Page 63 - UDYAMA FINAL final for web

BOUNCY ROAD AHEAD FOR
THE ECONOMY:
MODERATE RISK
The 2nd Wave:
Covid-19 2nd Wave forced a 2nd
lockdown in 4Q 2020 which may
slowdown economic growth
again. However, it may minimize
the impact for 2021 with the
number of new Covid patients
towards Jan 2021 coming under
control, improving the number of
active cases to a more managea-
ble level.

Vaccinations to start: Source: BBC
Sri Lanka’s Covid-19 vaccination
program is likely to kick start as surge in CBSL Holdings and improved access to capital and
early as Feb 2021 with vaccina- foreign debt payment require- relief to borrowers by state loans
tions expected reach Sri Lanka by ments may lead to a major depre- or credit guarantees and restruc-
the 27th January 2021. ciation in currency possibly turing of loans or moratorium on
Sri Lanka has currently chosen leading to a spike in interest rates payments. The measures have
the Oxford – AstraZeneca Covid-19 towards 2Q 2021, illustrating a actually led to a money printing
vaccine. However, the Govern- “Bumpy road to Recovery”. spree, where printing their way
ment has informed that it is Considering the shocks, we out of the mess is the mantra
considering the Chinsese and the expect SL to go through a heard worldwide. Most justify the
Russian vaccines as well. W-shaped recovery as explained case via the Modern Monetary
in Our Sep 2020 Mid-Year Theory.
GDP growth for 2020E main- Outlook. Amidst the possible
tained at -5.8%; 2021E upgraded shocks, we believe SL to be in the CBSL Holdings spike:
to 3.2%: second leg of “W”. Sri Lanka too, is following a
We factored in a 2nd wave in 3Q similar course to other global
2020, thereby we maintain our Money Printing Spree: central banks, illustrated by the
annual expectations for 2020E at Globally, Central Banks are using unprecedented surge in CBSL
-5.8%. With the 2nd wave every tool in the book with mone- Holdings. CBSL Holdings have
lockdown materializing in 4Q tary policy measures such as spiked to LKR 725Bn by Dec
(instead of 3Q), we revise our 4Q policy rate cuts, liquidity support 2020 compared to a mere LKR
2020 GDP expectations down- schemes, SWAP lines and Central 74Bn in Dec 2019. Supported by
wards to a range of (- 4.5%) - Bank asset purchase schemes. the rise in CBSL Holdings,
(- 5.0%) from our previous expec- Further in order to mitigate exter- market liquidity has surged
tations of (- 0.8%) - 2.0%. How- nal economic shocks selected passed LKR 200Bn by Dec 2020.
ever, in relation to 2021E and Central Banks have adopted
2022E, we upgrade our expecta- foreign currency interventions Credit Growth to rise:
tions to 3.2% from our previous and capital flow measures. With liquidity AWPR, represent-
2.8% and 2022E to 3.8% from the Central Bank globally have intro- ing the lending rate for prime
previous 3.3%. duced supported systems for customers plunged below 6.0%
banks for distress situations with Decade low lending rates and
The second leg of W; Bumpy easing countercyclical capital rising consumer demand may
road to ‘Recovery’: buffers, easing domestic capital accelerate private sector credit
As you are well aware consi- buffers, use of capital buffers and growth to c.12% in 2021E while
dering the dip in 2020E, SL’s liquidity buffers while also also maintaining the same
recovery outlook seems to be well supporting via making adjust- momentum for 2022E to reach
intact. But the sluggish growth is ments to provisioning require 12%.
expected continue. Sri Lanka’s -ments. Certain Central Banks

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