LKR to ‘appreciate steadily’ against USD over 2014 : StanChart report
View(s):A recent report by global banking giant Standard Chartered has forecasted that the value of the Sri Lankan Rupee (LKR) will “appreciate steadily” in relation to the US Dollar (USD) over the course of the coming year, ultimately falling to 128 against theUSD by year’s end.
The report, entitled “Global Focus 2014 – Rising East, emerging West”, commented; “Sri Lanka has weathered Fed tapering concerns relatively well, suffering lower capital outflows and less currency weakness than regional peers. We expect the LKR to appreciate steadily versus the US dollar in the coming quarters, touching 128.0 by end-2014. The balance of payments is supported by heavy net inflows across the financial account, and we expect it to remain in surplus in 2014. Capital inflows should be sufficient to put the LKR on a path of trend appreciation. We expect the fiscal deficit to narrow to 6.2 per cent of GDP in 2014″.
Further, the Standard Chartered report also stated; “Sri Lanka looks set to consolidate its economic performance in 2014, following stronger-than-expected H2-2013 growth. Monetary easing, softer inflation and a stable exchange rate should support robust economic growth in 2014, which we forecast at 7.0 per cent. Private consumption remains the main growth engine, fuelled by rising incomes and foreign remittance inflows along with public infrastructure spending (although this is constrained by fiscal consolidation). We expect investment to edge up towards 30% of GDP on continued reconstruction and strong public-sector investment”.
Additionally, it was also opined that inflation levels during 2014 would be “benign amid favourable supply-side dynamics, declining global commodity prices and the absence of demand-driven inflationary pressures. We expect core inflation to remain subdued in H1-2014 as the Central Bank continues its prudent demand management policies, which successfully contained underlying core inflation in 2013. Core inflation slowed to 2.6 per cent year-on-year in October 2013, the lowest level since 2007. We lower our CPI inflation forecast for 2014 to 6.8 per cent from 7.2 per cent. We expect inflation to inch higher in 2015 and remain watchful of private-sector credit growth, which may gather pace due to monetary policy easing”.
The report further noted that “Sri Lanka’s exports have regained momentum against the backdrop of improving prospects in the EU and US. We expect this momentum to continue in 2014. We project that the current account deficit will narrow to 5.0 per cent of GDP (slightly higher than our earlier forecast of 4.5 per cent of GDP) from an estimated 5.5 per cent in 2013 due to the improving trade outlook, robust remittances and recent positive developments in advanced economies”.
It also revealed that the bank had a “constructive outlook on T-bonds for 2014. Stable CPI inflation, lower policy rates and possible fiscal consolidation should easily offset headwinds from the Fed’s expected QE tapering. We expect faster growth and a narrower current account deficit, along with marginal Sri Lankan rupee (LKR) appreciation, to support foreign holdings of LKR T-bonds and T-bills in 2014… Ahead of fresh supply starting in January 2014, we maintain a Neutral duration outlook on LKR T-bonds”.
On the other hand, the report was not all positives. It also predicted that, “due to the challenging funding environment in emerging markets, we see a stronger likelihood that lending rates will edge higher heading into 2014.
Given the anticipated gradual uptick in inflation in 2015, we expect policy rates to increase by a cumulative 75bps to 7.25 per cent by end-2015″.
Also indicated; “The government has set an ambitious budget deficit target of 5 per cent of GDP for 2014 (our estimate is 6.0 per cent). Further fiscal consolidation will depend heavily on raising the share of revenue to GDP through tax revenue reforms. The government’s revenue targets may be difficult to achieve since tax reforms have yet to show significant results, and we expect lower growth in 2014 than the central bank’s 7.5-8.0 per cent estimate. In light of this risk of fiscal slippage, expenditure restraint will be crucial”.
At the same time, the report also cautioned that, “[while] the government is making steady progress on fiscal consolidation, reducing the fiscal deficit to a projected 5.8 per cent of GDP in 2013 from 6.4 per cent in 2012, its debt burden remains high. The government’s foreign debt burden is currently 57 per cent of GDP on account of two key factors: (1) relative currency stability due to a less open capital account, and (2) sluggish FDI inflows.
The strengths of stable GDP growth above 7 per cent and an improving fiscal profile need to be balanced against the country’s vulnerable external liquidity position and high external debt”.
The report also concluded that “President Rajapaksa, more than halfway through his second six-year term, continues to enjoy widespread popularity.
His United People’s Freedom Party (UPFA) performed strongly in elections for most provincial councils in 2011-13. It is unlikely to face significant parliamentary challenges for the remainder of the current term given its two-thirds majority in parliament and the weakness of the opposition. The UPFA now controls eight of Sri Lanka’s nine provincial councils. Sri Lanka’s human rights record still concerns Western governments, but progress has been made in improving bilateral ties. We expect relations between the UPFA and the US and European governments to remain tense in the medium term”.
Meanwhile, commenting on Asia as a whole, the report signaled; “Major developed economies are likely to add to Asia’s growth in 2014, after years of Asian outperformance against a weak global backdrop. This outperformance reflects the strength of the region’s economies, which have proven their ability to outperform in most scenarios other than a sharp global downturn.
While the backdrop for markets will be challenging in H1-2014 as the US heads towards ending QE, the reasons for this tightening (i.e., stronger growth) will likely help current account balances around the region. Asian growth and current account balances should also receive support from a return to positive growth in the euro area following two years of decline”.
It also added that “[policy] implementation will be an important swing factor for Asian growth in 2014. In many countries – such as the Philippines, Malaysia, Indonesia and Thailand – this will mean implementing public infrastructure investment plans. In others – such as China, India and Japan – it will mean implementing reforms to unleash growth potential.
Elections in India and Indonesia may raise the risk of populist policies in early 2014. The key question is whether the newly elected governments will be able to reduce these economies’ dependence on portfolio flows and shift towards more FDI inflows. Inflation is unlikely to be a major concern for most markets in 2014 as key food and energy prices remain subdued”.
The report also elaborated further on China, the world’s second-largest economy, stating that the country could expect a “consolidation of growth.
We forecast 7.4 per cent GDP growth in 2014, following 7.6 per cent in 2013.
2013 saw the implementation of ‘easier’ reforms such as cutting red tape and the anti-corruption drive. 2014 will be about tackling the tougher issues of land and state-owned enterprise (SOE) reform. We believe the new leadership is determined to push ahead with these reforms. This should boost confidence in the growth outlook for 2014 and beyond. In short, we do not expect another downshift in China’s growth rate in the next few years”.
(JH)