First Capital Research (FCR) recently issued its Pre-policy analysis for 2018, which stated GDP growth for 3Q 2017 was lower than expected, growing by 3.3% YoY in the quarter.
Overall agricultural activities reported negative growth, mainly due to unfavourable weather conditions (severe drought and heavy rainfall) that prevailed during the last two years in many districts of the country.
During the third quarter of 2017, ‘Services activities’ continued to expand further by 4.3%, while ‘Industrial Activities’ recorded a marginal growth rate of 1.9%.
Credit Growth Increases
FCR upgraded private sector credit growth for 2017 from 14% to 16% in August 2017 amidst a likely increase towards the end of the year.
The private sector credit figure decelerated to Rs 41 billion in October 2017, prior to pickup by Rs 61.6 billion in November 2017. FCR believes overall credit is likely to continue to remain under check.
Inflation continues to slow down
CCPI-based headline inflation decelerated on a YoY basis to 5.8% in January 2018 (below the FCR estimate of 6.7%) from 7.1% in December 2017. NCPI-based inflation accelerated on a YoY basis to 7.7% in December 2017 from 7.5% in November 2017.
However, Core inflation remained under check, decelerating to 3.5% in January 2018 from 4.3% in December 2017.
FCR forecast February 2018’s CCPI headline inflation to be at 5.1%. They expect inflation to come under control over the next 2-3 months, while there could be some upward pressure towards 2Q 2018.
Official Reserves remain above US$ 7 billion
Sri Lanka’s forex reserves assets decreased by US$ 286 million to US$ 7.67 billion in January 2018, which was equivalent to about 4.5 months of imports, from Rs 7.96 billion in December 2017. The Central Bank of Sri Lanka (CBSL) had net-purchased US$ 191 million from currency markets so far during 2018.
First Capital Research expects foreign reserves to maintain at US$ 7.0 billion, which is equivalent to 4 months import bill value.
CBSL Holdings brought down to zero
Year-To-Date, CBSL increased its holding in Government Securities marginally from Rs 2.55 billion in January 2018 to Rs 4.92 billion as at 12 February 2018. However, on 3 January 2018, CBSL holdings were seen increasing to Rs 120.05 billion, prior to settling at Rs 4.23 billion the following day.
Fed Rate Hike Expectations
Economists said the Fed will still pencil in three hikes for 2018 (March 2018, June 2018 and December 2018), but moved forward one of those projected moves to March 2018 from June 2018.
Expected Monetary Policy Stance
First Capital Research believes inflation rate to moderate, foreign reserve position to be maintained above Rs 7.0 billion levels, improve in credit growth and likely increase in GDP growth in 2018. Consideration of above favourable macroeconomic environment current monetary policy is appropriate and no change is required.
FCR expects the CBSL to keep Statutory Reserve Ratio (SRR) unchanged at 7.50%.