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MONTHLY ECONOMIC UPDATE - OCTOBER 2018

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As at October 25, 2018

Read the full Monthly Economic Update for October 2018

KEY INSIGHTS

  • Three key international institutions downgrade Sri Lanka’s growth forecasts for 2018
  • LKR continued to be under pressure against the USD; 1.7% depreciation so far in October 2018 breaching the 170 per US dollar mark.
  • Global growth for 2018 and 2019 expected to remain at 2017 level (3.7%) as per latest IMF forecasts

 

Sri Lankan Economy

ADB, IMF and WB Downgraded Sri Lanka’s Growth Forecasts: ADB has downgraded Sri Lanka’s growth forecast to 3.8% in 2018 owing to weak domestic demand, investment and exports. Meanwhile, the IMF downgraded Sri Lanka’s growth forecast to 3.7% in 2018 due to tight monetary and fiscal conditions, drought and floods. The World Bank expects Sri Lankan economy to grow 3.9% in 2018 which is a 0.5% reduction from their previous forecast made in June 2018.

Currency continues to Weaken despite Import Restrictions: The CBSL in mid-October took further action to reduce non-essential consumer imports by directing authorized dealers not to provide foreign exchange for the importation of certain items under advance payment terms. This comes after the CBSL put 100% cash margin requirement on selected import items as well. Despite this, the LKR has been under pressure owing to dollar demand and outflows from the government securities market. The receipt of the USD 1 billion syndicated loan from China Development Bank is expected to ease the pressure on the currency while boosting reserves which fell sharply in September.

CBSL Policy Interest Rates Remain Unchanged, Market Rates Rise: The Monetary Board of the Central Bank of Sri Lanka (CBSL) decided to maintain policy interest rates at their current levels, at its early October meeting citing a current tightening bias with higher real interest rates relative to peers in the emerging markets. However, market rates have adjusted higher pricing in a potential rate hike at this meeting and from the impact of consistent stream of foreign holdings outflows. The 12-month Treasury bill in the primary market has seen a rise of 1.39% in the period from 12th September 2018 to 17th October 2018.

External Sector Recorded a Moderate Performance in July: The trade deficit continued to widen with higher import expenditure despite export earnings surpassing USD 1 billion for a second consecutive month. Earnings from tourism recorded a modest growth while workers’ remittances declined marginally. However, the overall Balance of Payment (BoP) remained at a surplus of USD 554Mn owing to FDI inflows, issue of sovereign bonds and IMF-EFF receipts.

FDI Inflows Rise on the Back of Hambantota Port Investment Inflows: FDI inflows in the first half of 2018 rose 137% to USD 1,428Mn with USD 681Mn recorded as Investment inflows for the Hambantota Port. There was a notable increase in inflows to the Infrastructure sector while 55% of the FDI inflows in the first half of 2018 was received from China.

 

Global Economy

Global Growth for 2018 and 2019 is projected to Remain Steady at its 2017 Level: The October update of the World Economic Outlook of the IMF projected that global growth for 2018 and 2019 will be remain steady at its 2017 level (3.7%),

Emerging and Developing Asia (EMDA) - Growth to Remain Strong: WEO October Update forecasted 6.5% growth for EMDA in 2018 which is the same as the WEO July Update.

Developing Asia to Grow by 6% in 2018- ADB: ADB projected that the Developing Asia’s GDP is expected grow by 6% in 2018 and 5.8% in 2019. ADB’s previous growth projections for 2018 remain unchanged while growth forecast for 2019 was trimmed by 0.1 percentage points.

Fed Hiked Rates for the Third Time in 2018: The Federal Reserve raised its target range for the Federal Funds rate by 0.25% to 2.25% in September 2018. The Federal Open Market Committee (FOMC) projects one more hike for 2018.

Global Oil Prices Continue to Pick Up:  The OPEC Reference Basket increased sharply in September by 7%, to average USD 77.18 per barrel, the highest since October 2014. Crude oil futures prices also increased during September, mainly due to geo-political tensions, growing concerns over a shortage in global oil supply and low US oil inventories.

The Ceylon Chamber of Commerce

Economic Intelligence Unit

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