Moody’s forecasts Sri Lanka growth to weaken, slow recovery

ECONOMYNEXT – Sri Lanka’s economic growth will slow sharply in the second quarter of this year after April’s suicide bombings with its growth momentum interrupted in 2019 before picking up the next year, Moody’s Investors Service said.

“We expect Sri Lanka to face a marked cooling in Q2, reflecting a slump in tourism following the terrorist bombing in April,” the rating agency said in a new report that lowered growth forecasts for most of 16 economies it rates in Asia.

Weak output in the year-to-date and deteriorating outlook for trade drive lower growth forecasts across Asia, the report said.

“Spill-overs from an uncertain operating environment are most apparent in softer capital formation, although some signs of trade and investment diversion are emerging,” it said.

It also forecast stable private and public consumption to be sustained on account of monetary and fiscal policy accommodation.

Moody’s said Sri Lanka’s economic growth is forecast to slow to 2.6 percent in 2019 and pick up again to 3.4 percent in 2020, having grown 3.2 percent in 2018 and 3.4 percent in 2017.

More trade reliant economies will see a greater deterioration in growth through the export channel, with more advanced G 20 economies growing below potential, the rating agency said.
 
Moody’s said the G 20 broad based below potential growth has wide implications for trade reliant Asia.

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Global trade hubs like Singapore and Hong Kong and large manufacturing and commodity exporters are most sensitive to the weaker G 20 growth outlook, with economies like India and Sri Lanka less so, the report showed.

It noted that growth has generally slowed across the Asian region with the uncertain operating environment weighs on investment.

“Externally oriented economies have experienced a sharper slowing in the first half of 2019,” Moody’s said.

“Domestic factors have had a greater influence in India, Japan (consumption tax hike) and the Philippines (budget delay).

“Hong Kong and Singapore have been particularly weak this year, with very large deteriorations in real GDP growth when compared with first half of 2018.”

Moody’s said softer capital formation has mirrored the weakening in exports, especially for trade reliant economies such as Korea and Hong Kong, with weakening in the latter also reflecting political developments.

“Separately, the delay in the passing of the government budget in the Philippines has disrupted its infrastructure building plans , while fiscal tightening has posed similar drags in Malaysia and Sri Lanka.”

Moody’s noted that monetary easing has kick-started the policy response to slowing growth in most countries.

Reserve Bank of India has been most active in cutting rates in support of growth in 2019 up to 23 August, followed by Sri Lanka which cut rates Friday.

Moody’s also said that generally healthy balance sheets and fiscal positions across the region, with the exceptions of India, Malaysia, Mongolia and Sri Lanka, provide space to pursue countercyclical fiscal policies.
(COLOMBO, 23 August, 2019)