Sri Lanka. Summary. Economic Indicators

Transcription

1 Sri Lanka Summary Moody s B1 / S&P B+ / Fitch BB+ 1 Economy: Agriculture 8%, Industry 31%, Services 63% Since the global financial crisis in , Sri Lanka s economic growth has slowed to a solid and more sustainable pace. The country s economic backbone remains the textile and garment industry, although the economy is gradually diversifying toward services. Tourism is becoming increasingly important, and remittances are vital to the economy. The democratic transition of power in the 2015 presidential and parliamentary elections was instrumental in moving the country forward. In mid-2016, the government reached an agreement with the International Monetary Fund, which should help to address structural problems. The main risk is that the ruling coalition is unable to deliver on reforms and adjustments that are part of the IMF agreement. Economic Indicators F 2018F Population (Millions) GDP per Capita (USD) 3,522 3,767 3,597 3,721 3,531 3,277 Nominal GDP (USD Billions) Real GDP (%) Year-End CPI (%) Fiscal Balance (% of GDP) Interest (% of Revenues) FC Debt/Public Debt (%) Government Debt (% of GDP) Government Debt (% of Revenue) Current Account (% of GDP) FDI (% of GDP) External Debt (% of GDP) Foreign Reserves/External Debt (%) Foreign Reserves (Mo. of imports) Foreign Reserves (% of GDP) As of November 2017 Forecasted or estimated results do not represent a promise or guarantee of future results and are subject to change. Source: Lazard, Central Bank, Haver Analytics, IMF 77

2 Lazard Emerging Markets Debt Rating History Below is a history of the country s foreign and local currency ratings by the major agencies dating back to We have also included a chart of the country s hard currency external debt spread and the JP Morgan EMBI Global Diversified Index spread for comparison. Rating History Hard Currency BB Local Currency BB BB- BB- B+ B B+ B B Moody s S&P Fitch S&P Fitch As of December 2017 Performance represents past performance. Past performance is not a reliable indicator of future results. Source: Bloomberg, Fitch, Moody s, Standard and Poor s Bond Spreads Sri Lanka 2010 EMBIGD 2017 As of December 2017 Performance represents past performance. Past performance is not a reliable indicator of future results. Source: JP Morgan 78

3 Sri Lanka Strengths IMF Agreement Sri Lanka has strong growth potential with abundant natural resources, a young population, and a strategic location in South Asia. However, structural problems persist, including a high fiscal deficit and low tax revenue, poor management of public companies, and unfriendly business conditions. The IMF agreement signed in 2016 is very important to deal with these structural imbalances and involves a three-year US$1.5 billion loan under the extended fund facility. So far, the government appears to be committed to the IMF agreement, making progress on necessary reforms. Complying with the IMF agreement will be essential to maintaining investor confidence in the medium term. Economic Growth and Reconstruction One of Sri Lanka s main strengths is its very high economic growth rate, which has averaged around 6% since 2010, making it one of the fastest-growing countries in Asia. Recently, growth has slowed to more sustainable levels, but Sri Lanka s growth potential remains strong. Major drivers of growth include large infrastructure investments as well as the integration of northeastern Sri Lanka into the national economy. Some notable infrastructure projects include new airports, ports, roads, power and water projects, hotels, schools, and hospitals. The northeastern part of the country, where most fighting took place during the civil war, represents about 20% of the country s total land mass, and about 50% of the coast. 2 The northeast is fertile and suitable for agriculture, and the government has invested in this region in an effort to close the economic gap with the rest of the country. Democratic Elections In early 2015, Sri Lanka held presidential elections during which former President Mahinda Rajapaksa lost his bid for a third term. 3 Significantly, Rajapaksa conceded defeat, allowing a peaceful transition of power to the opposition candidate, President Maithripala Sirisena, marking an important milestone in Sri Lanka s transition to a more democratic society. Parliamentary elections were also held in August 2015 and progressed smoothly. The United National Front for Good Governance, a coalition, won 106 seats (out of 225) while the United People s Freedom Alliance obtained The main risk going forward is a split within the United National Front for Good Governance, which would make it more difficult for the government to pass reforms in accordance with the IMF agreement. So far in 2017, the government has been able to pass tax reforms consistent with the IMF agreement. Tourism Sri Lanka s tourism industry benefits from the country s beautiful beaches, rich historical heritage sites, and biodiversity. In 2016, the number of tourists totaled 2.1 million, an 14% increase from Most tourists are from Western Europe and Asia, with an increasing share specifically from China; the number of Chinese tourists increased from 8,000 in 2009 to a record 271,577 in Indian tourists also rose 17%, totaling 356,729 in This trend will likely continue as more airlines fly to Sri Lanka and new hotel construction continues. Tourism sector earnings in the first seven months of 2017 totaled US$2.1 billion, an increase of 4% compared to the same period in Tourism is the third-largest source of foreign currency after remittances and textile exports. 79

4 Lazard Emerging Markets Debt Ports Sri Lanka has the potential to become an international port center given its strategic location on the ocean route linking Asia with Europe. The main port is currently in the capital, Colombo, but a larger new port at Hambantota, in the southern part of the country, will soon become one of the largest in South Asia. 5 The Hambantota port s location lies along the shipping route between Asia and Europe. The government targets 8,000 of the 70,000 cargo vessels traveling between Asia and Europe to stop at Hambantota port, which will provide key services such as refueling and maintenance. 6 The total cost of the Hambantota port project is US$1.4 billion, part of which has already been disbursed. 7 While the project had some initial setbacks, it remains a focus of the new government. 8 The first phase of the port was completed in November 2010, and ships are already using it. 9 In addition to this project, China Merchants Holding International Company completed a US$500 million investment in the Colombo port in August 2013 and signed an agreement in September 2014 to supply, operate, and transfer Phase II of the project. 10 It is also important to point out that Sri Lanka is part of China s ambitious One Belt One Road strategy. Remittances Workers remittances are an important part of Sri Lanka s economy. In 2016, remittances totaled US$7.2 billion, and in the first seven months of 2017, remittances were US$3.9 billion. 11 Currently, about two-thirds of the remittances come from the Middle East, with the remainder coming from Europe. 12 While remittances help to support the economy, the fact that so many Sri Lankans live abroad roughly 1.8 million indicates that economic conditions have not improved enough for them to return home. According to independent studies, most emigrants from Sri Lanka left because of low wages or poor job opportunities. Remittances also represent the outflow of highly educated people ( brain drain ), an obvious negative for a country with a shortage of highly skilled workers. China Relationship Sri Lanka has traditionally maintained a good relationship with China, which has been a key partner, providing substantial financial assistance to support the infrastructure projects during the previous Rajapaksa administration. After the end of the civil war, China agreed to provide US$6 billion to rebuild the country s infrastructure, which was partially destroyed during the war. China has contributed to financing several major projects, including the Hambantota port, the construction of a new international airport near the Hambantota port, and the construction of the US$1.4 billion Colombo Port City project, which was announced during Chinese President Xi s visit in September Additionally, Sri Lanka has a 10 billion yuan currency-swap agreement with the People s Bank of China, and is also considering issuing a yuan-denominated sovereign bond. However, the new government is taking a more moderate approach, working to improve relations with India and the West. Regardless of the orientation of Sri Lanka s new foreign policy, the Chinese relationship will remain important for the future of Sri Lanka, and the new government has already initiated steps to restore and strengthen this relationship. Weaknesses High Fiscal Deficit Historically, the government had a high fiscal deficit that was over 7% for the past two decades, but despite some attempts at fiscal consolidation, Sri Lanka s fiscal position continues to disappoint. The IMF program targets reducing the fiscal deficit to 3.5% by 2022 via 80

5 Sri Lanka increasing tax receipts and simplifying the tax system, broadening the tax revenue base, and reducing tax exemptions. Failure to improve the government s ability to generate income would not only force the government to cut expenses, but also hinder the possibility of implementing countercyclical fiscal policies in the event of an economic shock. In 2016 and 2017, the government approved a series of tax measures including a higher VAT rate and an increase in the tax base, which should make it easier for the government to reduce the fiscal deficit to 4.8% of GDP in from 7.6% of GDP in High Debt Levels As a result of historically high fiscal deficits, Sri Lanka s debt ratios remain high at an estimated 80% of GDP in The IMF s base case estimate on debt sustainability projects the country s debt-to-gdp ratio will decline to 67% by 2022, assuming a growth rate of 5.0% 5.5% and a reduction in the fiscal deficit. Central government debt does not include government-guaranteed debt, which totaled 3.4% of GDP in Diversification A lack of diversification makes Sri Lanka s economic growth more volatile and vulnerable to specific shocks. Even though its economy is gradually diversifying, it is still dependent on a limited number of sectors and products, such as textile manufacturing and agriculture, which account for 11% of GDP but employ nearly 30% of the working population. The government is trying to transform the country into a regional exporter of services by focusing on five key areas: tourism, transportation, information technology, business process outsourcing, and knowledge process outsourcing. Ethnic Tension There is a possibility of renewed ethnic tension between Sinhalese (74.9% of the population, who mainly live in the western part of the country) and the minority Tamil (11.2% of the population, who mainly live in the northern provinces). The civil war fought for three decades was in part due to the ethnic tension between these two groups. The risk of internal fighting could increase in the medium term if the government does not successfully integrate the north into the national economy. 81

6 Lazard Emerging Markets Debt Country Background Size Capital Population 65,610 KM 2 (122nd) Colombo 21.4 Million Religion Buddhist 70.2%, Hindu 12.6%, Muslim 9.7%, Roman Catholic 6.1, Other 1.4% Median Age 32.8 Years Literacy Rate 92.6% Independence 4 February 1948 Political System Government Leadership Next Election 2021 Legislative Branch Presidential Republic President Maithripala Sirisena Unicameral Parliament Economy Agriculture 8.2%, Industry 30.6%, Services 62.6% Labor Force Agriculture 28.4%, Industry 25.7%, Services 45.9% Merchandise Exports Textiles, Apparel, Tea and Spices, Rubber Manufactures, Precious Stones, Coconut Products, Fish Export Partners United States 27.3%, United Kingdom 10.2%, India 7.3%, Germany 5.0%, Italy 4.2% Currency Sri Lankan Rupee (LKR) As of November 2017 Source: CIA 82

7 Sri Lanka Country Timeline 2002 Government and Tamil Tiger rebels sign a Norwegian-mediated ceasefire. De-commissioning of weapons begins; the road linking the Jaffna peninsula with the rest of Sri Lanka reopens after 12 years; passenger flights to Jaffna resume. Government lifts ban on Tamil Tigers. Rebels drop demand for separate state Tamil Tiger rebels and government forces resume fighting in the north-east in worst clashes since 2002 ceasefire. Government steadily drives Tamil Tigers out of eastern strongholds over following year Government pulls out of 2002 ceasefire agreement, launches massive offensive Government declares Tamil Tigers defeated after army forces overrun last patch of rebel-held territory in the northeast. Military says rebel leader Velupillai Prabhakaran was killed in the fighting. Tamil Tiger statement says the group will lay down its arms Rajavarothiam Sampanthan becomes the first lawmaker from the ethnic Tamil minority in 32 years to become leader of the opposition in parliament The government announces its aim for Sri Lanka to become completely demilitarized by 2018, a significant development which would see the end of the army s involvement in civilian life after decades of ethnic war. Source: BBC 83

8 Lazard Emerging Markets Debt Notes 1 As of December The World Factbook, CIA, accessed on 8 December 2013, 3 Aneez, Shahir and John Chalmers, Sri Lanka s strongman president voted out after a decade, Reuters, 9 January 2015 accessed on 5 November 2015, 4 Mahinda misfires, The Economist, 20 August 2015, accessed on 5 November 2015, 5 Aneez, Shihar, Sri Lanka takes next step to opening strategic China-built port, Reuters, 4 March Aneez, Shihar, Sri Lanka opens $1.5 billion to outside investors, Reuters, 1 August 2010, reuters.com/article/2010/08/01/srilanka-port-idafsge Aneez, Shihar, Sri Lanka seeks $40 million Chinese loan for port rock removal, Reuters, 23 August 2011, 8 SL looks to China to buoy H tota port, Daily News, November 6, 2015, accessed on 24 November 2015, 9 Aneez, Shihar, Sri Lanka takes next step to opening strategic China-built port Reuters March Ondaatjie, Anusha, Sri Lanka Opens $500 Million Port Terminal Build by China, Bloomberg News, August 5, and China Invests in Hambantota Port Project, DredgingToday.com, accessed on 4 December 2014, 11 Statistics, Central Bank of Sri Lanka, accessed 5 November 2015, stat/s_3.html. 12 Migration Profile 2013, Ministry of Employment Promotion and Welfare, 2013, migration/publication/migration_profile/migration_profile_ips.pdf. 13 Sri Lanka Country Profile, Australian Government Department of Immigration and Border Protection, 10 December 2013, 14 Migration Profile 2013, Ministry of Employment Promotion and Welfare, 2013, migration/publication/migration_profile/migration_profile_ips.pdf. 15 Shaw, Judith, Sri Lanka Country Study Government of Australia, Documents/sri_lanka_study.pdf. 16 China gets dragon s share of post-war project in Sri Lanka, The Sunday Times, 6 December 2009, sundaytimes.lk/091206/news/nws_02.html. 17 Crabtree, James, Sri Lanka eyes renminbi dim sum bond, Financial Times, 4 December 2014, accessed on 4 December 2014, html#axzz3kxbnwqyb. 18 Iyengar, Rishi, Sri Lanka Attempts to Repair Relations With China Amid an Escalating Financial Crisis, Time, 19 October 2015, accessed on 5 November 2015, 19 Annual Report 2013, Central Bank of Sri Lanka, annual_report/ar2013/english/8_chapter_04.pdf 20 Economic and Social Statistics of Sri Lanka 2014, 84

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