With the gradual reduction in interest rates and indicative lower contraction in the GDP in 2Q-2023, the country is poised to expand in 2H-2023E, says CT CLSA Securities Macro Snapshot August 2023.
The Monetary Board of the Central Bank, at its meeting held on August 23, decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) at 11 % and 12 %, respectively. SRR was reduced to 2% (previously 4%) with effect from August 8.
The Colombo Consumer Price Index (CCPI – Base year 2021) reduced to 190.1 index points for the second consecutive month, whilst point-to-point inflation was recorded at 4.% in August 2023 (vs. 6.3% in July 2023).Although inflation slowed down significantly in July to mid-single digits, the market lending rates have not adjusted to the expected levels of CBSL, despite the reduction recorded in the market deposit rates. CBSL decided to impose caps on interest rates on pawning facilities at 18%, on pre-arranged temporary overdrafts at 23%, and on credit cards at 28%, per annum, for all LCBs.
CBSL also directed the Licensed Banks to reduce annual nominal interest rates for all existing and new LKR-denominated lending products. However, CT CLSA Securities says the impact of weather-related disruptions and modest external demand conditions could weigh on expected growth in the near term. Services PMI continued to expand in July supported by the expansion in all the sub-indices.
Employment rose for the first time after a span of 15 months. Expectations for Business Activities for the next three months continued to improve. However, Manufacturing PMI declined in July after a slight recovery in the previous month. Flexible exchange rate policy resulted in the LKR appreciating by +8% against the USD.
Worker remittances improved +17% Month on Month (MoM) and +93% in July 2023 at US$ 541 mn (+17% MoM and +93% YoY).
“We expect a significant increase in remittances during 2023 and 2024, as the number of people leaving for overseas work opportunities remains high.”
The growth in tourist arrivals contributed to the leisure segment in Sri Lanka, resulting in an average industry occupancy rate of 60% 2Q2023 end. July 2023 imports increased by +7.8% YoY to US$ 1,388 million due to the recent relaxation of import control of certain items.
“However during 2023E, we expect a reduction in the import bill for fuel as new fuel players like Sinopec and RM Parks are expected to procure fuel through their US$ funds.”
July exports declined by -12% YoY to US$ 1,020 mn, primarily due to reduced demand in key export markets such as the USA and Europe over global commodity pressures.