Right recovery strategy and policies essential for 2H growth: ICRA Lanka

• Estimates 1Q growth at 0.2%, 2Q at -6.9%
• Projects 3Q and 4Q growth to improve 
• Expects monetary policy to remain accommodative
• Recovery contingent on performance of key sectors including construction, tourism and SMEs 
• Wage growth likely to trend down, rupee could depreciate to Rs. 187
• Govt. will roll over debt, but challenged by $ 1 b bond repayment in Oct. 

A stable policy framework and recovery strategy will be of paramount importance in the second half of 2020, rating agency ICRA Lanka said yesterday, projecting stronger economic growth in 3Q and 4Q helped by the accommodative monetary policy stance of the Central Bank. 

ICRA Lanka, which is a subsidiary of Moody’s Investor Services, releasing their Mid-year Economic Update, said that recovery of the financial sector will be largely contingent on the recovery of certain key segments of the economy, such as construction, tourism, and the SMEs. 

“A stable policy framework and recovery strategy is paramount for the overall stability of the economy. ICRA Lanka’s projections show that the economic growth recording better performance in 3Q and 4Q,” the report said. 

ICRA Lanka expects the Central Bank of Sri Lanka (CBSL) to maintain an accommodative monetary policy and therefore current low interest rate climate to continue throughout 2H 2020. 

“It is less likely that we see an appreciable expansion in credit as the recessionary currents flow strong at the moment. In addition, fall in aggregate demand may lengthen the current deflationary environment.” From the point of view of strengthening of reserves, the Government is likely to meet foreign currency obligations by rolling over some of these debts or through bilateral arrangements being negotiated or in place currently. However, the bigger challenge would be in meeting obligation of the $ 1 billion international sovereign bond maturing in October.

Wage growth will continue to trend down in accordance with higher unemployment level expected by the year end. Given the slightly stronger rupee in terms of REER that prevailed as of end 1H 2020, the CBSL may tolerate further depreciation leading to reserve accumulation, the report said. 

“Going by the forward rates, the rupee could depreciate close to Rs. 187/USD by the end of the year with strong probability of falling further if the imports pick up. Financial institutions will continue to lend to safer and less risky market and customer segments.”  

Proxy leading indicators for industrial activity; electricity consumption, cement consumption, and port services show a considerable decline from the corresponding period of 2019. As a result, the economy may have operated with a considerable slack in 2Q 2020. ICRA Lanka’s now casting models indicate the quarterly GDP growth rates for 2020 to record 0.2% in 1Q and -6.9% in 2Q.