Sri Lanka’s First Capital Research has upgraded their exchange rate outlook for 2019E to US $1: Rs.180 from RS.194 as their 65% base case scenario.

The firm has also introduced a 12-month target for June 2020E of US $ 1: Rs.185 as a 60% 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.

The firm also noted that, CBSL targets dollar debt inflows to maintain reserves.

Central Bank’s foreign reserve position is key in building confidence in the exchange rate. Currently, as at May 2019, foreign reserves stood at US $6.7 billion 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 US $6.5- 7 billion ranges, CBSL needs to raise a further US $2 billion for which cabinet approval has already been obtained. CBSL also targets an additional 2.5 billion dollar to be raised to meet payments falling due in 2020 before the election season which starts in 4Q2019 and may continue up to 2Q2020.

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 considering the prevailing environment. The firm said.

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 demands 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% 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% up to 31 May 2019.

Meanwhile, the US Dollar is expected to weaken during the 2H2019 possibly favoring the Sri Lankan Rupee, The firm added.