Stanchart issues disappointing outlook for 2021 direct investments

Foreign Direct Investments (FDIS) which were earlier primed to take off to about US$ 1.5 billion to US$ 2.0 billion in 2021 could come in well below that level as the current economic conditions have dampened investor sentiments while the much hyped Colombo Port City is yet to make any tangible impact to the nascent investment flows into the country.

According to fresh projections, Standard Chartered Bank expects subdued direct investment flows of US$ 800 million in 2021, little over US$ 670 million in 2020 including the loans to the Board of Investment (BOI) companies.

In 2020, Sri Lanka attracted FDIS of US$ 434 million, of which fresh equity accounted for a paltry US$ 20 million and the balance came from re-investment of earnings and inter-company loans at US$ 191 million and US$ 223 million each.

The loans to BOI companies amounted to US$ 236 million. Loans are also investments.

Despite the initial euphoria over the Colombo Port City and other port related developments elsewhere to provide a fresh impetus to direct investment flows, that is yet to materialise.

The recent enactment of a fresh law governing the economic activities at the Colombo Port City, to rid the zone from the woeful inefficiency in the mainland and the generous tax concessions offered could reactivate investment flows, although it takes time.

The direct investment flows thus far through the year are less impressive and the underwhelming projections for the year could well aggravate the country’s external sector woes amid weak inflows from other sources, the main source being tourism.

Stanchart expects the tourism inflows to come in at US$ 300 million, from the earlier expected US$ 1.4 to US$ 1.5 billion as the third wave of the virus hampered the progress.

As a result, the Asia focused multinational lender projected a wider deficit in the current account of the Balance of Payment of 2.4 percent of the Gross Domestic Product in 2021 from their previous projection of 1.4 percent.

At the start of the year, Sri Lanka was primed to record a surplus in the current account of at least half a billion, but the trajectory went awry with the faster than anticipated rise in global oil prices and the subsequent virus induced restrictions which blunted merchandise exports momentum and stifled the progress in tourism trade. “This reflects lower tourism receipts, as we expect a tourism recovery to be delayed to H2-2022”, Stanchart said.

The bank also maintains an year end target for the exchange rate at Rs.210 for the dollar amid widening trade deficit, weak tourism outlook and steep external financing requirements amid limited foreign exchange reserves.

The bank projects the trade deficit to expand to US$ 7.2 billion in 2021 from their earlier projection of US$ 6.5 billion due to lower than expected exports.