New Country Reports market report from Business Monitor International: "Sri Lanka Business Forecast Report Q1 2014"

Boston, MA -- (SBWire) -- 12/20/2013 --Despite the ruling United People's Freedom Alliance (UPFA)'s electoral defeat in the Northern Province's recent elections, the Rajapaksa regime's success in holding largely peaceful elections in a majority-Tamil area should help in deflecting international pres -sure and criticism off of Colombo to enhance reconciliation efforts following the recent end of the country's decades-long civil war.

While a recovery in exports and robust government spending have continued to drive Sri Lankan economic activity in 2013, the invest -ment story has so far failed to recapture its double-digit growth form of 2011-12. Still, we are cautiously optimistic that a strengthening currency, rejuvenated export performance, and lower borrowing costs can kick start investment activity in the coming quarters.
The Central Bank of Sri Lanka (CBSL) shocked the market in October, cutting its reverse repo rate by 50 basis points (bps) to 8.50% and extending the current easing cycle to 125bps. Looking ahead, we cannot rule out further loosening in the near term, given that real lending rates remain relatively high, private sector credit growth continues to cool, and the bond market is pointing to additional cuts. With this in mind, the downside risks to our view of a prolonged pause remain acute.

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We believe that the recent weakness in the Sri Lankan rupee is both a blessing and a curse for Sri Lanka's booming tourism industry. With the rupee now at the cheapest it has ever been against the euro, it should help to entice additional arrivals from the bloc which remains the island's top tourist market. That said, the downside of having to deal with a much weaker rupee is that the cost of major tourism-related infrastructure developments is likely to face some upside pressure.

Major Forecast changes

We continue to forecast reasonably healthy real GDP growth rates of 6.4% and 6.8% in 2013 and 2014, respectively, which would make the island one of the fastest growing economies in the region.
Key risks to outlook

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