A tough year ahead…but measures in the right direction
Economic Summary: Delayed decision to curb excessive credit growth
Sri Lanka’s excessive credit growth experienced in the 2H2011 coupled unsustainable rupee peg was leading the country to a fresh Balance of Payments crisis forcing the Government and the Central Bank to unpopular policy decisions to slow down economic growth and address the balance of payments situation which is required for long sustainable economic growth. The major policy developments included;
- Hike in government policy rates
- Allowing flexible exchange rates
- Sharp upward revision of fuel and electricity prices
- Imposition of a maximum limit for loan book growth of Commercial Banks for 2012
- Increase of import duty on motor vehicles
- Direction to limit credit for purchase of motor vehicles
The above decisions have resulted in a sharp rise in interest rates gradually improving liquidity in the system and decelerating demand for credit. The imports are likely to show steep decline in the short to medium term with the depreciation of the rupee and the decline in purchasing power of consumers leading to an improved balance of payments position. The approved IMF funds are likely to bring back confidence to the investors and stabilize the exchange rate.
With these measures economic growth is likely to slow down during the next 6 months while a recovery of economic activity is expected beyond August 2012.
EQUITY MARKET OUTLOOK
Bleak short term, but bright long term prospects…
Market Summary: Market may stagnate in the short term while long term prospects may seem bright
The recent policy measures introduced by the GoSL and the Central Bank provide a weak outlook for Sri Lankan Equities. The rise in interest rates provides an incentive to investors with a low risk appetite to shift their investment funds towards fixed income signalling selling pressure likely to be created with the market itself.
The rise in fuel, electricity prices and increased taxes on motor vehicles are likely slowdown economic growth resulting in lower consumer demand and higher savings. Profit growth in most segments are downgraded as market earnings are likely to grow by only 7-8% for the financial year ending Dec 2012E / March 2013E. While most sectors are likely to record lower growth rates, sectors such as finance, leasing and motor sector may record declines in their profitability.
We expect economic conditions and earnings of most companies to start improving towards August representing 3Q-4QCY12 resulting in a better second half for most companies with the expected improvement in economic conditions. As a result long term valuations of the market seem attractive with the tough policy decisions already implemented in the 1HCY12.