HSBC forecasts upbeat trade scenario for Sri Lanka

Trade overview

As the world continues to face well-documented economic challenges, the Trade Forecast suggests grounds for optimism for international businesses. 

Despite the current climate the overall trend for international trade is positive with growth acceleration sooner than expected from 2014, rather than 2015.

After 2014 the global economy ends a period of slow growth and contraction and sees an upturn in trade in line with GDP forecasts.  Over the next five years it is forecast that world trade will grow at an annualised rate of 3.78% (see below graph for year-on-year predictions), due primarily to the expectation of an earlier recovery of the overall global economy.  

In the period 2017-2021, the Forecast predicts even more rapid annualised growth at 6.23%, as world demand for traded goods recovers its dynamism. As a result world trade is predicted to grow by 86.00% in the next 15 years, taking total trade activity in that year to $53.8 trillion compared to a predicted $28.9 trillion in 2012.

The Trade Forecast predicts that trade in Sri Lanka will grow at an annualised rate of 3.68% over the next five years to 2016 but that it will increase subsequently with annualised growth between 2017-2021 at 6.04%.  This equates to growth indexed to a base in 2011 of 150.40% due to an acceleration of trade expected in the Asia Pacific region. Annualised total trade growth in Sri Lanka over the next 15 years will be 4.50% which is the rate at which companies will need to increase their international activities if they are to keep pace with this change.

Sri Lanka’s trade outlook

The Trade Forecast expects that Sri Lanka’s trade index will perform increasingly better than the world’s average over the next 15 years. Over the next five years, trade with developing countries is expected to increase, offsetting the fall in demand from developed trading partners such as the UK and the USA.

Sri Lanka has a strong comparative advantage in the manufacture of garments and in the next five years, this is set to open up new trade corridors. Amongst others, exports of t-shirts and vests to Italy are predicted to increase by 10.10% while exports of track suits, ski suits and swimwear to the USA are forecast to increase by 9.69%.

Chamira Wijetilleke, Head of Corporate Banking, HSBC, commented: “Sri Lanka is well positioned as an investment destination, and has become a potential market for rapid business growth and investment opportunities in various sectors. We are optimistic of further growth in trade this year, considering the significant support of the Government that bodes well for the economy as well as trade within the South Asian and Asia Pacific countries.”

Trade corridors and trends

Sri Lanka’s largest export partners are the UK, USA and Italy and exports to all of these countries are forecast to increase over the next five years. Exports to the UK will grow at an annualised rate of 5.49%, accounted for mainly by clothing (skirts, t-shirts, accessories, tracksuits, swimwear and underwear), to the USA also in clothing plus sectors such as re-tread tyres, and finally Italy, also accounted for by clothing at a rate of 8.98%, all annualised to 2016. The fastest growing export partners are Singapore, Turkey and Hong Kong, annualised to 2016 of 14.29%, 11.89% and 9.50%, respectively.

Tea remains Sri Lanka’s largest export sector and in the next five years it will provide even more opportunities for trade. Exports to Turkey are expected to increase by 8.35%.  Importantly, exports of wheat and meslin flour to Indonesia are forecast to increase by 11.35% over the next five years - a sector that is forecast to increase by 7.41% globally, indicating even more trade opportunities for Sri Lanka. Sectors including machine tools, machine parts and machine instruments are emerging sectors with high growth rates from fairly low bases.  Sri Lanka’s largest import partners are India, Singapore and China and imports from each are forecast to increase over the next five years. Imports from India will grow at an annualised rate of 5.67%, accounted for by fabrics, fresh food, auto rickshaws and medicines. Imports from Singapore are accounted for by milk and milk products (21.63%), non crude oil (13.92%) and cement (11.01%), whilst those imports from China include fabrics.

These suggest that Sri Lanka is still a major global provider of many types of clothing, and is reliant on certain import sectors, such as raw materials for this industry. It is also reliant on milk and medicines which it does not develop itself. The fastest growing imports are in dried vegetables (13.63%), sugar cane and beet (11.82%)  and electrical appliances for line telephony (10.82%), all annualised rates for the next five years.\

Sector opportunities

Clothing: Sri Lanka represents a strong trading route for the clothing sector between China and India and Europe and the USA. Sri Lanka imports raw materials from India and China and exports large amounts of clothing of various types to markets principally in the UK, Italy, Germany, and the USA. Reflecting the need for imports for this sector knitted or crochet fabric imported from India will grow at an annualised rate of 11.47% over the next five years and the same from China at 8.32%.

Sri Lanka imports fabrics from Italy (9.21%), and is then exporting  t-shirts to Italy (10.10%), all annualised to 2016. The clothing sector is still Sri Lanka’s third largest export sector and when aggregated is also its largest fastest growing export sector. The challenges for business will be to grow their international activities an annualised rate of around 11.00% for the next five years in order to keep pace with this.  As the clothing sector becomes more focused on speed of turnaround and supply, the pressure will be on the businesses within Sri Lanka to improve the efficiency with which goods go through the system.  Agriculture: Sri Lanka remains a major provider of certain niche agricultural products. For example, its largest export sector is tea, with the rates of growth to Japan at 6.95% and Turkey, 8.35%, annualised between 2012 and 2016. Its first and third largest fastest growing export sectors are food, especially fish (14.71%) and rubber in its primary form, 9.23%, all annualised to 2016.

Sri Lanka’s top two largest fastest growing import sectors are dried vegetables and sugar cane and beet, (13.63% and 11.82%).

Sri Lanka is still dependent on the production of and processing of agricultural produce. Whilst it is well known that there are expanding markets for simply refined and processed foodstuffs, it will be a challenge for Sri Lankan companies to capitalise on those markets.