%)

Total exports 795 1,137 798 +0.4 -29.8 3,784 3,954 +4.5

Industrial exports 601 898 618 +2.7 -31.3 2,923 3,112 +6.5

Tex. and garments 339 533 358 +5.6 -32.9 1,667 1,832 +9.9

Rubber products 55 83 53 -4.3 -36.0 281 286 +1.9

FB&T* 34 47 29 -12.5 -38.1 155 165 +6.6

Gems, D&J** 17 32 23 +32.2 -28.3 107 106 -0.4

Agri exports 190 232 177 -7.0 -23.8 843 825 -2.2

Tea 110 126 99 -9.7 -21.4 478 446 (6.7)

Coconut 23 35 24 +5.8 -31.3 101 112 +10.7

Spices 18 24 16 -11.2 -34.7 96 96 +0.4

Seafood 23 28 23 -0.4 -19.5 93 104 +11.2

Rubber 2 3 3 +8.7 -21.9 14 11 -22.7

Total imports 1,794 1,729 1,596 -11.0 -7.7 7,765 6,413 (17.4)

Consumer goods 420 352 308 -26.6 -12.4 1,780 1,220 (31.4)

F&B 126 138 123 -3.1 -11.2 653 457 -29.9

NF cons. goods^ 293 214 186 -36.7 -13.2 1,127 763 -32.3

Vehicles 158 72 48 -69.8 -34.1 517 217 -57.9

Clothing & acc. 19 23 20 +3.1 -11.6 116 95 -18.2

Intermediate goods 978 987 883 -9.8 -10.6 4,330 3,657 (15.5)

Fuel 327 408 295 -9.7 -27.7 1,402 1,314 (6.3)

Crude oil 50 102 56 +10.1 -45.5 204 293 +43.8

Refined petroleum 257 272 240 -6.8 -11.8 1,054 898 (14.8)

Textiles 192 214 219 +14.3 +2.4 883 908 +2.8

Fertiliser 14 39 26 +89.9 -33.3 89 75 -15.7

Base metals 54 35 32 -40.2 -7.5 189 173 (8.6)

Investment goods 395 389 404 +2.4 +3.8 1,591 1,533 -3.6

Machin. and equip 216 214 210 -2.7 -1.9 867 849 -2.1

Building material 121 135 101 -16.5 -25.0 500 477 -4.5

Transport equip 58 40 93 +61.0 +134.4 221 205 -7.5

Trade balance (999) (592) (797) -20.2 +34.6 (3,981) (2,458) (38.3)

Tourism earnings 339 459 313 -7.7 -31.8 1,667 1,704 +2.2

Worker remittances 541 571 554 +2.4 -3.0 2,520 2,171 -13.8

Inflows to the CSE 28 (5) 10 -64.3 -300.0 47 (24) -151.1

Inflows to the govt. 2,735 2,562 115 -95.8 -95.5 3526 3,199 (9.3)

T bills and bonds 122 71 29 -76.2 -59.2 480 267 -44.4

Int'l sov. bond 2,500 2,400 - -100.0 -100.0 2,500 2,400 (4.0)

Syndicated loans - - - nm nm - - nm

LT loans 113 91 86 -23.9 -5.5 546 532 (2.6)

FDI - - - nm nm - - nm

Source: CB, Asia Securities | Note - *Food, beverages & tobacco, **Gems, diamonds & jewelry, ^Non-food consumer goods

15



Current account – Tourism earnings down 70.0% following 21/4 events Official data is yet to be published, however according to media reports quoting the Chairman of the Sri Lanka Tourism Promotion Bureau (SLTPB), tourist arrivals in the month of May were down ~70.0% YoY reaching close to 38,840. Based on our assumptions, this should amount to tourism earnings of ~USD 72mn (vs. USD 240mn in May 2018). Remittances reverted to a declining trend with May down 3.2% YoY (following +2.3% YoY growth in April). However, the declines are on a diminishing trend; Single digit decline in May vs. double digit decline in March YTD (-18.3% YoY). This indicates to us that the speculative behavior that contributed to much of the declines in 1Q CY19 is beginning to phase out. Nevertheless, we expect remittances to maintain a declining trend as a result of waning demand for migrant labour in the Middle East. The government has taken steps to increase migrant worker quotas to other regions such as Europe. Overall, however, we feel these steps, while encouraging, are insufficient to compensate for the general slowdown in the Middle East which accounted for ~50.0% of CY18 total remittances to Sri Lanka.

Remittances revert to declining trend following a brief pick up in April; tourism adds drag

Source: CBSL, Asia Securities | May 2019 Tourism earnings are based on ASEC estimates

With adverse travel warnings lifted for all key source markets, we expect a pick-up in Chinese and Indian tour operations from October onwards. The developments are encouraging and in line with our expectations to attract an additional +750,000 arrivals for the remainder of CY19E. We continue to expect tourism arrivals for CY19E at 1.7mn (-26.0% YoY) and tourism receipts of USD 3.2bn (USD 4.4bn in 2018). Coupled with decline in worker remittances, we forecast a current account balance of -3.6% for CY19E (-3.2% in CY18) but improve to -3.2% in CY20E.

0

200

400

600

800

1,000

1,200


USD mn

Worker remittances Tourism earnings

Remittances return to

declining trend in May,

albeit slower than 1Q

CY19

16



Policy update – Pension anomaly revisions to see salary hikes of upto LKR 20,000 As per the proposal brought forward during the March 2019 budget, 500,000 pensioners who retired before 31 December 2015 are set to benefit from a removal of an anomaly between two separate pension salary scheme circulars. Accordingly, pensioners who retired before the 31 December 2015 could see salary increases ranging from LKR 2,800 (equivalent to Service Grade 1 employee) to LKR 20,000 (equivalent to a ministry secretary), depending on the designation. The policy is expected to come into effect 1St July 2019, along with anticipated LKR 2,500 hike in basic public sector wages. We note that the government is expected to release a revised budget for 2019, taking into account pressure on expenditure post Easter Sunday attacks and its impact on tax revenue given;

• consumer slowdown which has resulted in a slowdown in imports and consequently a decline in duty collections, and

• low VAT collection • low income tax collection on lower corporate and individual incomes

To compensate for the increase in expenditure on defence and to provide financial support towards affected sectors, we believe that the government will look to cut back on expenditure allocated towards projects such as the Gamperaliya and Enterprise Sri Lanka for certain sectors. In addition, given the critical objective of maintaining fiscal consolidation efforts to meet IMF requirements under the EFF program, we continue to expect the government expenditure cut back, especially on major infrastructure projects. However, with weakening revenue collection conditions, we revise our 2019 budget deficit to reach ~5.2% of GDP from previous 5.0% of GDP.

Pension scheme revision

to come alongside LKR

2,500 public sector pay

hike in July 2019

17



Outlook

1) CY19E growth to come in at 2.5% YoY on tourism slowdown to adding drag – We maintain our expectation of a consumer-led growth in 2H CY19E on the back of a bumper paddy harvest in 1Q CY19 adding impetus to farmer incomes as well as government concessions such as the public sector salary hike in July and the extension to a special drawing facility for pensioners under the Samurdhi scheme. Nevertheless, we continued to expect growth to slow down to 2.5% YoY in CY19E (3.2% YoY CY18) given the impact on tourism which is likely to have a spill over impact on the food industry, retail, wholesale and banking sectors. 2) Fiscal consolidation to materialize at a slower pace - To compensate for the increase in expenditure on defence and to provide financial support towards affected sectors, we believe that the government will look to cut back on expenditure allocated towards projects such as the Gamperaliya and Enterprise Sri Lanka for certain sectors. To maintain public sector favour within the current government, the LKR 2,500 pay hike to the public sector was approved as planned. Given the critical objective of maintaining fiscal consolidation efforts to meet IMF requirements under the EFF program, we continue to expect the government to see a decline in overall government expenditure with a cut back to major infrastructure projects. However, with weakening revenue collection conditions, we revise our 2019 budget deficit to reach ~5.2% of GDP from previous 5.0% of GDP. 3) Reserves to remain under pressure in 2019, ending the year covering ~3.9 months of imports – We expect CBSL to prioritise strengthening reserves in 2019 with the shortfall brought about by a weakness in the current account to be met with additional borrowing of USD 2.0bn. Inflows to be minimal, given heightened security concerns following Easter Sunday events, heightened political uncertainty and upcoming elections which will have investors take a wait-and-see approach on investment decisions. However, outflow risks remain under control. With a majority of the debt obligations for CY19E fulfilled, we continue to expect reserves to end at USD 7.2bn, covering ~3.9 months of imports in CY19E. 4) Current account weakness likely to add pressure on currency – We expect a significant decline in tourism earnings and workers remittances as well as a lack of FDIs and other capital inflows to continue to challenge the YTD appreciation of the LKR. The improvement in the trade balance, on account of slower consumer demand as well as lower fuel and gold imports, is currently limiting the downside risk. However, with the lift to restrictions on non-essential imports in March, we expect a sequential improvement to imports incrementally shaving off some of the tailwind. As such, we continue to expect the YTD appreciation in the LKR to be challenged in 2H CY19E. One positive is the likelihood of US Fed rate cuts in 2019 which should prevent further strengthening of the USD. Accordingly, we expect LKR/USD spot 30-day average to depreciate to LKR 185.00 by December 2019, although at a much slower rate compared to CY18. Effectively, we expect 4.8% depreciation from the current 30-day spot average. 5) Inflation to gain stability in CY19E on subsidised fuel prices – The increase to big ticket household expenditure for 2019 such as utilities, housing, and education coupled with food prices hitting inflationary territory, we expect inflation to face some upward pressure. As such, we expect December CY19E to see higher headline inflation compared to CY18. However, while the government continues to administer a fuel pricing formula, our calculations show a substantial subsidy on low grade fuels, especially Auto diesel which is widely used for transport of public and goods. This, we believe, will help to curtailing inflation volatility whilst ease pressure from other non-food and food inflation. As such, we expect headline inflation to come in at 4.8% and 12M rolling average forecast at 4.7% in CY19E. This still comes below the mid-point of the CBSL’s expectation of 4.0-6.0% although on par with the IMF estimate of 4.8% YoY and higher than that of CY18. We expect CY20E inflation to pick up to 5.0% YoY, the mid-point of the target band set by the Central Bank.

18



Fiscal deficit

Source: MoF, Asia Securities

Headline inflation


Forex reserves (Months of imports)


Currency depreciation


Trade deficit


Broad money growth


Yield spread (3M vs. 1Yr)


Purchasing Manager Index


0.5

1.0

1.5

2.0

1Q 2Q 3Q 4Q

(%) of GDP

12M ended 4Q CY17 12M ended 4Q CY18

0.0

2.0

4.0

6.0

8.0

10.0


(%)

12M ended to May 18 12M ended to May 19

2.0

3.0

4.0

5.0

6.0


(%)

12M ended to May 18 12M ended to May 19

0

4

8

12

16

20

Jun-18 Aug-18 Oct-18 Dec-18 Feb-19 Apr-19 Jun-19

(%)

12M ended to June 18 12M ended to June 19

0.4

0.6

0.8

1.0

1.2

1.4

Apr-18 Jul-18 Sep-18 Nov-18 Feb-19 Apr-19

(%) of GDP

12M ended to Apr 18 12M ended to Apr 19

4.5

5.0

5.5

6.0

6.5

7.0

7.5

Apr-18 Jun-18 Aug-18 Oct-18 Dec-18 Feb-19 Apr-19

LKR tn


0.0

0.5

1.0

1.5

2.0

Jun-18 Aug-18 Oct-18 Dec-18 Feb-19 Apr-19 Jun-19

(%)

12M ended to June 18 12M ended to June 19

30

40

50

60

70


Points


19

This report is strictly for direct recipients from Asia Securities. Redistribution of this report is strictly prohibited. Please see pages 20 & 21 for


Key Economic Indicators

Key indicators 2014 2015 2016 2017 2018 2019E 2020E 2021E

Real GDP growth (%) 5.0 5.0 4.5 3.3 3.0 2.5 3.8 4.3

Headline inflation (%) 3.3 0.9 4.0 7.1 2.8 4.8 5.0 5.0

12M moving average (%) 3.3 2.2 4.0 6.6 4.3 4.7 5.0 4.8

Core inflation (%) 3.5 3.1 4.4 4.3 3.1 5.0 4.7 5.0

LKR/USD 131.05 144.06 149.80 152.85 180.37 185.00 190.87 193.81

Depreciation (%) 0.2 9.9 4.0 2.0 18.0 2.6 3.2 1.5

Unemployment (%) 4.3 4.7 4.4 4.2 4.1 4.3 4.2 4.3

12M government bond yield (%) 6.00 7.30 10.20 8.90 10.90 8.50 8.90 9.00

12M moving average (%) 6.69 6.61 9.93 10.05 9.75 10.41 8.50 9.70

Fiscal balance (% of GDP) (5.7) (7.6) (5.4) (5.5) (5.3) (5.2) (4.7) (4.5)

Trade balance (% of GDP) (10.4) (10.4) (10.9) (10.9) (11.6) (10.9) (10.9) (10.7)

Current balance (% of GDP) (2.5) (2.3) (2.1) (2.6) (3.2) (3.6) (3.2) (2.6)

FX reserves (months of imports) 5.1 4.6 3.7 4.0 3.7 3.9 4.0 4.2

Debt/GDP (%) 71.3 77.7 78.8 77.6 82.9 90.0 90.0 88.0

Foreign debt (% of total debt) 30.0 32.4 34.0 35.2 41.2 45.0 45.0 40.0

Source: CBSL, DoCS, MoF, Asia Securities | E: baseline estimate

20



Company Certification

Asia Securities (Private) Limited has no direct affiliation with the company/companies covered in this report and does not receive any material benefit from the company for publishing this report.

Disclaimer The report has been prepared by Asia Securities (Private) Limited. The information and opinions contained herein has been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith. Such information has not been independently verified and no guaranty, representation or warranty, express or implied is made as to its accuracy, completeness or correctness, reliability or suitability. All such information and opinions are subject to change without notice. This document is for information purposes only, descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments. In no event will or Asia Securities (Private) Limited be liable for any loss or damage including without limitation, indirect or consequential loss or damage, or any loss or damage whatsoever arising out of, or in connection with the use of this report and any reliance you place on such information is therefore strictly at your own risk. Asia Securities (Private) Limited may, to the extent permissible by applicable law or regulation, use the above material, conclusions, research or analysis in which they are based before the material is disseminated to their customers. Not all customers will receive the material at the same time. Asia Securities (Private) Limited, their respective directors, officers, representatives, employees, related persons and/or Asia Securities (Private) Limited, may have a long or short position in any of the securities or other financial instruments mentioned or issuers described herein at any time and may make a purchase and/or sale, or offer to make a purchase and/or sale of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principal or agent. Asia Securities (Private) Limited may make markets in securities or other financial instruments described in this publication, in securities of issuers described herein or in securities underlying or related to such securities. Asia Securities (Private) Limited may have recently underwritten the securities of an issuer mentioned herein. The information contained in this report is for general information purposes only. This report and its content is copyright of Asia Securities (Private) Limited and all rights reserved. This report- in whole or in part- may not, except with the express written permission of and Asia Securities (Private) Limited be reproduced or distributed or commercially exploited in any material form by any means whether graphic, electronic, mechanical or any means. Nor may you transmit it or store it in any other website or other form of electronic retrieval system. Any unauthorized use of this report will result in immediate proceedings.

21



RESEARCH DISCLOSURES Third Party Research This is third party research. It was prepared by Asia Securities (Pvt) Limited (Asia Securities), with headquarters in Colombo, Sri Lanka. Asia Securities is authorized to engage in securities activities according to its domestic legislation. This research is not a product of Tellimer Markets, Inc., a U.S. registered broker-dealer. Asia Securities has sole control over the contents of this research report. Tellimer Markets, Inc. does not exercise any control over the contents of, or the views expressed in, research reports prepared by Asia Securities. Asia Securities is not registered as a broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This research report is provided for distribution to “major U.S. institutional investors” and other “U.S. institutional investors” in reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”). Any U.S. recipient of this research report wishing to effect any transaction to buy or sell securities or related financial instruments based on the information provided in this research report should do so only through Tellimer Markets, Inc. located at Floor 36, 444 Madison Avenue, Floor 36, New York, NY 10022. A representative of Tellimer Markets, Inc. is contactable on +1 (212) 551 3480. Under no circumstances should any U.S. recipient of this research report effect any transaction to buy or sell securities or related financial instruments through Asia Securities Tellimer Markets, Inc. accepts responsibility for the contents of this research report, subject to the terms set out below, to the extent that it is delivered to a U.S. person other than a major U.S. institutional investor. None of the materials provided in this report may be used, reproduced, or transmitted, in any form or by any means, electronic or mechanical, including recording or the use of any information storage and retrieval system, without written permission from. Asia Securities is the employer of the research analyst(s) responsible for the content of this report and research analysts preparing this report are resident outside the U.S. and are not associated persons of any U.S. regulated broker-dealer. The analyst whose name appears in this research report is not registered or qualified as a research analyst with the Financial Industry Regulatory Authority (“FINRA”) and may not be an associated person of Tellimer Markets, Inc. and, therefore, may not be subject to applicable restrictions under FINRA Rules on communications with a subject company, public appearances and trading securities held by a research analyst account. Tellimer Markets, Inc. or its affiliates has not managed or co-managed a public offering of securities for the subject company in the past 12 months, has not received compensation for investment banking services from the subject company in the past 12 months, and does not expect to receive or intend to seek compensation for investment banking services from the subject company in the next three months. Tellimer Markets, Inc. has never owned any class of equity securities of the subject company. There are no other actual, or potential, material conflicts of interest of Tellimer Markets, Inc. at the time of the publication of this report. As of the publication of this report, Tellimer Markets, Inc. does not make a market in the subject securities. About Tellimer Tellimer is a registered trade mark of Exotix Partners LLP. Exotix Partners LLP and its subsidiaries ("Tellimer") provide specialist investment banking services to trading professionals in the wholesale markets. Tellimer draws together liquidity and matches buyers and sellers so that deals can be executed by its customers. Tellimer may at any time, hold a trading position in the securities and financial instruments discussed in this report. Tellimer has procedures in place to identify and manage any potential conflicts of interests that arise in connection with its research. A copy of Tellimer’s conflict of interest policy is available at www.tellimer.com/regulatory-information. Distribution This report is not intended for distribution to the public and may not be reproduced, redistributed or published, in whole or in part, for any purpose without the written permission of Tellimer. Tellimer shall accept no liability whatsoever for the actions of third parties in this respect. This report is for distribution only under such circumstances as may be permitted by applicable law. This report may not be used to create any financial instruments or products or any indices. Neither Tellimer, nor its members, directors, representatives, or employees accept any liability for any direct or consequential loss or damage arising out of the use of all or any part of the information herein. United Kingdom: Distributed by Exotix Partners LLP only to Eligible Counterparties or Professional Clients (as defined in the FCA Handbook). The information herein does not apply to, and should not be relied upon by, Retail Clients (as defined in the FCA Handbook); neither the FCA’s protection rules nor compensation scheme may be applied. UAE: Distributed in the Dubai International Financial Centre by Exotix Partners LLP (Dubai) which is regulated by the Dubai Financial Services Authority (“DFSA”). Material is intended only for persons who meet the criteria for Professional Clients under the Rules of the DFSA and no other person should act upon it. Other distribution: The distribution of this report in other jurisdictions may be restricted by law and persons into whose possession this document comes should inform themselves about, and observe, any such restriction. Disclaimers Tellimer and/or its members, directors or employees may have interests, or long or short positions, and may at any time make purchases or sales as a principal or agent of the securities referred to herein. Tellimer may rely on information barriers, such as “Chinese Walls” to control the flow of information within the areas, units, divisions, groups of Tellimer. Investing in any non-U.S. securities or related financial instruments (including ADRs) discussed in this report may present certain risks. The securities of non-U.S. issuers may not be registered with, or be subject to the regulations of, the U.S. Securities and Exchange Commission. Information on such non-U.S. securities or related financial instruments may be limited. Foreign companies may not be subject to audit and reporting standards and regulatory requirements comparable to those in effect within the United States. The value of any investment or income from any securities or related financial instruments discussed in this report denominated in a currency other than U.S. dollars is subject to exchange rate fluctuations that may have a positive or adverse effect on the value of or income from such securities or related financial instruments. Frontier and Emerging Market laws and regulations governing investments in securities markets may not be sufficiently developed or may be subject to inconsistent or arbitrary interpretation or application. Frontier and Emerging Market securities are often not issued in physical form and registration of ownership may not be subject to a centralised system. Registration of ownership of certain types of securities may not be subject to standardised procedures and may even be effected on an ad hoc basis. The value of investments in Frontier and Emerging Market securities may also be affected by fluctuations in available currency rates and exchange control regulations. Not all of these or other risks associated with the relevant company, market or instrument which are the subject matter of the report are necessarily considered.

http://www.tellimer.com/regulatory-information

22



Research

Institutional Sales

Foreign Sales

Retail Sales

Subeeth Perera

[email protected]

+94 11 772 2035

+94 71 404 2683

Kalana Hewawasam

[email protected]

+94 11 772 2028

+94 77 395 9438

Priyantha Hingurage

[email protected]

+94 11 772 2033

+94 77 350 2015

Nuwan Eranga Perera

[email protected]

+94 11 772 2026

+94 77 736 8012

Romesh Priyadarshana

[email protected]

+94 11 772 2032

+94 77 254 8795

Ashan Silva

[email protected]

+94 11 772 2005

+94 77 045 8028

Asia Securities (Pvt) Ltd., 4th Floor, Lee Hedges Tower, 349, Galle Road, Colombo 03, Sri Lanka. | Tel: +94 11 772 2000 | Web:

www.asiasecurities.net

Kavinda Perera – Head of Research

Strategy | Banks | Insurance |

Telecommunications

[email protected]

+94 11 772 2044

Lakshini Fernando

Economics | Finance

[email protected]

+94 11 772 2045

Osadi Hettiarachchi

Finance

[email protected]

+94 11 772 2048

Mangalee Goonetilleke

Conglomerates | Consumer |

Healthcare | Logistics

[email protected]

+94 11 772 2042

Isuri Munasinghe

Economics | Leisure

[email protected]

+94 11 772 2036

Thilini Amarasiri

[email protected]

+94 11 772 2041

Naveed Majeed

Manufacturing | Leisure |

Energy | Construction

[email protected]

+94 11 772 2043

Sabri Marikar

CEO

[email protected]

+94 11 772 2022

+94 77 357 6868

Anushan Kandasamy

[email protected]

+94 11 772 2019

+94 77 722 2519

Charith Perera

[email protected]

+94 11 772 2015

+94 77 359 8937

Shiyam Subaulla

Co-head, Broking

[email protected]

+94 11 772 2011

+94 77 350 2016

Ruwan Hettiarachchi

[email protected]

+94 11 772 2020

+94 77 741 0164

Niroshan Wijekoon

[email protected]

+94 11 772 2007

+94 77 771 3645

Gagani Jayawardhana

[email protected]

+94 11 772 2014

+94 71 408 4953

Dinusha Gomes

Head of Foreign Sales

[email protected]

+94 11 772 2080

+94 77 300 2274

Lahiru Ariyaratne

Co-head, Broking

[email protected]

+94 11 772 2002

+94 77 3468103

Udith Wickramasinghe

[email protected]

+94 11 772 2031

+94 71 868 8004

sri lanka macro | economics & policy macro roundup: … securities - macro... · continuation...

Documents