(Corrected to reflect typo in report. USD/LKR seen at 152 by end 2017)
Sept 02, 2016 (LBO) – Sri Lanka is expected to hold interest rates steady for the rest of 2016 as the impact of two previous rate hikes kick in, Standard Chartered said in a report analyzing the economies of Sri Lanka and Bangladesh.
“We expect CBSL to stay on hold in 2016 as it monitors the impact of the two previous policy rate hikes on credit growth (50bps each in February and July),” the report said.
“We expect private sector credit growth to ease gradually to 20 percent by December 2016, from 28 percent in May 2016,” Standard Chartered economists said, adding private sector credit growth typically responds to rate hikes after a lag of six to nine months.
There is a risk of further tightening in Q1 of 2017 if private sector credit growth remains above 20 percent by December 2016, thus putting pressure on the balance of payments, while average inflation should peak at 6 percent in Q3 2016, trending down to 5 percent by December 2016, they added.
Domestic consumption is the primary growth driver in both Bangladesh and Sri Lanka and inflation will inch higher in both economies on supply side constraints and higher taxes. While Bangladesh’s fiscal deficit is set to widen, Sri Lanka’s will narrow but remain wide.
Both countries have relatively high inflation and run twin fiscal and current account deficits.
Standard Chartered said Sri Lanka’s foreign reserves should improve by an additional 1 billion dollars to 7 billion dollars on sovereign debt raising during the rest of 2016, while the rupee could ease to 152 against the dollar by end of 2017.
“We like 5Y bonds on attractive valuations, light investor positioning and start of medium term structural reforms,” the report said, referring to rupee treasury bonds.
Sri Lanka’s sovereign rating at B+ is behind neighbors such as Thailand, India, Malaysia and Bangladesh an,d vulnerabilities remain such as high public debt and high debt repayments as a percentage of foreign reserves in the near term, according to the report.