The Sri Lankan Economy
Interest rates: CBSL raised policy interest rates by 50 bps at its Monetary Policy Committee meeting in February. This begins a hiking cycle that was expected to commence by end H1; so the hike in February was sooner than expected. CBSL appears to be responding to continued fast credit growth, core inflation steadily edging upwards, and non-fuel imports growing. This increase represents the first hike in four years.
Inflation: Core inflation showed a steady uptick, edging up to 4.6%, the highest in over a year.
External: Export levels remained stagnant in Q4 ’15, and the data for the year showed a secular decline YoY. Imports across most categories remained stagnant or dipped slightly by end 2015, contributing to a falling trade deficit. Meanwhile tourist arrivals steadily rose, and drove an uptick in earnings, reversing a declining trend seen in most of H2.
The Global Economy
Advanced economies: The Organization for Economic Cooperation and Development (OECD) cut its 2016 economic growth forecast (for 34 developed countries) to 3% from 3.3% owing to “disappointing data, sluggish demand, weak investment and a high risk of financial instability”. The weaker outlook for emerging economies is also a drag on growth of advanced economies.
US: Federal Reserve Chair indicated that rate hikes in 2016 are not on a preset course, and may be revised taking into account the outlook for economic activity and job creation. She noted particular focus on the impact on US exports of the fall in commodities price and demand. The US economy continues to post encouraging job and consumption numbers.
Europe: Factory and inventory data in Europe indicate continued sluggish growth, and further deflationary pressure. The uptick seen in H1 2015 dissipated by end of the year, and euro-area GDP was below pre-crisis peak levels (in early 2008). The European Central Bank may consider another round of stimulus funding at its next meeting in March.
Oil: Oil prices continue to weigh on the global economy, with a mixed bag of effects. Oil importers continue gain from continued lower prices, while oil exporters are struggling as a result of lower oil revenues and resultant impacts on their trade and budget deficits. Lower oil prices are also having a knock on effect on some international banks – particularly in Europe – who are heavily exposed to oil company portfolios. This adds to their continued vulnerability
China: China’s economic health continue to be in question, with new evidence on the level of off-balance-sheet lending by Chinese banks contributing to a weak overall financial system, and strains on Chinese reserves amidst PBOC’s defense of the Yuan.