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MONTHLY ECONOMIC UPDATE - SEPTEMBER 2018

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EIU - September 2018

Download the full Monthly Economic Update for September 2018

KEY INSIGHTS

  • LKR has weakened sharply in September; adverse global factors, importer demand and foreign outflows weigh in on the currency
  • GDP growth showed a rise in Q2 2018 led by a stronger performance in Services and Agriculture
  • Government revenue and expenditure grows at 5% in the first half of 2018, primary surplus maintained

 

Sri Lankan Economy

 

LKR under Stress: The Sri Lankan rupee has weakened about 4% so far during the month of September, bringing the total depreciation against the USD for the year to 10%. The latest round of weakness comes in the backdrop of external factors applying deprecating pressure on vulnerable economies like India which are faced with current account deficits similar to Sri Lanka. The CBSL has stated it will not look to overly defend the currency with dollar reserves but rather intervene where necessary to smoothen out the currency during periods of sharp volatility.

Q2-2018 Growth Picks Up: Growth in the second quarter of 2018 rose to 3.7% from 3% recorded in the corresponding quarter of 2017. All three sectors of the economy saw an expansion with the Services sector leading this growth.

Foreign Holdings in Government Securities Declines in the Last 5 Months: Foreign holdings in treasury bills and bonds showed a downward trend since the last week of April 2018 declining by Rs 64 billion. This has been a key reason for the increasing pressure on domestic currency, with foreign outflows from government securities accelerating in September 2018 (about a Rs 18 billion decline since the end of August 2018).

Mixed movement in CCPI and NCPI in August: In August 2018, CCPI Inflation rose to 5.9% from 5.4% in the previous month, whereas the CCPI Core inflation went down to 3.7% from 3.9% in July 2018. However, the National index (NCPI) saw the headline number decreasing to 2.5% in August 2018 from the 3.4% a month earlier owing to a larger fall in the F&B category. The NCPI Core inflation however rose to 2.7% from the 2.5% recorded in the previous month of 2018.

Government Revenue Growth Moderates, Primary Surplus Maintained in the 1H 2018: Government revenue grew by 5% in the first half of 2018 compared to the same period in 2017. This is below the estimated growth of 21% for the full year of 2018 largely owing to the 36% decline in import duties collected. Total government expenditure also grew by 5% with the primary balance continuing to be positive despite the slow pace in revenue growth.

Key Findings from the recently concluded Sri Lanka Economic Summit 2018: Under the theme, ‘On a Fast Track to a Turnaround the deliberations centered around the following:  (1) consistency, communication and execution is key, (2) drive micro reforms to steer the turnaround, (3) long term solution to improve growth without resorting to stop-gap measures.

 

Global Economy

Global Market Uncertainty: Uptick in political tensions in the U.S and the escalation of U.S. China trade disputes have put a dampener on global financial markets, growth and trade. The latest round of tariffs imposed on the 24th of September 2018 will continue to test the resilience of the upswing seen in growth last year.

Global Oil Prices low in August; Expectation for $100 Crude: The OPEC Reference Basket ended August lower, though it remained above USD 70 per barrel for the fourth month in a row. Prices of both Dated Brent and WTI declined by 2.3% and 4.3% respectively in August compared to the price per barrel recorded in July 2018. The expectation from major oil trading houses is that oil could return back to trading at $100 a barrel from the first time since 2018 with OPEC and its allies unable to compensate for the supply losses from U.S. sanction on Iran’s oil exports. However in September, oil prices have hit a four-year high over USD 81 per barrel (Brent) after Saudi Arabia and Russia rejected the request by the US to increase production.

Bank of England Policy Hikes Rates Again: The Bank of England raised its key interest rates by 0.25 percentage points for the second time in the last decade in August 2018 following the first hike in November 2017.The recent hike was on the back of strong labor market and credit growth. UK inflation rate unexpectedly rose in August to 2.7%, which was the highest level in the last six months.

 

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