Sri Lanka: Economic Prospects and Challenges

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Sri Lankas Economic Prospects and
ChallengesPositioning for Global Recovery in
2010 and beyond
Sri Lankas Economic Prospects and
ChallengesPositioning for Global Recovery in
2010 and beyond
(
(
ICASL/RAM CEO Breakfast Meeting
Sri Lankas Economic Prospects and Challenges
Positioning for Global Recovery in 2010 and Beyond
Yeah Kim Leng, PhD Group Chief Economist RAM
Holdings Berhad
4 November 2009
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Outline

• I. Global Economic Recovery How sustainable and
  different post-crisis?
• Impact on the Sri Lankas Economic Performance
  and Outlook
• Current performance
• Short term expectations for 2010 and 2011
• Medium-to-long term forecasts up to 2020
• III. Positioning for Global Recovery Key issues
  and challenges
• IV. Increasing Private Sector Financing
  Lessons from the Malaysian experience
• V. Concluding Remarks

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PART I

• Global Economic Recovery How sustainable and
  different post-crisis?
• Current state of the world economy
• Short term outlook
• Implications for developing economies and
  emerging markets

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Near-collapse averted recovery gathering pace,
but global growth over the next few years is
expected to be uneven, weak and vulnerable to a
relapse.
Source Bloomberg
I. Global Economic Recovery How sustainable and
different post-crisis?
Current state of the global economy
Quarterly GDP growth
Source Bloomberg, CEIC
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I. Global Economic Recovery How sustainable and
different post-crisis?
Short-term Outlook Growth Forecast for 2010 and
2011
Large Asian economies are ahead in the recovery
cycle however there are significant risks to
growth in crisis-hit advanced economies,
suggesting prolonged weakness.
Developing Asian economies leading the global
recovery
Source IMF WEO October 2009
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I. Global Economic Recovery How sustainable and
different post-crisis?
Short-term Outlook Risks to 2010-11 Growth
Forecasts

• High unemployment and jobless recovery High
  and still-rising unemployment rates in the
  crisis-hit American and European countries.
• Continued deleveraging by banks Weak balance
  sheets and further stresses on loan asset
  quality, along with the constrained capital bases
  of financial institutions, will hamper lending
  activities.
• Wearing out of fiscal stimulis effects One-off
  fiscal measures, such as auto-scrapping schemes
  (sometimes known as cash for clunkers) and
  spending vouchers, only have one-time effects.
• Weak final demand Consumer and investor
  confidence is weighed down by concerns over the
  broader economy.

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I. Global Economic Recovery How sustainable and
different post-crisis?
Implications for Developing Economies

• Ongoing deleveraging of banks in developed
  economies
• Reduced lending from developed economies.
• Increased focus on domestic financing.
• Stricter regulatory oversight for financial
  institutions.

American, UK and European banks hit by large
write-downs on loans and securities
Source IMF Global Financial Stability Report
October 2009
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I. Global Economic Recovery How sustainable and
different post-crisis?
Implications for Developing Economies
(contd)

• Rebalancing of global demand, trade and
  investment flows
• Asian imports outpacing those of other regions
• Asian exports to North America projected to
  decline gradually while intra-regional trade is
  expected to rise by 1-2 points to account for
  51 of total world imports by 2012.

Asian imports outpacing those of other regions
Steady fall in Asian exports to North America
while intra-regional trade is expected to rise
Source WTO
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PART II

• Impact on Sri Lankas Economic Performance and
  Outlook
• Current performance
• Short term expectations for 2010 and 2011
• Medium-to-long term forecasts up to 2020

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II. Impact on the Sri Lankas Economic
Performance and Outlook
Current Growth Performance

• Recession averted but economy decelerated sharply
  in 1Q 2009, with gradual improvement expected
  from 2Q 2009 onwards.

Source CBSL CEIC fforecasts by RAM Economics
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II. Impact on the Sri Lankas Economic
Performance and Outlook
Current Growth Performance
(contd)

• Export-oriented industries will lead rebound but
  growth not expected to be robust given the
  fragile global economic recovery.

Recovering food and non-fuel commodity prices
Agriculture rebounding more strongly than other
sectors
Source CBSL CEIC fforecasts by RAM Economics
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II. Impact on the Sri Lankas Economic
Performance and Outlook
Industrial Production

• The major impact from the global recession on Sri
  Lankas economy has been a sharp slowdown in
  industrial output.

Industrial production dragged down by contraction
in export-based industries
Source CBSL CEIC
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II. Impact on the Sri Lankas Economic
Performance and Outlook
Export Performance

• Sri Lankas exports hit by slumping demand in
  recession-hit advanced nations, but not as bad as
  those of more open East Asian economies.

Industrial and agricultural exports recorded
pronounced monthly declines
Source CBSL CEIC
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II. Impact on the Sri Lankas Economic
Performance and Outlook
Improvement in trade balance

• Trade deficit narrows as imports contracted more
  sharply than exports.

Source CBSL CEIC
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II. Impact on the Sri Lankas Economic
Performance and Outlook
Exports hit by global recession

• Exports to Emerging Asia have been picking up
  gradually since the beginning of 2009 exports to
  the US and EU trend have been trending downwards.

Trade deficit narrows as imports contracted more
sharply than exports
Source CBSL CEIC
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II. Impact on the Sri Lankas Economic
Performance and Outlook
Aggressive monetary loosening

• Aggressive monetary loosening, as undertaken by
  most non-crisis-hit countries, to shield against
  contagion from the global turmoil.

Private sector credit remained relatively stable
while government borrowings rose significantly
Gradual upturn in the growth of narrow and broad
money since the beginning of 2009
Source CBSL CEIC
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II. Impact on the Sri Lankas Economic
Performance and Outlook
Price disinflation rather than deflation

• Disinflation as price level stabilises due to
  sharp fall in commodity prices and weak demand
  amidst economic slowdown.

Source CBSL CEIC
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II. Impact on the Sri Lankas Economic
Performance and Outlook
Short-term Outlook for 2010 and 2011

• Sri Lankas economy is forecast to expand 5.6 in
  2010 and pick up more strongly to 6.3 in 2011.

( annual change, constant 2002 prices)
Source CBSL CEIC fforecasts by RAM Economics
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II. Impact on the Sri Lankas Economic
Performance and Outlook
Short-term Outlook for 2010 and 2011
(contd)

• Stronger domestic and external demand is
  anticipated to underpin growth in all sectors.

( annual change, constant 2002 prices)
Source CBSL CEIC fforecasts by RAM Economics
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II. Impact on the Sri Lankas Economic
Performance and Outlook
Medium-to-long term growth prospects

• Over the medium-term horizon (from 2010 to 2015),
  the economy is expected to expand 5.5 per annum.
  This is slightly above the current underlying
  potential output, estimated at 5.3 with another
  statistical technique.
• Medium-to-long-term growth prospects are likely
  to be enhanced by more efficient resource
  allocation, reduced macroeconomic imbalances and
  the expected re-direction of resources to
  economic development and reconstruction.

( average annual growth, constant 2002 prices)
Source RAM Economics
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II. Impact on the Sri Lankas Economic
Performance and Outlook
Medium-to-long term growth prospects
(contd)

• High case scenario of 2 percentage points above
  baseline forecast achievable with
• Raising productivity growth by 10 per annum.
• Closing the human-capital development gap (as
  proxied by the average number of years of
  schooling).
• Raise employment level to 46 from the current
  36 of the countrys population.
• Increase investments share of GDP increases to
  35 from 27 in 2008.
• For growth to be sustainable, there is a need to
  promote a shift in resources and production
  capacity to higher-value and productivity-driven
  industries within the manufacturing and services
  sectors.

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II. Impact on the Sri Lankas Economic
Performance and Outlook
Addressing macroeconomic imbalances

• Projected narrowing of Sri Lankas
  current-account deficit and improvement in the
  savings-investment balance.

Source CBSL CEIC fforecasts by RAM Economics

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II. Impact on the Sri Lankas Economic
Performance and Outlook
Addressing macroeconomic imbalances
(contd)
Government spending cuts needed to reduce deficit

• Persistently large fiscal deficits must be reined
  in to restore the countrys macroeconomic
  stability.
• Sri Lankas fiscal deficit is projected to
  gradually narrow to a more sustainable level.

Gradual pace of fiscal consolidation projected

Source CBSL CEIC fforecasts by RAM Economics

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II. Impact on the Sri Lankas Economic
Performance and Outlook
Addressing macroeconomic imbalances
(contd)

• Disinflation across Asia, but Sri Lankas CPI
  inflation likely to remain higher than regional
  averages.

Sharp fall in consumer price inflation across the
region

Source IMF WEO October 2009

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II. Impact on the Sri Lankas Economic
Performance and Outlook
Addressing macroeconomic imbalances
(contd)

• Accommodative monetary policy expected to provide
  a more conducive environment for growth.

Growth of quasi and broad money supply projected
to stabilise to a more sustainable and
non-inflationary level of 10-14

Source CBSL CEIC fforecasts by RAM Economics

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II. Impact on the Sri Lankas Economic
Performance and Outlook
Addressing macroeconomic imbalances
(contd)

• With inflation normalising, the directions of
  interest rates and exchange rates are expected to
  reflect the improving macroeconomic fundamentals.

Improving macroeconomic fundamentals expected to
underscore rise in foreign reserves and currency
strengthening.

Source CBSL CEIC fforecasts by RAM Economics

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PART III
Positioning for Global Recovery Key Issues and
Challenges
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III. Positioning for Global Recovery
Key Challenges Raising productivity efficiency

• Enhancing productivity and competitiveness

Improving macroeconomic fundamentals expected to
underscore rise in foreign reserves and currency
strengthening

Source International Trade Centre

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III. Positioning for Global Recovery
Key Challenges Sustaining international
competitiveness

• International ranking of Sri Lankas exports

High ranking in resource-based (fresh food) and
low-technology products (clothing) Change index
suggests improved ranking in Chemicals, IT
Consumer Electronics, Transport equipment,
Non-electronic machinery and Miscellaneous
Manufacturing

Ranking of international competitiveness in terms
of static indicators (current index based on net
exports, per capita exports, share in world
market, product diversification, market
diversification) and the change in world market
share (absolute change of world market share in
points per annum). Position 1 in the ranking
refers to the best performance out of 189
countries.
Source International Trade Centre, 2008

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III. Positioning for Global Recovery
Key Challenges Promoting private sector-led
growth

• Promoting private sectors dynamism and
  entrepreneurship

Strong correlation between income level and
business formation

Source World Bank Entrepreneurship Survey and
Database 2008

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III. Positioning for Global Recovery
Key Challenges Enhancing private sector
financing

• Given the sizeable gap in financial
  intermediation, expanding Sri Lankas domestic
  credit to the private sector will help to unleash
  this private sector-led growth and dynamism.

GDP per Capita (in/nal current
PPP), 2007
Internet Users per 1000 People,
10
Poverty Index, 2005
2007
9
Gr. Capital Formation as of GDP,
Mobile Phones per 1000 People,
8
2003
-
2007
2007
7
Financing is a key constraint to the private
sectors growth
6
Exports of Goods and Services as
Total Telephones per 1000 People,
5
of GDP, 2007
2007
4
3
2
Domestic Credit to Private Sector
1
Gender Development Index, 2005
as of GDP, 2007
0
Employment to population ratio,
Political Stability, 2007
15 (), 2007
Prof. and Tech. Workers as of
Researchers in RD, 2006
Labor Force, 2007
High
-
Tech Exports as of Manuf.
Employment in Services (), 2005
Exports, 2007
Adult Literacy Rate ( age 15 and
Private Sector Spending on RD
above), 2007
(1
-
7), 2008

Sri Lanka
Malaysia
Source World Bank Knowledge Methodology
Assessment 2009

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III. Positioning for Global Recovery
Key Challenges Enhancing private sector
financing
(contd)

• Vast scope for expanding financial intermediation
  and deepening of Sri Lankas financial system.

BANK DEPOSITS /
GDP
2.0
1.5
FINANCIAL SYSTEM
BANK CREDIT /
1.0
DEPOSITS / GDP
BANK DEPOSITS
0.5
Sri Lanka
0.0
India
Korea, Rep.
Malaysia
PRIVATE CREDIT BY
STOCK MARKET
DEPOSIT MONEY
CAPITALIZATION /
BANKS / GDP
GDP
PRIVATE BOND
MARKET

CAPITALIZATION /
GDP
Source World Bank A New Database on Financial
Development and Structure (updated May 2009)

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III. Positioning for Global Recovery
Key Challenges Enhancing private sector
financing
(contd)

• Comparison of financial structures and
  performance for 2007.

Thortsen Beck and Asli Demirgüç-Kunt, "Financial
Institutions and Markets Across Countries and
over Time Data and Analysis", World Bank Policy
Research Working Paper No. 4943, June, May 2009.


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PART IV
Increasing Private Sector Financing Lessons
from the Malaysian experience
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IV. Increasing Private Sector Financing
Malaysias experience in enhancing private sector
financing

• Policy- and institution-building initiatives
  undertaken by the Malaysian government to enhance
  the private sectors liquidity and to broaden as
  well as deepen the corporate bond market include

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IV. Increasing Private Sector Financing
Malaysias experience in enhancing private sector
financing
(contd)



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IV. Increasing Private Sector Financing
Malaysias experience in enhancing private sector
financing
(contd)



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IV. Increasing Private Sector Financing
Malaysias experience in enhancing private sector
financing
(contd)



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V. Concluding Remarks
High sustained growth is possible with
appropriate policies and strategies

• Sri Lankas short- and medium-term growth
  prospects have brightened considerably after the
  end of the armed conflict.
• Expected improvement in macroeconomic stability
  will provide a conducive environment for private
  sector-led growth.
• We expect Sri Lankas economic outlook to show an
  improving trend, with growth picking up to 5.6
  in 2010 and 6.3 in 2011
• a rebalancing of government spending towards
  development projects.
• higher foreign and domestic investments in the
  construction, services and manufacturing sectors.
• a rise in consumer and investor confidence
  following the end of the armed conflict.
• Key risks include
• Slower-than-expected global recovery and risk of
  a relapse.
• Overshooting of world oil and commodity prices.
• Slower-than-expected reduction in political risk
  premium and reallocation of government
  expenditure to development.

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Thank you....
comments...questions? Please email yeah_at_ram.com
.my

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