Sluggish economy and weakened consumer confidence could persist until the Presidential election is announced towards the latter part of the year. But the collapse in the rupee could be less severe than earlier predicted due to a potentially weak dollar, lower imports and debt inflows, according to First Capital Research.
In a recent research report on the exchange rate, First Capital said the monetary stimulus launched by the Central Bank by way of a 50 basis points rate cut would do very little to stoke animal spirits in the economy, albeit a slight improvement in the demand, but would weigh on the rupee.
“First Capital Research expects the recovery in demand to be at a significantly slow-pace considering the severity of the impact to all sectors by the Easter Sunday attacks and the subsequent incidents,” First Capital Research analyst and author of the report Dimantha Mathew, said.
“We expect demand to normalize by 4Q19 supported by the possible improved sentiment with the announcement of the Presidential election,” he added.
Sri Lanka’s economy has been slowing since 2016 before it plunged to 17-year low of 3.2 percent in 2018 as a result of the toxic combination of myopic monetary and fiscal policies compounded by bad politics and a dose of adverse weather conditions.
The moribund economy received a final blow on April 21 when the radical Islamist terrorists targeted innocent civilians and foreigners claiming 250 lives, injuring over 500 more.
The country and its people are still struggling to come into terms with the shock the attack delivered and the incident 10 years since the end of the war sent shock waves through all the sectors in the economy, with tourism being most affected as arrivals slumped more than 70 percent.
“Sri Lanka’s consumer confidence index compiled by Neilson recorded a major plunge in the last couple of months subsequent to the Easter Sunday attacks which we expect could lead to a further dent in imports amidst lower consumer demand,” Mathew said.
The bombings clearly showed deterioration of the Sri Lankan State machinery with the top two leaders in the government involved in a bitter tug of war.
Meanwhile, First Capital Research upgraded its forecast for the rupee to Rs.180 to buy a dollar by the end of the year from their earlier forecast of Rs.190. Their base case has a 65 percent probability.
“Further, we are introducing a 12-month target for June 2020E of 1 US$ Rs. 185.0 as a 60 percent base case scenario.
In spite of the rate cut, the weakness of the rupee may be limited considering the delay in consumer demand while rupee is also likely to be supported by the weak dollar and targeted debt-driven inflows,” the report noted.