Sri Lanka exports may be affected by US, EU slowdown

COLOMBO, Nov 11 (LBO): Stagnation in the United States and European Union might slow demand for Sri Lanka's exports and a shift away from such reliance to new markets would help to cushion growth prospects, a new rating report said. RAM Ratings Lanka also said the central bank is likely to hold repo rates at 7.0 per cent for the coming year with inflation projected at 6.5-7.0 per cent in 2012. The central bank is also expected to continue controlling the rupee's peg against the US dollar with some room for gradual appreciation in the near term to fight inflation, RAM said. "Gross exports have been recovering from the global recession, with imports outpacing exports, driven by strong domestic demand and nation-building efforts," the rating agency said in a report on the outlook for the island's economy. "The country's main export markets are, however, a concern; with the US and EU still mired in stagnation, demand is envisaged to shrink further next year, although the real effect on growth should be minimal as Sri Lanka is not as export driven as some of its peers." RAM Ratings expects exports to grow 7.2 per cent this year and 3.7 per cent the next while the trade deficit should widen even further, albeit at a slower pace, as economic growth picks up after the end of the 30-year ethnic war in 2009. The report also said the Central Bank of Sri Lanka (CBSL) is likely to hold repo rates at 7.0 per cent for the coming year, as the global economy is expected to deliver a "lacklustre performance" in 2012. "However, gradual normalisation may take place on the back of better economic conditions, to ensure a more sustainable pace of growth over the longer term," it said. Inflation is also expected to chart a similar pattern as movements in global commodity prices due to Sri Lanka's substantial import exposure to primary commodities. Food and energy constituted a third of the total value of the country's imports in 2010.