Page 64 - UDYAMA FINAL final for web

Inflation though may trend centre stage. We expect Govern- tenors identifying the possibility
upwards is likely to continue to ment to raise at least USD 2.5 Bn of a spike in rates in the future.
remain under check: via SWAPs from India and China
With the potential currency deval- combined while other channels of
uation we may experience cost fund raising such as Commercial EXTERNAL OUTLOOK REMAINS
push inflation towards the middle Loans and Bilateral or Multilater- WEAK: MODERATE RISK
of the year. However, despite the al funding may account for a
cost push inflation, we continue further USD 1.5 Bn. We also Rating Downgrades:
to expect inflation to remain expect FDI to improve this year The expected downgrades by the
single digit throughout 2021E with Port City investments and rating agencies materialize during
broadly maintaining a 4.0% - investments into Eastern Contain- the Sep – Dec 2020 period which
6.0% range. er Terminal on the cards. On a are as follows:
conservative note, we expect
Balance of Payment to a stru- USD 600 Mn to be generated via • Fitch downgrades SL Credit
ggle: FDIs. Rating to CCC on 27 Nov
th
Trading activity may recover 2020
back in 2021E to at least 90% of Foreign Reserves may further
2019 level, provided the Govt dip: • S&P downgrades SL Credit
allows a gradual relaxation of With a balance of payment likely Rating to CCC+ with Outlook
trade restrictions. We expect to reach a deficit of USD 1.6Bn Stable on 11 Dec 2020
th
export to recover to USD 11 Bn we expect foreign reserves gradu-
while imports are also likely to ally decline over the next 12 • Moody’s downgrades SL
recover at a slightly faster pace to months. Foreign Reserves are Credit Rating to Caa1 with
reach USD 17.5 Bn generating a likely to fall to USD 5.0Bn by Jun Outlook Stable on 28 Sep
th
higher trade deficit of USD 2021 while falling below 2020
6.5Bn. Yet, the recovery in Tour- comfortable levels to USD 4.0 Bn
ism Earnings may pull the current by Dec 2021.
account balance to a marginal
surplus in 2021E. Tourism Debt Repayment stands tall: Global fund flows may continue
earnings are likely to recover to Total Rupee and USD Bond in developed markets:
65% in 2021E. However, Balance obligations are high closing in on Foreign flows into Sri Lanka as
of Payment may improve on short LKR 1 Tn in 2021E with total portfolio investments has virtual-
term funding but may continue in debt obligations including project ly been non-existent for a long
negative territory reaching a loans rising to 2.7 Tn 2021E from period amidst weak macro
deficit of USD 1.6 Bn amidst 2.4 Tn in 2020. Foreign currency environment in Sri Lanka leading
challenges in rolling over matur- reserves which were at USD to multiple downgrades over the
ing foreign debt via fresh funds. 5.7Bn as at Dec 2020, have now past 3-4 years. Foreign Holding in
marginally fallen below the total Government Securities has fallen
Higher budget deficit: foreign debt obligations for the to LKR c.7Bn . However, on a
A surge in capex with the resump- first time in the recent past as positive note it reduces the risk of
tion of Govt’s infrastructure drive foreign currency reserve cover further outflows from the system.
may curtail any expectations of a falls below 1.0x. During 2021E, Fund flow into Emerging Markets
lower budget deficit. We expect Rupee debt maturity spikes in 4Q are unlikely to improve during
Government Budget deficit to a hile foreign debt maturity is high 2021. With the global pandemic
range of 9.0% - 1 0.0% for 2021E, in 2Q & 3Q with an ISB maturity potentially easing off towards 2H
possible only marginally lower of USD 1.0 Bn in Jul 2021. Even 2021, developed markets are
than 2020E supports by the in the Government Securities likely to raise interest rates and /
Government major drive towards market it is important to note that or reverse quantitative easing to
infrastructure spending. the treasury bill stock whas prevent inflation in the system
spiked to 24% of the Government which may attract portfolio funds
Foreign currency borrowing, a Securities portfolio, one of the reducing attraction for more
challenge: highest levels in the recent past riskier assets.
Foreign currency borrowing which clearly illustrates the risk
options continue to be limited to in the system as most investors
short term funding as SWAPs take prefer to invest in the shorter

62 January 2021