First Capital upgrades exchange rate outlook for 2019E to LKR 180 from 194

LBO – Sri Lanka’s First Capital Research has upgraded their exchange rate outlook for 2019E to 1 USD: LKR 180 from 194 as their 65 percent base case scenario.

The firm has also introduced a 12-month target for Jun 2020E of 1 USD: LKR 185 as a 60 percent base case scenario.

“In spite of the recent 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 firm said.

Central Bank’s foreign reserve position is key in building confidence in the exchange rate.

Currently, as at May 2019, foreign reserves stood at 6.7 billion US dollars which is estimated to be above the targeted 4 months of imports.

Heavy dip in imports has reduced the overall comfortable level of foreign reserves.

“In order to maintain reserves at USD 6.5-7.0Bn range, CBSL needs to raise a further USD 2Bn for which cabinet approval has already been obtained.”

CBSL also targets an additional 2.5 billion dollars to be raised to meet payments falling due in 2020 before the election season which starts in 4Q2019 and may continue up to 2Q2020.

First Capital Research says if Sri Lanka is successful in raising the required funds via foreign debt over next couple of months, the foreign reserve position could be maintained at a reasonably comfortable level which they believe is 6.5 billion dollars considering the prevailing environment.

Following the Easter Sunday attacks, with immediate effect, the tourism sector saw heavy cancellations flowing in for 2019 while many small scale hotels and resorts decided to shut down for 6 months.

“We estimate the tourism earnings are likely to fall short by USD 1.5-2.0Bn from the original estimate,” First Capital Research said.

“In addition to the loss in foreign exchange, the net impact is, however, much lower as consumer demand crashed almost immediately and is yet to recover.”

As a result imports have seen a further crash following the attacks amidst the lower consumer demand and 30 percent of tourism earnings estimated to be imports.

Amidst a further hit in imports despite the loss in revenue from tourism the Sri Lankan Rupee stands steady with a YTD appreciation of 3.5 percent up to 31 May 2019.

Meanwhile, the US Dollar is expected to weaken during the 2H2019 possibly favouring the Sri Lankan Rupee.