Sri Lanka’s gross domestic product likely to contract 1-3 percent in 2020 over a Coronavirus shock and macro issues, with a lower chance of the economy shrinking over 5 percent or recording slightly positive growth, analysts said.
Sri Lanka’s tourism sector which accounts for 4.3 percent of gross domestic product has come to a virtual standstill.
Multi Sector Hit
“We have done about 1.3 billion dollars up to March we are looking at about 1.8 million earnings until December,” Senior Vice President, Capital Alliance Ltd, Udeeshan Jonas told an online forum by Sri Lanka’s Echelon business magazine.
“That itself is going to have a 2.2 percent impact on the GDP. Adding to that, if we look at the apparel sector which counts to about 6.6 percent of our GDP, we are looking at about 30 percent reduction in apparel exports.”
“So putting all this, our base case view is 1 to 3 percent drop in GDP if the COVID 19 situation will be contained in the next 3 to 6 months.”
Udeeshan Jonas said another reason for the country’s economic recovery to slow down is a hit on consumption.
“If you look at our GDP composition, 70 percent GDP comes from consumption,” Jonas said.
“So it plays a large role in terms of our economic activity.
“As we look at it right now we are seeing significant imports slow down people cutting non-essential consumption, which is why we are trending towards a negative 1 to 3 percent in GDP.”
Acuity Stockbrokers, Director Research, Chethana Ellepola said there was only a slight possibility for Sri Lanka’s economy to grow in 2020.
“In a best-case, we see a V-shaped recovery and we are assuming a 1.5 GDP growth for this year,” Ellepola said.
“The assumptions that we make are we have this shock but it will last about a quarter. So we assume a 1.5 percent growth. It is not as much as 2.5 last year but still, it is not a bad place to be.
“However, we don’t feel like that is the most likely case. The most likely case is we it will be a negative 3 – 4 percent.”
“And we are assuming in this scenario, unlike in other cries in which the impact was limited to a quarter this one will affect for several quarters.”
There was a broad consensus that the impact of the shock would last more than one quarter.
“We are looking at a negative GDP from -1 percent to -0.5 percent,” Head of Research at First Capital, Dimantha Mathew said.
“Obviously the second quarter is the most affected and it will probably go the 3 quarter as well.”
Mathew said with the current rate Sri Lanka is expected to return mostly to normal by the end of June or at the beginning of July 2020.
“If Sri Lanka goes into the third scenario which is facing another wave that is the worst case,” he said.
“Then the recovery will start to the end of September. Then the 2 and 3 quarters will be affected by this situation.” Mathew said.
“If that happens we are looking at a number of -4.8 percent or more than that.”
Observers, however, say Sri Lanka’s Coronavirus situation cannot be compared to Western countries, which had community transmission from the Chinese first Wave in January, and infections are all over.
Sri Lanka, along with Vietnam and Cambodia completely killed Wave I based on available information.
All current infections have come from index cases from Wave II third countries from March, with one or two unexplained cases, which are also believed to be linked to second wave index cases, increasing the chances of containing the spread.
However, infections from military personnel who were allowed to go on leave during a nation-wide lockdown have worsened the risk somewhat.
South Korea’s clusters also date back from the first Chinese Wave and it cannot be compared to Sri Lanka either.
Sri Lanka’s recovery would also depend on the global situation, which will affect export demand and tourism, analysts said.
The International Monetary Fund is projecting a V-shaped recovery for most countries, which is accentuated by the low base from a contraction this year.
Sri Lanka is also projected to 4.2 percent in 2021 after contracting 0.5 percent the IMF said. Emerging markets, in general, were projected to grow 8 percent in 2021 after slowing to 1 percent, the slowest for decades.
Vietnam, whose central bank did not print money and break the currency peg in this crisis, will grow 7 percent in 2021, after a positive 2.7 percent in 2020.
In a Keynesian stimulus fiasco in 2009 amid already strong private credit growth, the Vietnam Dong collapsed leading massive consumption hit.
“There is a possibility of a U or V shape recovery in the global economy,” Softlogic Capital Markets, Chief Executive, Danushka Samarasinghe said.
“It depends on how quickly a vaccine will be produced and distributed throughout the world.
“Even in a global recovery in Sri Lanka will show a slow recovery. We are still a service lending economy. The GDP contribution is 67-72 percent, but that will be seriously affected.”
“We are expecting remittances which 7.5 of GDP will come into half of it. Tourism income we expect to go down by 76 pct. We don’t expect new arrivals in the balance of the year.
“Job losses, salary cut, and all the things will create a snowballing effect in disrupting domestic demand.”
Samarasinghe said out of all the sectors they expected only agriculture to show a growth in 2020.
Sri Lanka, however, was likely to benefit from crude oil.
“We tend to benefit from import of crude oil,” Bartleet Religare Securities, Head of Research, Nikita Tissera said.
“We have to take the net effect. I believe we benefit about 2.5 to 2.8 million dollars as a cost-saving with the reduction price in crude oil.”
Domestic value added (GDP) in the energy sector would rise by the lowering of cost of fuel as an input. If oil prices are not cut, the value added would go as taxes to the government.”
Sri Lanka’s central bank is expecting imports to fall as much as 4.5 billion US dollars in 2020.
The central bank is expecting Sri Lanka to grow 1.5 percent in 2020. In 2009 Sri Lanka’s per capital GDP dropped over 200 US dollar following the collapse of the rupee’s soft-peg with the US dollar.
Money printing which breaks the soft-peg has been the principal economic problem in the country from 1951, which triggered exchange controls, trade controls (which in turn triggered trade controls and import controls) as well a severe output shock and unemployment.