Business Sentiment – Business Confidence at a Six-Month Low in Testing Times
Posted on the January 27th, 2012 under Research & Views by Lanka Monthly Digest 
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Business Confidence at a Six-Month Low in Testing Times
The heady passage of events in November and a high-risk global outlook take their toll
The OECD said mid last month that key indicators “all point to a slowdown” in the world’s major developed economies. By all accounts, not only are the Eurozone and the US struggling to come to terms with the financial and economic turbulence of recent times, but the two Asian powerhouses China and India may also be threatened by an economic cloud, spiralling inflation and lower-than-projected manufacturing activity. The only consolation is that there are signs of an US revival emanating from the most recent data.
At home, the humdrum of dirty politics, an ill feeling that political interference is back on the agenda, a stock market that has turned increasingly bearish amidst allegations of foul play and a budget that failed to capture the imagination of many corporate types are undermining business confidence, so much so that The LMD-Nielsen Business Confidence Index (BCI) shed nine basis points in December to register 149 – that’s nine points below the average in the last 12 months and a low-point for the second half of last year.
The Nielsen Company’s Managing Director notes that “the index has shown a southward-direction trend in the last three months,” adding that while business performance has been positive in 2011, many respondents have expressed concerns about the business outlook.
Shaheen Cader explains: “This concern is true for large as well as small and medium-size entities. Factors such as the global downturn impacting manufactured exports, concerns about the inflationary impact of the recent rupee devaluation, fuel-price increases, the budget not being entrepreneur-oriented and the ‘re-acquisition bill’ have been mentioned as reasons for concerns about the outlook for 2012.”
THE ECONOMY There’s been a downgrading of Sri Lanka’s perceived economic trajectory, in that almost a fifth of Nielsen’s sample population now believe that the economy ‘will get worse’ in the next 12 months – compared to less than one-in-10 in November. On the contrary, around a half of those surveyed continue to say there will be an improvement, so there is hope.
SALES TRENDS The medium-term outlook in the eyes of business executives participating in the exclusive LMD-commissioned monthly poll has deteriorated, with the optimists falling to below half from more than 60 per cent in the previous month.
INVESTMENT Despite reports in the press about the flow of FDIs picking up in recent months to record highs, corporates have suddenly got cold feet about the investment climate in this country. Whilst more than four-in-five interviewees rated Sri Lanka’s investment prospects as being ‘very good’ or ‘good’ for two months in a row to November, confidence waned in December with less than 60 per cent of the sample population saying the feel-good factor is intact. Instead, a fifth of those surveyed are now sitting on the fence with a ‘fair’ verdict (a mere four per cent said so in November) and just over a fifth expecting FDI flows to be ‘poor’ or ‘very poor’ going forward.
SENSITIVITIES As we said last month, “the new year will be rife with question marks dotting both the developed world and the little one we live in.” At home, there seems to be a change of heart following the budget euphoria and the show of hands in its favour by the business community, as small businesses and entrepreneurs read the fine print and come to realise that there may not be very much substance in it for them. One respondent to the monthly survey puts this in perspective: “The budget is not impressive; there is nothing favourable for small businesses, and businesspeople don’t have funds to invest any further.”
There is widespread discontent too, mostly off the record, that the 9 November enactment of The Revival of Underperforming Enterprises and Underutilised Assets Bill is proof that there is political interference in business. The majority, it would seem, view the passage of the bill as being draconian because of how it was presented and passed as hastily as it was. “Political interference is high,” charges one executive spoken to by the pollsters. “The Government is not creating confidence among foreign investors. State takeovers can threaten the investment climate; they can paint a completely wrong picture of our country,” he adds.
PROJECTIONS We expect the BCI to continue to come under pressure in the short term, as there’s nothing to suggest a change of heart in business circles about the connotations of the ‘expropriation bill’ and the implications of the extreme financial and economic turmoil in the Eurozone and elsewhere in the rich man’s world that is highly likely to affect mini economies like ours.
– LMD
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Business Sentiment
