Economy Highlights - ICRA

Economy Highlights

2020

Feb 2021

Economy at a glance for 2020

A double whammy blow

Highlights

▪ ICRA Lanka estimates Sri Lanka’s GDP growth rate in 2020 to be -4%. In addition, our estimates indicate

industry, services, and agricultural sectors to have contracted by 7.3%, 1.7% and 1.3% respectively.

▪ By mid-March the COVID crisis took center stage and the CBSL implemented a series of policy rate cuts

further bringing the short-term rates lower to unprecedented levels. As a result, Sri Lanka has seen the

lowest long-term rates in years.

▪ COVID crisis triggered a panic selling of SLISBs. This resulted in a massive spike in SLISB yields in March

accentuated by the country’s external sector vulnerabilities.

▪ Following the Moody’s downgrade, the yields on the SLISBs edged up by ~170 to 540 bps which weighed

down on country’s ability to raise foreign currency debt.

▪ 2020 was a challenging year for the financial sector. It marks a considerably weak performance for NBFIs.

However, compared to NBFIs, banking sector was much resilient due to its solid capital buffers.

▪ With exports, remittances, and tourist receipts falling to historical lows, rupee was facing immense

downward pressure during the first half of the year. In this context, the CBSL introduced import restrictions

to bring the situation under control.

▪ As per ICRA Lanka’s estimates, the total revenue and grants of the government have plummeted by nearly

28% in 2020, while total expenditure records a marginal increase. As a result, the fiscal deficit may have

widened by over 63%. In this context, we expect the total public debt to have reached 97.4% in 2020.

▪ With the economic recovery in 3Q, the bourse turned bullish and the record performance of ASPI lifted it

back to the pre-crisis level fueled by the quest for higher yield in the low interest rate environment.

▪ Oil prices slumped to twenty year low during March and April, due to the initial impact of the pandemic

lockdowns across several major economies, but gradually started recovering as the year wore on.

▪ Exporters enjoyed robust prices for key export commercial crops tea, rubber and coconut during the year.

▪ Price of base metals which are major industrial inputs, declined to their two-year lows in April. On the

contrary, onset of the COVID crisis boosted the demand for precious metals, especially gold, as an asset,

boosting its prices to historically high levels.

ICRA Lanka Macro Projections 2020-21

2019 2020 2021

GDP growth, % 2.3 -4.0 3.6

Government revenue, % of GDP 12.6 9.2 9.6

Government expenditure, % of GDP 19.4 20.3 20.4

Fiscal deficit, % of GDP -6.8 -11.1 -10.8

Government debt, % of GDP 86.8 97.4 99.3

Exports, % of GDP 14.2 12.6 14.4

Imports, % of GDP 23.7 19.7 20.5

Trade deficit, % of GDP -9.5 -7.1 -6.1

Current account, % of GDP -2.1 -1.1 0.2

Annual average inflation (CCPI), Y/Y, % 4.3 4.6 5.0

Unemployment, % 4.8 5.5 - 6.0 5.5 - 6.0

Exchange rate (Low), LKR/USD 182.9 193.1 200.0

Exchange rate (High), LKR/USD 174.4 181.4 190.0

Exchange rate (Avg), LKR/USD 178.8 185.6 194.3

Gross official reserves, yearend, USD Bn 7.6 5.7 3.7

Forex obligations for the year, USD Bn 4.2 6.1 6.8

AWPR, % 9.74 7.97 5.50 – 6.00

Contents

Interest Rates ............................................................ 1

External Sector ........................................................ 5

Fiscal Sector ............................................................. 7

Prices & Wages ........................................................ 8

Equities ....................................................................... 9

Financial Sector ..................................................... 10

Commodities ............................................................13

Real Sector .............................................................. 15

Ratings Commentary ........................................... 18

Outlook for 2021 ..................................................... 20

Rating Actions ........................................................24

Economy Highlights | 2020

Page | 1

Interest Rates

Short-term rates

Figure 1: Treasury bill yields and money market rates (weekly averages)

Notes: AWCMR- Average Weighted Call Money Rate, SDFR- Standing Deposit Facility Rate, SLFR- Standing Lending Facility Rate, T-bill yields are for the secondary market, ARR – simple average of daily repo rates

Source: CBSL

Figure 2: Excess liquidity and CBSL’s treasury holdings by month - 2020

Source: CBSL

The CBSL cut the policy rates in end January amidst gloomy global growth outlook. Call

and repo rates responded by moving down by about 50 bps but the effect was felt much

less in the T-bills market. By mid-March the COVID crisis took center stage and the

CBSL implemented a series of rate cuts further bringing the short-term rates lower to

4.00%

4.50%

5.00%

5.50%

6.00%

6.50%

7.00%

7.50%

8.00%

8.50%

AWCMR SDF SLF T-bill yield (3M) ARR

0

100

200

300

400

500

600

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

LKR

Bn

Average CBSL holdings of treasuries Average daily overnight liquidity

Sri Lanka’s money

market rates declined

to historic lows amidst

high liquidity.

Following the

outbreak of COVID-19,

the CBSL displayed

higher tolerance for

excess liquidity.


Page | 2

unprecedented levels. The move hoped to facilitate credit expansion to COVID hit

economy.

In 3Q more actions followed which included 200 bps reduction of Statutory Reserve

Ratio (SRR). The excess liquidity overwhelmed the treasury market and brought the T-

bill yields down sharply, resulting in the steepest drop in yields for the year. The CBSL’s

balance sheet expanded following the outbreak of the pandemic, and by the end

December, treasury holdings were boosted to whopping LKR 700 Bn. Markets flushed

with liquidity, forced the overnight rates towards the lower bound of the policy corridor

throughout 3Q and 4Q. The banks channeled the excess funds to repo market which

resulted in a marked drop in call market volumes while boosting repo volumes to pre-

crisis levels during June -September period.

Despite the massive liquidity surplus following COVID relief measures by the CBSL, the

T-bill yields displayed some pressure to rise in 3Q and 4Q which left the primary

auctions partially filled due to yield caps imposed by the CBSL. Sri Lanka's sovereign

rating downgrades by international rating agencies also intensified the pressure for

yields to rise.

Long-term rates

Figure 3: Yield curve of treasuries

Notes: Yields are based on the weekly average that prevailed at the last week of the month, Shorter end – less than 2Y, mid/intermediate tenor – 2 to 10Y, longer tenor – above 10Y Source: CBSL

The yields on treasuries across the board saw substantial decline of about 250-to-300

bps in 2020 compared to end 2019. Subsequent to Moody’s downgrade, bond yields,

especially the mid-tenor securities, jumped 10-to-30 bps immediately, while trading at

wider bid-ask spreads. With the advent of the second wave of infections, the yields

continued to rise for next two months. In this backdrop, there was a significant decline in

transaction volumes in T-bonds in 4Q.

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

11.00%

3M

6M 1Y

< 2

Y

< 3

Y

< 5

Y

< 6

Y

< 8

Y

< 1

0Y

< 1

5Y

< 2

0Y

< 3

0Y

Dec-20 Dec-19

The yields on

treasuries across the

board saw substantial

decline about 250 to

300 bps in 2020

compared to end 2019.


Page | 3

Figure 4: Secondary market T-bill yields and AWPR

Note: AWPR is calculated based on the submissions made by the commercial banks to the CBSL on the rates offered to customers who borrowed more than LKR 10 Mn for less than three months.

Source: CBSL

AWPR1 remained at upper single digit levels and continued to steadily decline (~130

bps) throughout 1H amidst monetary easing. Retail lending rates continued to decline

throughout 3Q (AWPR ~246 bps, AWNLR ~236 bps, AWLR ~143 bps)2. The spread

between AWPR and 3M T-bills historically had remained above 200 bps. Facilitated by

the July policy rate cut, the spread shrunk to under 200 bps by September and

continued to decline indicating improving risk appetite of lending institutions. Taking a

targeted approach, the CBSL decided to slap caps on interest rates on credit cards,

pre-arranged temporary overdrafts and pawning facilities in August.

Credit

Figure 5: Net credit to private and government sectors, (M/M)

Source: CBSL

1 AWPR is calculated based on the submissions made by the commercial banks to the CBSL on the rates offered to

customers who borrowed more than LKR 10 Mn for less than three months. 2 AWPR- Average Weighted Prime Rate, AWNLR – Average Weighted New Lending Rate, AWLR –Average Weighted

Lending Rate

0%

2%

4%

6%

8%

10%

2-J

an-2

0

17

-Jan

-20

31

-Jan

-20

14

-Fe

b-2

0

28

-Fe

b-2

0

13

-Mar

-20

27

-Mar

-20

10

-Ap

r-2

0

24

-Ap

r-2

0

6-M

ay-2

0

22

-May

-20

4-J

un

-20

19

-Ju

n-2

0

3-J

ul-

20

17

-Ju

l-2

0

31

-Ju

l-2

0

14

-Au

g-2

0

28

-Au

g-2

0

11

-Se

p-2

0

25

-Se

p-2

0

9-O

ct-2

0

23

-Oct

-20

6-N

ov-

20

20

-No

v-2

0

4-D

ec-2

0

18

-Dec

-20

1-J

an-2

1

T-bill (3m) AWPR

-100

-50

0

50

100

150

200

250

300

Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20

Private Credit Government Credit

Facilitated by the July

policy rate cut, the

spread shrunk to

under 200 bps by

September and

continued to decline

indicating improving

risk appetite of lending

institutions.

With the partial lifting

of the lockdown, from

August onwards, the

credit started picking

up to year ago levels.


Page | 4

Credit growth was recovered following the January rate cut by the CBSL, but quickly

lost momentum with the pandemic outbreak. In order to facilitate credit flow to the

economy to speed up recovery, the CBSL implemented several measures including

successive rate cuts, but the private credit contracted for three months. With the partial

lifting of the lockdown, from August onwards, the credit started picking up to year ago

levels (4.2% Y/Y). The government credit expansion remained strong throughout the

year (11.1% Y/Y).

International rates

Figure 6: International lending rates

Notes: The SOFR Averages are compounded averages of the SOFR over rolling 180-calendar day periods. Fed started publishing SOFR term rates from March onwards.

Sources: New York Federal Reserve and global-rates.com

The global growth outlook was already overshadowed by the deteriorating US-China

trade relations at the beginning of 2020. The situation was worsened by the rapid

spread of COVID-19 virus across China and the developed countries. The Central

Banks, including the Fed, dropped the interest rates to rock bottom which led to a

gradual decline of Eurodollar rates for the most part of 2020.

Figure 7: Sovereign bond yields, Sri Lanka, nearest vs. longest maturity

Source: CBSL

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%


LIBOR USD (6m) SOFR (6m)

0%

10%

20%

30%

40%

50%

4-Oct-20 28-Mar-30 27-Jul-21

Dovish Central Bank

policies helped to ease

the Eurodollar rates

Sovereign rating

downgrades by the

international rating

agencies drove the

SLISB yields higher.


Page | 5

COVID crisis triggered a panic selling of SLISBs. This resulted in a massive spike in

SLISB yields in March accentuated by the country’s external sector vulnerabilities.

Afterwards, yields went through a correction phase for good part of 3Q with the

strengthening of the external position of the country. Following the Moody’s downgrade,

the yields on the SLISBs edged up sharper by ~170-to-540 bps which weighed down on

country’s ability to raise foreign currency debt. In 4Q, the situation was further

aggravated by the country succumbing to the second wave of infections, however,

yields on ISBs started to moderate in November as investors reevaluated their initial

reaction to the second wave. Yields once again gradually climbed up during December

over Sri Lanka's long-term sovereign credit ratings being downgraded by Fitch and S&P.

External Sector

Figure 8: External Trade (USD Mn)

Sources: CBSL

With exports, remittances, and tourist receipts falling to historical lows, rupee was facing

immense downward pressure during the first half of the year. The CBSL introduced

import controls in March to curb forex outflows. In May, the exports started to recover

and by June bounced back closer to pre-crisis level driven by decent performance of tea

and apparel exports. Country achieved a trade surplus in June amidst subdued import

growth. The worker remittances also made a recovery in May and in June surpassing

the pre-crisis level. Throughout 3Q, monthly exports remained around USD 1 Bn led by

the apparels and commercial crops. Better-than-expected performance of exports

together with import controls contributed to a noteworthy improvement in trade deficit.

However, after a critical industrial zone in Western province became the epicenter of Sri

Lanka’s second wave of infections, several industrial plants were shutdown to contain

the spread, leading to notable reduction in export volumes. In 2020 we expect the trade

deficit to improve significantly to 7.1% of the GDP. Reduction in trade deficit has also

contributed to a noteworthy improvement in current account balance, which we expect

to around -1.1% of the GDP.

(500)

-

500

1,000

1,500

2,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Trade Deficit (2020) Exports (2019) Imports (2019)

Exports (2020) Imports (2020)

Notable improvement

in trade deficit was

witnessed as a result

of strong rebound of

exports and import

controls.


Page | 6

Figure 9: Net foreign purchase of equities and treasuries (LKR Mn)

Sources: CSE, CBSL

Pandemic worries and interest rate cuts caused the capital to flow out of treasury and

equity markets especially during March. ICRA Lanka’s estimates show around USD 800

Mn outflows on net basis for 2020. Despite bullish local investor sentiment in CSE, the

foreign investors continued to exit.

Figure 10: Exchange rate

Source: CBSL

Exchange rate remained broadly stable during1Q but once the COVID crisis

overwhelmed the economy, rupee depreciated sharply close to LKR 200/USD. The

import controls and intervention by the Central Bank brought the situation under control,

but in December rupee displayed some volatility and pressure to depreciate.

-60,000

-50,000

-40,000

-30,000

-20,000

-10,000

0

10,000

Jan

-20

Feb

-20

Mar

-20

Ap

r-2

0

May

-20

Jun

-20

Jul-

20

Au

g-2

0

Sep

-20

Oct

-20

No

v-2

0

Dec

-20

CSE Treasuries

0.0

0.5

1.0

1.5

2.0

2.5

170

175

180

185

190

195

200

2-J

an-2

0

17

-Jan

-20

31

-Jan

-20

14

-Fe

b-2

0

28

-Fe

b-2

0

13

-Mar

-20

27

-Mar

-20

10

-Ap

r-2

0

24

-Ap

r-2

0

6-M

ay-2

0

22

-May

-20

4-J

un

-20

19

-Ju

n-2

0

3-J

ul-

20

17

-Ju

l-2

0

31

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l-2

0

14

-Au

g-2

0

28

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g-2

0

11

-Se

p-2

0

25

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p-2

0

9-O

ct-2

0

23

-Oct

-20

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20

20

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v-2

0

4-D

ec-2

0

18

-Dec

-20

1-J

an-2

1

USD

Bn

LKR

/USD

Spot exchange rate (LHS) Outstanding forward volume (RHS)

Pandemic worries and

interest rate cuts

caused the capital to

flow out of treasury

and equity markets.

The import controls

and intervention by the

Central Bank

stabilized the

exchange rate for the

better part of 2020.


Page | 7

Latest available data indicates, the Real Effective Exchange Rate (REER)3 index, which

measures the external competitiveness of the country, has increased to 91 in November

compared to 90 which prevailed during the beginning of the year.

Figure 11: Gross official reserves (USD Mn)

Source: CBSL

During 2020, Sri Lanka lost one-fourth of its reserves. In addition, for 2020, over USD 6

Bn foreign currency obligations were pending including USD 1 Bn ISB in October. SLDB

auctions, Fed repo facility and SAARC swap facility were used to bolster reserves.

Weaker dollar, subdued imports, modest export volumes, and recovery of remittances

helped to ease pressure off the rupee and keep the intervention at a lower level. Under

these circumstances, the CBSL was able to be a net buyer of forex amounting to over

USD 280 Mn. In addition, the CBSL sold down about USD 234 Mn gold reserves amidst

favorable gold prices to boost reserves in June.

Fiscal Sector

Figure 12: Government revenue and expenditure (LKR Bn)

2019 2020* Change (%)

Total revenue and grants 1,899 1,374 -27.6

Total expenditure 2,915 3,035 4.1

Deficit 1,016 1,661 63.4 Notes: *ICRA Lanka projections Source: CBSL

As per ICRA Lanka estimates, the total revenue and grants of the government

plummeted by nearly 28% in 2020. Tax revenue alone have gone down by over 30%.

Total expenditure records only a marginal increase as the surge in recurrent expenditure

was counterbalanced by dramatic reduction in capital expenditure. Consequently, the

fiscal deficit was widened by over 63%.

3 A rising REER typically means that a country’s goods are becoming more expensive to foreign counterparts, and

therefore less competitive (i.e. stronger rupee), relative to its trading partners while a declining REER indicates the

opposite.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0


Weaker dollar,

subdued imports,

modest export

volumes, and recovery

of remittances helped

to ease pressure off

the rupee and keep

the intervention by the

CBSL at a lower level.

Rapid reduction in

total revenue and

grants inflated the

fiscal deficit by over

60% in 2020 period.


Page | 8

Figure 13: Outstanding government debt (LKR Bn)

End 2019 End 2020* Change (%)

Total debt 13,031 14,595 12.0 Notes: *ICRA Lanka projections Source: CBSL

The rupee value of foreign debt recorded a marginal decline. Domestic debt, which was

increased by nearly 25%, was mainly financed using T-bills. ICRA Lanka estimates show

total outstanding government debt increasing by 12% to LKR 14.6 Tn during the 2020.

We expect the total public debt to have reached 97.4% of the GDP in 2020.

Prices & Wages

Figure 14: CCPI and Wage Rate Index of the informal private sector, (Y/Y)

Notes: WRI (100=2012), CCPI (100=2013)

Source: CBSL

In 2Q unemployment fell to 5.4% from 5.7%. This faster recovery in the labour market

was somewhat unanticipated especially amid dormant leisure sector. The wage growth

continued to remain weak throughout the 2H with the exception of September where the

economy made a slight recovery before being hit by the second wave.

Purchasing power of the consumers also remained weak as seen by proxy indicators

such as outstanding credit card balances which show nearly a 4.8% decline this year up

to November. Tax cuts announced in November 2019 contributed to decline in non-food

inflation in early 2020 before the COVID outbreak, as a result of downward adjustment

of prices of services related items (telco, health, airfare, internet etc.). Even though

inflation remained around 4% since May, the food-inflation continued to be around

upper single digits due to supply shocks. Non-food inflation was mild, and was under 1%

for August and September months.

According to the PPI (Producer Price Index), agricultural producers saw the prices

increasing by double digits on year-on-year basis following the outbreak averaging

0%

1%

2%

3%

4%

5%

6%

7%


CCPI WRI

Even though the

headline inflation

remained around 4%

since May, the food-

inflation continued to

be around upper

single digits due to

supply shocks.

Total outstanding

government debt rose

by 12% to LKR 14.6 Tn

during 2020.


Page | 9

22.2% from May to November, while manufacturing producers saw prices increasing by

4.4%(Y/Y) for the same period.

Price inflation in real estate sector eased in the 1H (Land 10%, houses 2% Q/Q basis by

end 2Q) but as the credit recovered land and house prices accelerated in the second

half (Land 17%, houses 20% Q/Q basis by end 4Q)4.

Equities

Figure 15: ASPI (M/M)

Note: CSE was not operational for the whole month of April Source: CSE

The CSE operated with bearish sentiment throughout the first two months of 2020 as

Corona virus fears loomed across East Asia. With the first local Corona patient reported

in March, the CSE immediately went into free-fall. The trading at the CSE was

suspended several times during March due to intraday crashes. To prevent further

collapse, the market operations were suspended for the entire month of April. In

subsequent months the market made a modest recovery as investors start buying

undervalued stocks.

Economic recovery in 3Q turned bourse bullish and the record performance of ASPI

lifted it back to the pre-crisis level fueled by the quest for higher yield in the low interest

rate environment. Heavy buying interest was seen among the retail investors.

Nevertheless, throughout the year foreigners were on the sell-side despite attractive

valuations. The second wave of infections had a blow on the market sentiment in early

4Q but the prospects of viable vaccines helped to turn it around.

Essential sectors and utilities such as pharma, healthcare, power, energy, and telecom

had the least impact on their valuations. Export oriented sectors such as textile and

manufacturing had moderate impact, but plantations, which comprised mostly of tea

4 Calculations are based on Lanka Property Web price indexes.

-20%

-15%

-10%

-5%

0%

5%

10%

15% With the economic

recovery in 3Q, the

bourse turned bullish

and the record

performance of ASPI

lifted it back to the

pre-crisis level fueled

by the quest for higher

yield in the low

interest rate

environment.


Page | 10

exporters had fairly a good run during the 2Q due to rise in global tea prices. Due to

restrictions in mobility and social distancing, sectors such as construction, real estate,

leisure and services were also moderately affected. Import dependent sectors such as

trading and motor vehicles and financial sector equities such as banks, finance &

leasing, and investment funds were the hardest hit. Palm oils companies reported a

deep dent in their share values in 1H 2020.

In 3Q, nearly all GICS sectors made gains. Shipping, logistics, and tyre industry shares

saw the largest gains for the quarter. In addition, construction related stocks such as

cement and glass also gained. Increasing economic activities fuelled buying interest for

energy, utilities, retail and consumer products shares. In 4Q, all GICS sectors recorded

gains except bank and real estate shares. Transport sector shares recording

exceptional performance.

Figure 16: GICS sector performance- 2020

Sector Index Points Gain

Transportation 4,002.59

Materials 670.24

Automobiles & Components 494.64

Health Care Equipment 488.14

Household & Personal Products 272.85

Utilities 259.64

Retailing 253.19

Energy 166.27

Consumer Durable 129.21

Capital Goods 124.27

Food Beverage & Tobacco 92.10

Commercial & Professional Services 58.09

Food & Staples Retailing 35.49

Insurance 23.67

Telecommunication 21.65

Consumer Service 2.77

Real Estate -16.68

Diversified Financials -70.10

Banks -113.44 Source: CSE

Financial Sector

Financial sector was among the most affected in 2020. Credit demand plummeted at

the onset of the pandemic and remained subdued for two quarters. The CBSL’s COVID

response included slew of measures to facilitate credit to revive the economy and

ensure adequate liquidity in the financial system. These actions include policy rate cuts,

releasing capital and liquidity buffers, relaxing administrative and supervisory

compliance requirements, and implementing a debt moratorium.


Page | 11

Banks

Compared to NBFIs, banking sector was much resilient due to its solid capital buffers.

Return on Assets (ROA) were low. Net Interest Margin (NIM) of the banking sector

deteriorated to around 4% in 3Q on account of interest rate cuts, debt moratorium, and

lower credit growth. Import restrictions shaved off some of the income due to unutilized

credit lines for imports and reduction in fee base income. However, banks benefited

from reduction in operational costs as a result of partial deployment of workforce, limited

branch operations, permanent closure of certain branches, and frozen recruitments.

Banks maintained comfortable level of capital and liquidity while the credit grew in

double digits in the first 3 quarters. NPAs slid marginally. By 15th October 2020, under

the Saubagya Renaissance Facility, around LKR 178 Bn loans were approved. There

was a slight up-tick in Non-performing Assets (NPAs) in 2Q but, in 3Q due to the impact

of moratorium, Construction and retail were among the most affected sectors which the

banks had substantial exposure to.

NBFIs

2020 marks a considerably weak performance for NBFIs. Annualized Return on Assets

declined to -2.31% for 3Q. The NBFI sector recorded five consecutive quarters of

negative credit growth from 3Q 2019 which has resulted in a substantial decline in total

assets. Consequently, there was a significant improvement in capital adequacy level (i.e.

Core Capital to Risk Weighted Assets) in 2Q and 3Q.

As of March 2020, a large number of small-medium sized finance companies were

operating below the minimum core capital requirement stipulated by the CBSL and all

these entities were undergoing capital enhancement initiatives. This vulnerability played

a significant role in weakening the resilience of the NBFIs. The asset quality continued to

deteriorate as seen from high level of NPAs (i.e. Gross Non-Performing Advances to

Total Advances). Though moratorium helped to moderate the NPAs in 3Q, waning asset

quality caused the credit cost to rise. With the release of capital buffers, the liquidity

levels (i.e. Regulatory Liquid Assets to Total Assets) showed a marginal increase. Some

of the loss-making Licensed Finance Companies (LFCs) have been forced to shut down,

or adhere to the consolidation plan set out by the CBSL where they are obligated to

merge with profitable LFCs. The biggest hit the revenues of the NBFIs came as a result

of the import ban on new vehicles set by the government. But on the other hand, this

has led to an increase in lending to the secondary vehicle market. The rise in the value

of existing motor vehicles had a positive effect on the collateral position of these

companies, however its effect has been curtailed by the repossession ban set out by the

CBSL. Funding profiles of Sri Lanka’s finance companies have been largely

characterized by limited diversity, with fixed deposits dominating the funding profile. It

was earlier expected that deposit base of the finance companies would erode amidst the

pandemic. Nevertheless, the depositors opted to maintain their cash with the finance

companies as the opportunity cost of withdrawals far outweigh the low interest rate on

the bank deposits. Recoveries of trishaw and services sector performed considerably

better than anticipated while tourism related lending continued to experience delays in

recoveries.

There was a

noteworthy

improvement in capital

adequacy level of the

NBFIs in 2Q and 3Q on

account of contracting

asset base.

Net Interest Margin of

the banking sector

deteriorated to around

4% in 3Q on account of

interest rate cuts, debt

moratorium, and

lower credit growth.


Page | 12

Figure 17: Financial sector key indicators, %

Notes: Capital adequacy indicators; for banks- Tier 1 Capital Ratio, for finance/leasing companies – Core Capital to Risk Weighted Assets, Earnings indicators; for banks- Return on Assets – before tax, for finance/leasing companies – Return on Assets (Annualized), Asset quality indicators; for banks- Non-performing Loans to Total Loans and Advances, for finance/leasing companies – Gross Non Performing Advances to Total Advances, Liquidity indicators; for banks- Liquid Assets to Total Assets, for Finance/leasing - Regulatory Liquid Assets to Total Assets

Source: CBSL

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1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q

2014 2015 2016 2017 2018 2019 2020

Capital Adequacy

Banks NBFIs

-3

-2

-1

0

1

2

3

4

5

1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q

2014 2015 2016 2017 2018 2019 2020

Earnings

Banks NBFIs

0

2

4

6

8

10

12

14

16

1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q

2014 2015 2016 2017 2018 2019 2020

Asset Quality

Banks NBFIs

0

5

10

15

20

25

30

35

40

1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q

2014 2015 2016 2017 2018 2019 2020

Liquidity

Banks NBFIs


Page | 13

Commodities

Figure 18: Crude oil price

Source: Bloomberg quoted in CBSL

Oil prices slumped to twenty year low during March and April, due to the initial impact of

the pandemic lockdown across several major economies. Optimism regarding US and

China recovery along with the easing of lookdown restrictions in many countries caused

demand for oil to somewhat recover during July and August. Prices slumped again

during September and October as a result of the resurgence in COVID cases. However,

prices rebounded towards the end of the year due to vaccine optimism, confirmation of

congress relief bill as well as Brexit trade agreement. Milder crude oil prices that

prevailed during the height of the crisis and months following, greatly helped to bring

down the trade deficit for Sri Lanka and improve the balance sheet of Ceypetco.

Figure 19: Auction prices of commercial crops

Notes: Tea prices for all elevations, rubber prices for LATEX Crepe 4X Sources: Forbes & Walker, CDA, RRISL

0

10

20

30

40

50

60

70


US$

/bb

l

Brent WTI

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

7-J

an

19

-Fe

b

17

-Ap

r

21

-May

1-J

ul

12

-Au

g

23

-Se

p

4-N

ov

16

-Dec

USD

/Kg

Tea

2019 Avg. Price Price

0

10

20

30

40

50

60

2-J

an

30

-Jan

27

-Fe

b

16

-Ap

r

14

-May

11

-Ju

n

9-J

ul

13

-Au

g

10

-Se

p

'00

0 n

uts

Coconut

Price 2019 Avg. price

0

50

100

150

200

250

300

350

400

450

3-J

an

13

-Fe

b

5-M

ar

14

-May

2-J

ul

20

-Au

g

8-O

ct

26

-No

v

Pri

ce (

LKR

)

Rubber

Price 2019 Avg. price

Oil prices slumped to

twenty year low during

March and April, due

to the initial impact of

the pandemic

lockdowns across

several major

economies.


Page | 14

Adverse weather conditions coupled with labor shortages due to COVID19 restrictions

resulted in a marked rise in tea prices during the first half of the year. Nevertheless, the

demand remained robust due to weaker rupee. The second wave of the pandamic,

caused further price hikes during October and November but eventually edged lower

during December as buyers rushed in to buy stocks before market closure.

Global rubber demand fell by 15.7%, causing prices to fall during the first half of the

year. This was partly affected by the 20% decline in demand from China, which

accounts for 40% of total global consumption. Subsequently, the re-commencement in

China’s auto production accompanied by an increased demand for medical gloves

during 3Q triggered a sharp rise in global rubber prices. Eventually, prices declined

during December amidst weakening demand.

Coconut production continued to be affected by the unfavorable weather thereby driving

the prices higher for the most part of 2020. CDA suspended coconut auctions from 30th

September indefinitely as coconut prices soared due to supply shock.

Figure 20: Metal price index (2016=100)

Notes: Base metals index includes Aluminum, Cobalt, Copper, Iron Ore, Molybdenum, Nickel, Tin, Uranium, and Zinc, precious metals index includes Gold, Silver, Palladium, and Platinum Source: IMF

Price of Base metals, which are major industrial inputs, declined to their two-year lows in

April due to COVID disruptions. Prices started to recover on account of China’s

recovery during the subsequent months. Copper prices surged in August and

September as the world’s largest supplier, South America, was in complete disarray as

the Corona virus cases surged. Subsequently, vaccine announcements caused prices

to soar higher towards the end of the year.

Onset of the COVID crisis boosted the demand for precious metals, especially Gold, as

an asset class. Gold price has reached historicaly high levels during the year. But in

August, rise in US treasury in the first half of August sparked investors to sell gold halting

months long rally. Gold rebounded later in the same month over weaker dollar and

expectations of inflation to stay above 2% as Fed announced its new approach to

monetary policy. Prices remained relatively stable during 3Q, however plunged towards

the end of the year as vaccine optimism turned investors bullish before gaining back as

the second wave of infections rose across US and Europe.

0

50

100

150

200


Base Metals Precious Metals

Adverse weather

conditions coupled

with labor shortages

due to COVID19

restrictions resulted in

a sharp rise in tea

prices during the first

half of the year.

Price of Base metals

declined to their two-

year lows in April due

to COVID disruptions.

But onset of the COVID

crisis boosted the

demand for precious

metals, especially

gold, as an asset

class.


Page | 15

Real Sector

Agriculture

Figure 21: Growth of production volumes of key agriculture sectors – 2020, (Y/Y)

Month Tea (%) Rubber (%) Coconut (%) Fisheries (%)

Jan -5.6 -6.8 -3.0 1.5

Feb -17.1 -5.7 -10.2 -5.9

Mar -52.8 -13.9 -23.4 -25.5

Apr -14.0 -20.8 -20.6 -41.5

May -16.7 -6.2 -17.3 -41.4

Jun -1.5 -7.6 -2.8 -33.4

Jul 4.0 0.0 -5.1 -6.2

Aug -14.2 21.6 -6.5 -0.5

Sep 0 16.8 -1.6 -12.8

Oct 10.3 11.5 -8.2 -24.4

Nov 3.3 8.4 -3.6 -14.4 Source: CBSL

The data shows a massive setback in the overall production level of the agricultural

sector triggered by the adverse weather condition and Corona induced disruptions.

Coconut production has a marked decline and has been falling throughout the year.

Rubber production fell in the first half of the year but made a strong rebound in 3Q.

During 1Q, the tea production fell dramatically but was mostly recovering from July

onwards. Fisheries sector also suffered major blows during the height of first and second

waves.

Services & Industries

Figure 22: Economic activity level indicators – 2020, (Y/Y)

Month Total

electricity

usage

(%)

Industrial

electricity

usage (%)

Cement

consumption

(%)

Ship

traffic

(%)

Container

handling

(%)

Cargo

handling

(%)

Jan 5.4 2.8 -12.7 2.7 4.1 4.1

Feb 9.2 5.1 9.3 7.5 3.9 4.0

Mar -7.2 -26.9 -42.1 -5.4 -5.2 -5.4

Apr -15.5 -42.9 -55.9 -15.9 -25.2 -28.2

May -12.2 -15.4 -63.2 -17.5 -19.3 -24.2

Jun -5.0 -1.7 42.6 -13.7 -9.7 -14.2

Jul -1.5 2.1 10.4 -0.8 5.7 6.1

Aug -1.5 -4.1 17.4 -10.0 0.2 5.3

Sep 0.6 5.8 1.6 2.6 6.6 8.8

Oct 2.4 -1.2 29.9 -4.4 -1.6 4.2

Nov N/A N/A 0.6 -23.3 -9.2 -5.8 Source: CBSL

Agriculture production

took successive blows

in 1Q and 2Q possibly

due to COVID-19

related disruptions

(labor deployment

issues, agro inputs

scarcity, limited

market access etc.)

and unfavorable

weather.

Most high frequency

proxy indicators

turned positive in 3Q

indicating recovery in

services and industrial

sectors.


Page | 16

The economic activity levels were extremely subdued during March to June period.

Most high frequency proxy indicators turned positive in 3Q indicating gradual recovery

in services and industrial sectors.

Figure 23: PMI deviation from point of neutrality, Index points

Notes- negative values indicate sector is generally contracting on a month-on-month basis while positive values indicate the sector is expanding. The strength of contraction or expansion is manifested by the magnitude of the figure. Source: CBSL

Weaker manufacturing outlook that prevailed owing to slowdown in order books and

supply disruptions in the first two months of the year, exacerbated with the domestic

lockdowns imposed in mid-March. In April the sector underwent a record contraction as

the country went into a lockdown. Businesses quickly scaled down the operations to cut

costs. Apparel manufacturers continued to experience low orders from key export

markets. In addition, the lead-times of manufacturers lengthened due to delays in

inbound shipments and local logistics.

Tourist arrivals declined in the first two months of 2020 over Corona virus disruptions.

This hurt the activities in the services sector to a greater extent. Following the lockdown

in March, tourism came to a grinding halt causing a severe drop in revenues in the

leisure sector. Trade sector was also affected due to import restrictions and exchange

rate depreciation. Moreover, the disruption to delivery and distribution channels also

affected trade activities.

With the lifting of the lockdown, the economic activities normalized to some degree

helping the production activities in the manufacturing sector. Employers were seen

reinstating some of the jobs they previously cut. The order books showed improvement.

With greater mobility following the lockdown, trade and transportation sectors saw

business activities picking up. Employment in troubled leisure and tourism sectors were

seen contracting for yet another month. Backlogs started to deescalate as business

were returning to normalcy.

-30

-25

-20

-15

-10

-5

0

5

10

15

20


Manufacturing Services

Helped by a strong

rebound in exports,

manufacturing sector

recovered in 2H. With

normalization of day-

to-day life, services

sector, showed a

minor recovery in 2H.


Page | 17

Helped by a strong rebound in exports, manufacturing sector recovered in 2H. It was

characterized by rehiring of workforce, raw material stockpiling, increase in production

levels, and active orderbook. However, the supply chain disruption was widely prevalent.

With normalization of day-to-day life, services sector, also showed a minor recovery in

2H. However, the sector kept shedding workforce in order to stay afloat amid weaker

revenue streams. During the period, backlogs started to fade while the expectation for

future activities improved.

GDP

Figure 24: GDP growth – 2020 (Q/Q), %

1Q 2Q 3Q 4Q* Sector GDP*

Agriculture -6.2 -5.9 4.3 -2.0 -1.3

Industry -7.8 -23.1 0.6 -4.0 -7.3

Services 3.1 -12.9 2.1 -3.0 -1.7

Quarterly GDP -1.7 -16.3 1.5 -4.1 -4.0

Note: *based on ICRA Lanka estimates Sources: DCS, ICRA Lanka Research

ICRA Lanka’s previous quarterly GDP growth rates projections indicated the 2Q to be -

17.5% and 3Q to be -6.1% of which 2Q data is quite close and well within the margin of

error to the official data released shortly afterward ICRA Lanka’s release. As for 3Q

data, official data falls outside the margin of error of the ICRA Lanka’s predicted value, a

likely result of a significant structural change in the economy due to COVID crisis.

Furthermore, the economy seemed to have coped with the second wave considerably

well. Hence, we revised up our earlier projection (optimistic case) for 4Q from -11% to -

4.1%. In light of this, the 2020 GDP growth rate is estimated to be -4%, a stark

improvement against earlier expectation of -8.2% (optimistic case). In addition, our GDP

estimates indicate industry, services, and agriculture sectors to have contracted by

7.3%, 1.7% and 1.3% respectively.

2020 GDP growth rate

is estimated to be -4%,

a stark improvement

against earlier

expectation of -8.2%.


Page | 18

Ratings Commentary

Financial Sector

The calendar year 2020 was a perfect storm for the banking and NBFI sector, as the

industry was affected from multiple fronts. Credit growth was muted during the period,

while the financial institutions were cautious about their exposures. Lower credit growth

and the COVID-19 debt moratorium affected the core lending margins for financial

institutions, while the overall profitability was further affected by the higher credit cost

(i.e. loan impairment costs). Asset quality indicators deteriorated sharply, where the

peak NPA numbers were witnessed during mid-2020. From the capital side, most of the

planned capital raising initiatives, especially by NBFIs, got adversely affected by the

uncertain macro-outlook. In this context, ICRA Lanka downgraded the issuer rating one

licensed specialized bank and two NBFI. Outlook for most of the NBFIs remained

negative.

The life insurance sector was adversely affected by the sharp decline in systemic

interest rates, where the insurers saw a sizable increase in life insurance liabilities due to

the repricing effect. This resulted in significant unrealized losses for life insurance

companies, in turn affecting their overall profitability and capital buffers. However,

business-wise the sector showed resilience during the pandemic affected economic

climate. ICRA Lanka has not taken any rating actions in the life insurance sector, during

the 2020.

Primary dealers (PDs) gained significantly during the year 2020, as the sharp decline in

interest rates resulted in sizable trading gains for the PDs. Asset quality of the sector is

not affected as the PDs exposures are only towards treasury backed asset classes.

ICRA Lanka upgraded the issuer rating of one primary dealer.

The mutual fund and asset management sector also performed well during 2020, as the

asset management sector saw a sharp increase in AUM (asset under management) due

to the historically low interest rates offered by the banks and NBFIs.

Corporate Sector

The hydropower sector displayed healthy financial profile during 2020 which is

characterized by robust profitability, moderate capital structure and more than adequate

coverage metrics. The profit margins of mini hydropower producers received a boost

with the GoSL’s approvals on the new tariff structure for expired Power Purchase

Agreements (PPAs) that were under the avoided cost tariff system. In addition, this step

helped to recover outstanding trade receivables from these older PPAs at a favorable

tariff rates. With high rainfall in 3Q, power generation by the mini hydropower producers

rose further helping the revenues. But the longer payment cycles of the CEB, forced the

mini hydro producers to run with increased working capital intensity.

Private health sector faced a challenging year in 2020 due to the pandemic. This was

exacerbated by the already saturated market and industry regulations. Rising wage cost

was also contributing to cost escalations. Price increases by private healthcare service

providers helped to mitigate the impact to a certain degree.


Page | 19

Tea sector remained resilient in the 2H. Buoyant prices due to limited global supply

improved the profitability of the plantation companies. During the first six months Sri

Lanka’s tea production was down from the last year, though production for the first nine

months of 2020 was sharply down. Tea brokering business also recorded moderate

financial performance in 2020.

The construction sector experienced a slowdown in the overall order books and faced

operating profit margin pressure in 2Q before starting to recover in 3Q. Brief period of

exchange rate volatility in April caused strain on the profitability. The construction

contractors have faced pressure on the operating profit margin in 3Q due to delays in

trade receivables from the government. However, after the GoSL has made

arrangements for local banks to fund the contractors' trade payables from the

government, the liquidity pressure was eased somewhat. Gearing levels and working

capital levels were seen increasing among the ICRA Lanka rated construction entities.

During early 2020, the government had decided to procure the electrical cable

requirements for CEB from the local cable manufacturers. This has helped the local

cable manufacturers to improve their profitability levels.

Consumer durables though affected during 2Q, volumes improved due to pent-up

demand following the lockdown and demonstrated better-than-expected resilience.

The export sector, especially for perishable products such as horticulture, tissue culture,

vegetables and etc. have suffered from lower revenue growth. However, the export-

oriented manufacturing items such as gloves, purifications, protective clothes had a

robust cash flow and have performed exceptionally well in 2020.


Page | 20

Outlook for 2021

Global Outlook

Global economic outlook for 2021 is expected to rebound with the successful vaccine

rollouts in major economies supported by accommodative fiscal, financial and monetary

conditions. The World Bank forecasts global economy to expand by 4% in 2021 while

the IMF projects a more optimistic figure, 5.5%. The level of recovery is likely to be

uneven across countries. According to IMF, emerging and developing countries are

projected to grow at around 6.3% while advanced economies to grow around 4.3%.

Global trade volumes are forecasted to rebound to around 8%, where tradable sector is

expected to recover faster than non-tradable sector. Global inflation is expected to

remain subdued through 2022. The pandemic has significantly increased economic

vulnerability of frontier economies and sluggish growth will further weaken the debt

serviceability of these countries.

Figure 25: Vaccine timeline by country

Notes: Countries by when they are expected to have vaccinated 60-70% of their adult population against COVID-19 Source: Graphic developed by Statista based on Economist Intelligence Unit

Global recovery is predicated on how fast the countries vaccinate their population. US,

Europe, and some Scandinavian countries are among the countries with the fastest

rollout of inoculation programmes. Sri Lanka is expected to vaccinate 60-70% its

population by early 2023. India and China, two of the key trading partners of Sri Lanka,

are expected to reach the 60-70% milestone by late 2022.

The World Bank

forecasts global

economy to expand by

4% in 2021 while the

IMF projects a more

optimistic figure, 5.5%.

US, Europe, and some

Scandinavian

countries are among

the countries with the

fastest rollout of

inoculation

programmes.


Page | 21

GDP

Figure 26: Annual GDP growth projections, 2020–25, %

2020 2021 2022 2023 2024 2025

GDP -4.0 3.6 4.0 3.8 3.9 3.8 Source: ICRA Lanka Research

Shocks created by COVID in 2020 is expected to reverberate for another 8 or more

quarters, and the phase out of the pandemic will take place in a span of another year or

two according to some experts. Thus, it is less likely that the economy will return to full

employment in 2021. The growth will be subdued for next few years in the absence of

significant investments and improvements in technology. Therefore, we expect

economic growth of Sri Lanka to be around 3.6% in 2021 and hover around 4% for next

four years thereafter.

External Sector

Figure 27: Key trading partner growth outlook – 2021

1Q 2Q 3Q 4Q Return to pre-

crisis

USa 2.0% 3.6% 6.1% 4.6% 2021 2Qf

Europeb 0.7% 2.0% 1.0% 1.0% 2022 2Q

Indiac 1.3% 25.0% 8.5% 5.7% 2022 3Q

UKd -3.5% 2.5% 9.0% 1.5% 2022 1Qg

Chinae 7.9% 2020 4Qf Notes: China figure is for annual GDP growth Sources: (a)The Conference Board, (b) ECB, (c) ICRA, (d) Deloitte, (e) World Bank, (f) Goldman Sachs, (g) Bank of England

US, Europe, UK, India, and China have high significance when it comes to international

trade from Sri Lankan standpoint. Sri Lanka’s largest export destination – United States

(USD 3.1 Bn exports in 2019), is expected to recover to pre-crisis level by 2021 2Q,

while Europe’s (USD 2.2 Bn in 2019) and the UK’s (USD 998 Mn in 2019) recovery is

expected much later, in 2022. China, which is the main source market for industrial

inputs (total import value of USD 4 Bn in 2019), has already past the pre-crisis level

while India’s (USD 3.8 Bn) recovery is expected much later. Due to these reasons, we

do not expect the export sector to normalize in 2021. In other words, we expect the

exports to grow at a slower rate than its potential in the 2H. As for non-tradable sector,

especially the tourism sector, will likely to go through another tough year in 2021.

Therefore, the tourism earnings will see further collapse in 2021.

Unlike exports, imports are clipped by the import restrictions. Therefore, imports are

expected to be more or less flat throughout 2021. But we believe it is likely that the

government may ultimately be compelled to relax the restrictions, at least partially, in

4Q. Nevertheless, the import restrictions would increase the trade deficit to about 6.1%

of the GDP while generating a current account surplus of about 0.5% of the GDP. Rising

commodity prices also have a bearing on the trade balance. Increasing oil, and industrial

and agricultural inputs will also likely to inflate the import bill of the country more so than

We expect economic

growth of Sri Lanka to

be around 3.6% in 2021

and hover around 4%

for next four years

thereafter.

Economies of most of

Sri Lanka’s key trading

partners will not

return to pre-crisis

level in 2021.

Therefore, we do not

expect the export

sector to normalize in

2021

The import restrictions

would increase the

trade deficit to about

6.1% of the GDP while

generating a current

account surplus of

about 0.5% of the GDP.


Page | 22

the value of exports (expected price increases of export commodities and finished

goods are relatively mild) causing terms-of-trade to deteriorate further.

It is very likely that the financial (capital) account continued to be restricted. Remittances

are likely to remain flat for 2021. Net outflows from G-secs and equities would also

remain low. In this context, fluctuations in the trade deficit are likely to be the main

determinant of the exchange rate assuming all export proceeds are converted to

rupees. We expect significant pressure to depreciate in May, November, and December

months on account of relatively weaker current account balances. During these months

the exchange rate may depreciate as low as 200 LKR/USD, but the on other months the

rate in general may hover around 195 LKR/USD.

Foreign currency obligations for 2021 is just over USD 6 Bn. This includes settlement of

USD 1 Bn ISB maturing in July. We expect the GoSL to rollover about USD 2 Bn existing

obligations, borrow about USD 2.3 Bn of which USD 2 Bn may come from a bilateral

arrangement with China. In addition, FDIs may remain low around USD 200 Mn. As per

ICRA Lanka’s projections, with the positive current account balance and additional forex

borrowings the total reserves would fall to USD 3.7 Bn by the end of 2021.

Fiscal Sector

On the fiscal front, we expect the government revenue to gradually return to normalcy

by the 2H. The expenditure side of the government may expand at a steady pace

throughout 2021. The budget estimate put forth by the GoSL hopes to spend about LKR

3.5 Tn, while the revenue side is expected to be over LKR 2.0 Tn. Given the fragile state

of the economy and the revenue loss from import controls, we doubt that the

government would be able to meet this revenue target. Hence, we project the revenue

would fall short by about LKR 450 Bn from the envisaged level. The GoSL plans to

spend about LKR 1 Bn in capital expenditure (investments) in 2021. But we expect the

government to scale these down to about LKR 850 Bn and as a result we expect the

total expenditure to be LKR 140 Bn less than what is mentioned in the budget estimates.

According to our projections, the budget deficit would reach 10.8% of the GDP in 2021.

The government’s fiscal policy is now closely aligned with Modern Monetary Theory

(MMT). This means we can expect the treasury to rely less on the market borrowings

while lean more towards financing spending via short-term direct borrowings from the

Central Bank. In the meanwhile, impaired access to foreign markets may bring down the

foreign currency denominated debt. Total stock of debt will exceed LKR 16.3 Tn and

expected to reach 99.3% of the GDP.

Inflation

Inflation level is expected to be subdued in 1H as a result of the combined effect of high

food inflation and low non-food inflation. But with the gradual pick up of aggregate

demand along with constrained supply (due to import restriction) and lower production

levels, the prices will move up in 2H. However, we feel the CCPI (Y/Y) inflation will be

contained well within 4-to-6%.

We expect significant

pressure to depreciate

in May, November, and

December months on

account of relatively

weaker current

account balances.

According to our

projections, the budget

deficit would reach

10.8% of the GDP in

2021.

With the gradual pick

up of aggregate

demand along with

constrained supply

and lower production

levels, the prices will

move up in 2H.


Page | 23

Interest Rates

The CBSL, in its 2021 road map indicated that it is committed to maintaining single digit

interest rate throughout the year. Hence, we do not expect the CBSL to carry out

changes to current policy rate. With this the interest rates are expected to stabilize. We

expect the AWPR to fluctuate between 5.50-to-6% for the year.

Commodities

Figure 28: Key commodity price predictions

Commodity Unit 2020 2021 Change (%)

Crude oil, average USD/bbl 41.0 44.0 7.3

Tea, average USD/kg 2.75 2.77 0.7

Coconut oil USD/mt 930 937 0.8

Rice, Thailand, 5% USD/mt 500 498 -0.4

Wheat, US, HRW USD/mt 205 207 1.0

Shrimp USD/kg 12.75 12.87 0.9

Sugar, World USD/kg 0.28 0.29 3.6

Rubber, RSS3 USD/mt 1.62 1.68 3.7

DAP USD/mt 310 318 2.6

Phosphate rock USD/mt 75 78 4.0

Potassium chloride USD/mt 220 228 3.6

TSP USD/mt 260 268 3.1

Urea, E. Europe USD/mt 230 236 2.6

Aluminium USD/mt 1,660 1,680 1.2

Copper USD/mt 6,050 6,300 4.1

Iron ore USD/dmt 107.0 105.0 -1.9 Source: World Bank

Commodity prices will rebound in 2021 with surge in aggregate demand. Crude oil,

which takes a sizable portion of Sri Lanka’s imports bill, is projected to rise over 7% in

2021. In addition, major industrial and agricultural inputs are expected to rise by 3-to-

4% in 2021. Out of the key export commodities, only rubber prices are expected to

maintain the momentum.


Page | 24

Rating Actions

Following rating actions were taken by ICRA Lanka during 2020.

Visit https://www.icralanka.com/ratings/ to read the rating rationales.

January

Issuer Issue Action Previous Rating Current Rating

First Capital

Holdings Issuer Rating Reaffirmed A-(Stable) A-(Stable)

Orient Finance Guaranteed debenture program Withdrawal A (Stable) Withdrawn

Janashakthi General

Limited Issuer Rating Withdrawal A (Stable) Withdrawn

Janashakthi PLC LKR 2 Bn proposed guaranteed

debenture Withdrawal A- (SO) (Stable) Withdrawn

February


Dunamis Capital

PLC Issuer Rating Withdrawal BBB- (Negative) Withdrawn

Dunamis Capital

PLC

LKR 1Bn senior unsecured

debenture Withdrawal BBB- (Negative) Withdrawn

Dunamis Capital

PLC

LKR 1Bn senior unsecured

debenture - transferred Withdrawal BBB- (Negative) Withdrawn

Janashakthi PLC LKR 1Bn senior unsecured

debenture – transferred Assigned BBB- (Negative) BBB- (Negative)

LOLC Finance Issue Rating of LKR 5 Bn

Subordinated debenture Withdrawal A- (On Watch) Withdrawn

People's Merchant

Finance Issuer Rating Reaffirmed B (On Watch) B (On Watch)

Prime Lands Private

Limited Issuer Rating Assigned NA A- (Stable)

Prime Residencies

Private Limited Issuer Rating Assigned NA A- (Stable)

CAL Limited Issuer Rating Outlook

revised A- (Negative) A- (Stable)

CAL Holdings Issuer Rating Reaffirmed BBB+ (Stable) BBB+ (Stable)

Alliance Finance LKR 800 Mn senior unsecured

debentures Withdrawal BBB-(Negative) Withdrawn

March


Janashakthi PLC Issuer Rating Reaffirmed BBB- (Negative) BBB- (Negative)

Alliance Finance LKR 800Mn senior unsecured

debenture Withdrawal BBB- (Negative)

BBB-(Negative)

Withdrawn

People's Merchant

Finance Issuer rating Reaffirmed B (On Watch) B (On Watch)

Prime Finance PLC Issuer Rating Reaffirmed BBB- (Stable) BBB- (Stable)

CDB Issuer Rating Reaffirmed BBB+ (Negative) BBB+ (Negative)

CDB LKR 1,075 Mn subordinate

debenture Reaffirmed BBB (Negative) BBB (Negative)

CDB LKR 928 Mn subordinate debenture Reaffirmed BBB (Negative) BBB (Negative)

https://www.icralanka.com/ratings/


Page | 25

CDB LKR 2,000 Mn subordinate

debenture Reaffirmed BBB (Negative) BBB (Negative)

CDB LKR 1,000 Mn subordinated

guaranteed debenture Reaffirmed A- (SO) (Stable) A- (SO) (Stable)

CDB LKR 628Mn trust certificate Reaffirmed A- (SO) (Negative) A- (SO)

(Negative)

MCB Bank Issuer rating Reaffirmed A+ (Stable) A+ (Stable)

Vidullanka Issuer rating Reaffirmed A- (Stable) A- (Stable)

Vidullanka LKR 100Mn commercial paper

program Reaffirmed A2+ A2+

Vidullanka LKR 100Mn commercial paper

program Assigned NA A2+

April Issuer Issue Action Previous Rating Current Rating

Softlogic Holdings Issuer rating

Outlook

revised to

Negative

from Stable

BBB+ (Stable) BBB+ (Negative)

Softlogic Holdings LKR 2,000Mn (LKR Mn outstanding)

senior, unsecured debenture

Outlook

revised to

Negative

from Stable

BBB+ (Stable) BBB+ (Negative)

UB Finance Issuer rating Reaffirmed BB (Negative) BB (Negative)

Multi Finance Issuer rating Reaffirmed B- (Negative) B- (Negative)

May


Commercial Leasing

and Finance PLC

Issuer rating Reaffirmed

with

developing

implications

removed

A (Under watch

with developing

implications)

A (Stable) LKR 5,000Mn listed senior

unsecured redeemable debenture

LOLC Finance PLC Issuer rating

Reaffirmed

with

developing

implications

removed

A (Under watch

with developing

implications)

A (Stable)

LOLC Finance PLC LKR 3,500Mn listed senior


Reaffirmed

with

developing

implications

removed

A- (Under watch

with developing

implications)

A-(Stable)

LOLC Holdings PLC

Issuer rating Reaffirmed

with

developing

implications

removed

A (Under watch

with developing

implications)

A (Stable) LKR 5,000Mn listed senior


LKR 2,000Mn listed senior


LOLC Holdings PLC LKR 1,000Mn commercial papers

Reaffirmed

with

developing

implications

removed

A1 A1


Page | 26

LOLC Development

Finance PLC Issuer rating

Reaffirmed

with

developing

implications

removed

A- (Under watch

with developing

implications)

A-(Stable)

June


Nawaloka Hospitals

PLC Issuer rating Downgraded [SL]BBB Negative

[SL]BBB-

Negative

Nawaloka Hospitals

PLC

Senior Unsecured Redeemable

Debenture (LKR 186.6 Mn

outstanding)

Downgraded [SL]BBB Negative [SL]BBB-

Negative

Nawaloka Hospitals

PLC


Debenture (LKR 270.6 Mn

outstanding)

Withdrawal [SL}BBB Negative N/A

Softlogic Life

Insurance PLC Insurance Financial Strength rating Reaffirmed [SL]A Stable [SL]A Stable

Rainco (Private)

Limited Issuer rating

On Notice of

Withdrawal

for 30 days

[SL]D N/A

July Issuer Issue Action Previous Rating Current Rating

Union Bank of

Colombo PLC

Issuer Rating Reaffirmed [SL]BBB (Stable) [SL]BBB (Stable)

Ceylon Tea Brokers

PLC

Issuer Rating Reaffirmed [SL]BBB (Stable) [SL]BBB (Stable)

Bogawantalawa Tea

Estates PLC

Issuer Rating Reaffirmed [SL]BBB+

(Negative)

[SL]BBB+

(Negative)

Bogawantalawa Tea

Estates PLC

Senior Convertible Unsecured

Redeemable Debenture

Programme (LKR 850 Mn)

Reaffirmed [SL]BBB+

(Negative)

[SL]BBB+

(Negative)

National Savings

Bank

Issuer Rating Reaffirmed [SL]AAA (Stable) [SL]AAA (Stable)

National Savings

Bank


Debenture Programme (LKR

20,000 Mn)

Reaffirmed [SL]AAA (Stable) [SL]AAA (Stable)

National Savings

Bank

Subordinated Unsecured


Programme (LKR 6,000 Mn)

Reaffirmed [SL]AAA (Stable) [SL]AAA (Stable)

Metrocorp (Private)

Limited

Issuer Rating Assigned N/A [SL]A+ (Stable)

Rainco (Private)

Limited

Issuer Rating Withdrawn [SL]D N/A

Orient Finance PLC Issuer Rating Revised [SL]BB+

(Negative)

[SL]BB

(Negative)

Capital Alliance LTD Capital Alliance Investment Grade

Fund

Reaffirmed [SL]Amfs [SL]Amfs

Commercial Leasing

and Finance

Proposed Listed Senior

Unsecured Redeemable


5,000 Mn)

Assigned N/A [SL]A

(Stable)

Commercial Leasing

and Finance

Issuer Rating Reaffirmed [SL]A

(Stable)

[SL]A

(Stable)


Page | 27

Commercial Leasing

and Finance

Listed Senior Unsecured



Reaffirmed [SL]A

(Stable)

[SL]A

(Stable)

August Issuer Issue Action Previous Rating Current Rating

E B Creasy &

Company PLC

Issuer Rating Downgraded [SL]BBB+

(Negative)

[SL]BBB

(Negative)

E B Creasy &

Company PLC

Proposed Senior Unlisted

Unsecured Redeemable

Debentures Programme (LKR 700

Mn)

Downgraded

& Withdrawn

[SL]BBB+

(Negative)

N/A

Lankem Ceylon PLC Issuer Rating On Notice of

Withdrawal

[SL]D [SL]D

on Notice of

Withdrawal

Merchant Bank of Sri

Lanka & Finance PLC

Issuer Rating Downgraded [SL]A- (Negative) [SL]BBB+

(Negative)


Lanka & Finance PLC


Redeemable Debenture (LKR

2,000 Mn)

Downgraded [SL]A- (Negative) [SL]BBB+

(Negative)


Lanka & Finance PLC

Asset Backed Trust Certificate

Programme of MBSL Trust -01

(LKR 2,000 Mn)

Downgraded

&

Withdrawn

[SL]A(SO)

(Negative)

N/A

Commercial Credit

and Finance PLC

Issuer Rating Reaffirmed [SL]BBB

(Negative)

[SL]BBB

(Negative)

Commercial Credit

and Finance PLC

Commercial Paper Programme Reaffirmed [SL]A3 [SL]A3

Commercial Credit

and Finance PLC

Listed Guaranteed Subordinated



Reaffirmed [SL]A+(SO)

(Stable)

[SL]A+(SO)

(Stable)

Commercial Credit

and Finance PLC

Listed Guaranteed Subordinated



Withdrawn [SL]AA-(SO)

(Stable)

N/A

September Issuer Issue Action Previous Rating Current Rating

JAT Holdings (Pvt) Ltd Issuer Rating Reaffirmed [SL]A+

Stable

[SL]A+

Stable

Bank of Ceylon Issuer Rating Reaffirmed [SL]AAA

Negative

[SL]AAA

Negative

Habib Bank Limited (Sri

Lanka branch)

Issuer Rating Assigned N/A [SL]A+

Stable

Lankem Ceylon PLC Issuer Rating Withdrawn [SL]D N/A

LCB Finance Limited Issuer Rating Reinstated [SL]B

(Suspended)

[SL]B

Stable

Hayleys PLC Issuer Rating Revised [SL]A+

Stable

[SL]A+

Negative

Hayleys PLC Senior Unsecured Listed


programmes (LKR 3,527 Mn)

Revised [SL]A+

Stable

[SL]A+

Negative




Revised [SL]A+

Stable

[SL]A+

Negative




Withdrawn [SL]A+

Stable

N/A


Page | 28




Withdrawn [SL]A+

Stable

N/A

Associated Motor

Finance Company PLC

Issuer Rating Reaffirmed [SL]B+

Negative

[SL]B+

Negative

Arpico Finance

Company PLC

Issuer Rating Reaffirmed [SL]B+

Negative

[SL]B+

Negative

Regional Development

Bank

Issuer Rating Revised [SL]A

Negative

[SL]A-

Negative


Bank

Subordinated Unsecured Listed



Revised [SL]A-

Negative

[SL]BBB+

Negative


Bank

Subordinated Unsecured Listed



Withdrawn [SL]A-

Negative

N/A

October


Trade Finance &

Investments PLC

Issuer Rating Reaffirmed [SL]BBB-

Negative

[SL]BBB-

Negative

Softlogic Capital PLC Issuer Rating On Watch [SL]BBB+

Stable

[SL]BBB+

On Watch

Softlogic Capital PLC Senior Unsecured Redeemable

Debenture (LKR 1500 Mn)

On Watch [SL]BBB+

Stable

[SL]BBB+

On Watch

Softlogic Finance PLC Issuer Rating On Watch [SL]BB-

Negative

[SL]BB-

On Watch

Access Engineering

PLC

Issuer Rating Reaffirmed

with Outlook

Revision

[SL]A+

Stable

[SL]A+

Negative

Access Engineering

PLC


Listed Debenture (LKR 5000 Mn)

Reaffirmed

with Outlook

Revision

[SL]A+

Stable

[SL]A+

Negative

National Savings Bank Proposed, Basel III Compliant

Additional Tier I Capital Bond

Programme (LKR 5000 Mn)

Assigned N/A

[SL]AA(hyb)

Stable

November


Sarvodaya

Development Finance

Limited

Issuer rating On Notice of

Withdrawal

[SL]B (Negative) [SL]B (On notice

of withdrawal)

Panasian Power PLC Issuer rating On Notice of

Withdrawal

[SL]A- (Stable) [SL]A- (On

notice of

withdrawal)

Lakderana Investments

Limited

Issuer rating Assigned N/A [SL]BB- (Stable)

Nation Lanka Finance

PLC

Issuer rating On Watch [SL]B-

(Negative)

[SL]C+

(On Watch)

First Capital Holdings

PLC

Issuer rating Upgraded [SL]A-

(Stable)

[SL]A

(Stable)


PLC

Commercial Paper Programme

(LKR 1,500 Mn)

Upgraded [SL]A2 [SL]A1


PLC

Proposed Senior Unsecured


programme (LKR 2,000 Mn)

Assigned N/A [SL]A


Page | 29

First Capital Treasuries

PLC

Issuer rating Upgraded [SL]A-

(Stable)

[SL]A

(Stable)


PLC



programme (LKR 750)

Upgraded [SL]BBB+

(Stable)

[SL]A-

(Stable)


PLC



programme (LKR 500)

Withdrawn [SL]BBB+

(Stable)

[SL]BBB+

(withdrawn)

December


DFCC Bank PLC Issuer Rating Assigned N/A [SL]AA- (Stable)

Sarvodaya

Development Finance

Issuer Rating Withdrawn [SL]B (Negative) N/A

LOLC Holdings PLC Issuer Rating Reaffirmed [SL]A

(Stable)

[SL]A

(Stable)

LOLC Holdings PLC Commercial Paper Programme

(LKR 3,000 Mn)

Assigned N/A [SL]A1 assigned

LOLC Holdings PLC Listed Senior Unsecured



Reaffirmed [SL]A

(Stable)

[SL]A

(Stable)

LOLC Holdings PLC Listed Senior Unsecured



Reaffirmed [SL]A

(Stable)

[SL]A

(Stable)

LOLC Holdings PLC Proposed Listed Senior

Redeemable, Debenture

Program (LKR 6,500 Mn)

Assigned N/A [SL]A

(Stable)

ACL Cables PLC Issuer Rating Reaffirmed [SL]A+

(Stable)

[SL]A+

(Stable)

SMIB Bank Issuer Rating Reaffirmed [SL]BBB+ (Stable) [SL]BBB+

(Stable)

Commercial Leasing Issuer Rating Reaffirmed [SL]A (Stable) [SL]A

(Stable)

Commercial Leasing Listed Senior Unsecured



Reaffirmed [SL]A (Stable) [SL]A

(Stable)

Commercial Leasing Listed Senior Unsecured



Withdrawn [SL]A (Stable) N/A

LOLC Development

Finance PLC

Issuer Rating Reaffirmed [SL]A- (Stable) [SL]A- (Stable)

LOLC Finance PLC Issuer Rating Reaffirmed [SL]A (Stable) [SL]A

(Stable)

LOLC Finance PLC Listed Subordinated Unsecured



Reaffirmed [SL]A (Stable) [SL]A

(Stable)

Janashakthi PLC Issuer Rating Reaffirmed [SL]BBB-

(Negative)

[SL]BBB-

(Negative)

Janashakthi PLC Senior Unsecured Redeemable


1,000 Mn)

Withdrawn [SL]BBB-

(Negative)

N/A

Panasian Power PLC Issuer Rating Withdrawn [SL]A- (Stable) N/A


Page | 30

ICRA Lanka rating scale

Long Term Definition Grade

[SL]AAA Highest Safety, Lowest Credit Risk

Investment Grade [SL]AA High Safety, Very Low Credit Risk

[SL]A Adequate Safety, Low Credit Risk

[SL]BBB Moderate Safety, Moderate Credit Risk

[SL]BB Moderate Risk of Default

Non-investment Grade [SL]B High Risk of Default

[SL]C Very High Risk of Default

[SL]D Already in / Expected to Default

Abbreviations

ASPI All Share Price Index

bps Basis points

CBSL Central Bank of Sri Lanka

CDA Coconut Development Authority

CSD Census and Statistics Department

CSE Colombo Stock Exchange

GICS Global Industry Classification Standard

GoSL Government of Sri Lanka

SLDB Sri Lanka Development Bonds

SLISB Sri Lanka International Sovereign Bonds

SOFR Secured Overnight Financing Rate

PMI Purchasing Managers Index

PUCSL Public Utilities Commission of Sri Lanka

RRISL Rubber Research Institute of Sri Lanka

To subscribe to ICRA economic updates, contact Lalinda Sugathadasa Head of Research & Business Development Call: +94 77 478 1343 Email: [email protected]

mailto:[email protected]


Page | 31

Works Cited

[1] Moody's Investors Service, "Rating Action: Moody's downgrades Sri Lanka's ratings to Caa1, outlook

changed to stable," 28 September 2020. [Online]. Available: https://www.moodys.com/research/Moodys-

downgrades-Sri-Lankas-ratings-to-Caa1-outlook-changed-to--PR_431359.

[2] Goldman Sachs, "V(accine)-Shaped Recovery," 2020.

[3] Bank of England, "Monetary Policy Report - February," 2021.

[4] European Central Bank, "Eurosystem staff macroeconomic projections," December 2020. [Online].

Available:

https://www.ecb.europa.eu/pub/projections/html/ecb.projections202012_eurosystemstaff~bf8254a10a.en

.html#toc7.

[5] Deloitte, "Deloitte COVID-19 Economics Monitor," January 2021. [Online]. Available:

https://www2.deloitte.com/uk/en/pages/finance/articles/covid-19-economics-monitor.html.

[6] Business Standard, "Nomura says India would be fastest growing Asian economy in 2021," December

2020. [Online]. Available: https://www.business-standard.com/article/economy-policy/at-9-9-gdp-growth-

india-could-be-fastest-growing-asian-economy-in-2021-120120900305_1.html.

[7] The Conference Board, "The Conference Board Economic Forecast for the US Economy," January 2021.

[Online]. Available: https://conference-board.org/research/us-forecast/US-Economy-Forecast-November-

2020.

[8] The World Bank, "Global Economic Prospects," 2021.

[9] World Bank, "Global Economy to Expand by 4% in 2021; Vaccine Deployment and Investment Key to

Sustaining the Recovery," 2021. [Online]. Available: https://www.worldbank.org/en/news/press-

release/2021/01/05/global-economy-to-expand-by-4-percent-in-2021-vaccine-deployment-and-

investment-key-to-sustaining-the-recovery.

[10

]

IMF, "World Economic Outlook Update," January 2021. [Online]. Available:

https://www.imf.org/en/Publications/WEO/Issues/2021/01/26/2021-world-economic-outlook-update.

[11

]

J. Ignacio, "S&P downgrades Sri Lanka over deteriorating fiscal position," S&P Global Ratings, 11

December 2020. [Online]. Available: https://www.spglobal.com/marketintelligence/en/news-

insights/latest-news-headlines/s-p-downgrades-sri-lanka-over-deteriorating-fiscal-position-61701747.

[12

]

World Bank, "Commodity Market Outlook," World Bank, October 2020.

Published date: 2/22/2021 Document #: an21ec ©Copyright, 2021- ICRA Lanka Limited. All Rights Reserved. Contents may be used freely with due acknowledgement to ICRA Lanka. All information contain herein are from sources deemed reliable; however, no representation or warranty is made to the accuracy of thereof.

About ICRA Contacts

ICRA Lanka Limited (ICRA Lanka) is a Credit Rating

Agency licensed by the Securities and Exchange

Commission of Sri Lanka (SEC). ICRA Lanka is a fully

owned subsidiary of ICRA Limited ("ICRA") of India. The

ultimate parent company of the international credit

rating agency, Moody's Investors Service, is the indirect

majority shareholder of ICRA.

Subsidiary of

ICRA Limited

CORPORATE OFFICE Level 10, East Tower, World Trade Center, Colombo 01, Sri Lanka

Tel: +94 11 4339907; Fax: +94 11 2333307

Email: [email protected]; Website: www.icralanka.com

Disclaimer This publication has been prepared by ICRA Lanka solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ICRA Lanka does not represent that it is accurate or complete. ICRA Lanka does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication.

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+94-11-4339907 [email protected]

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Business Development +94-11-4339907

[email protected]

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+94-11-4339907 [email protected]

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