Business Sentiment
Posted on the May 1st, 2012 under Research & Views by Lanka Monthly Digest 
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Economic Quake Shatters Index
Sri Lankans literally ran for cover on 11 April, when the island shook like never before from the massive earthquake more than 1,500 kilometres away, off Sumatra’s coast in the Indian Ocean. Thankfully, the 15 seconds or so that the earth shook under our feet wasn’t a prelude to the real thing, and the tsunami alert that followed turned out to be a false alarm. At around the same time, The Nielsen Company’s pollsters were finalising the results of the latest monthly poll for LMD, only to find that the business community is beginning to see danger signs on the ground for Sri Lanka’s macroeconomic prospects – for the first time since the end of the war in May 2009. The LMD-Nielsen Business Confidence Index (BCI) reflects this scenario in no uncertain terms.
BIZ CONFIDENCE Nielsen Sri Lanka’s Managing Director Shaheen Cader observes that the April BCI (105 basis points) is at a nearly three-year low, and that it has “declined sharply” from 135 in March. In fact, this is the highest fall in the index in a month since February last year, when major floods in the east and the hill country forced it down by 36 points (to 134).
“There’s been increasing pessimism with regard to future business prospects, and concerns about inflation have picked up markedly,” Cader observes, adding that “business performance in the last year has also decreased relative to a year ago” and respondents are concerned that the economy will worsen in the next 12 months. Higher interest rates and taxes, and the devaluation of the rupee, are also to blame, he says.
“Consumer Confidence has also shown a continuous decline,” Cader reveals. “This is being driven by increasing concerns about job prospects and a feeling that this is a bad time to purchase things that consumers would like to have,” Nielsen’s Sri Lanka chief explains.
THE ECONOMY There’s a new ‘conflict’ in our land, it would seem. And this time around, we’re fighting a war of words, meaning that economists on both sides of the political divide (yes, even the professions are politicised these days!) are making diametrically opposite statements on the national economy and former senior public officials (notably from the now-under-scrutiny Central Bank) have also jumped on to the bandwagon by challenging the official numbers that we all base our assessments on – and this, it has to be said, may not be a case of hearsay. And then there’s the IMF, which has said it is “fundamentally very optimistic about Sri Lanka…,” following its recent country review.
But ‘the statement of the month’ goes to a respondent to Nielsen’s poll, who remarks: “According to various reports, they are saying that [the] economy is overheated, but I hope this would be a short-term thing. Irrespective of all the negatives, infrastructural development continues; and in the long run, things will change positively.” We hope so too…
The poll verdict on the national economy isn’t as encouraging as this statement, with 57 per cent (March – 40%) stating that it ‘will get worse’ in the coming 12 months. A third however, say the economy will ‘improve’ – which is by and large the same level of optimism as a month ago but noticeably down on the 50-plus per cent in the three months from December 2011 to February this year.
FDI PROSPECTS Amidst claims and counter claims that Sri Lanka’s forex inflows are on the rise, there’s a slight downgrading in perceptions in business circles about investment prospects. In April, the biz take is as follows: a quarter say the investment climate is ‘good’ or better, with the balance split somewhat evenly between ‘fair’ and ‘poor’ or worse.
SENSITIVITIES One survey participant notes that “taxes and import duties on vehicles and other goods have increased significantly. Even the cost of electricity was considerably higher last month, resulting in high operating costs. This is definitely going to affect our business and profitability.”
“Increased oil prices have influenced the price of a range of goods and services, so rising inflation is the main issue that needs to be addressed. I think that measures taken by the Government are not enough to control prices,” says another businessperson.
And a representative of the crucial construction industry is up in arms over “rising interest rates … At these borrowing rates, it’s difficult to continue business, and I feel that this is going to severely affect real-estate and construction firms like ours.”
PROJECTIONS There are too many sensitivities, too many unknowns and too many external factors at this time to even hazard a guess as to where the BCI will stand next month. It may be safe to say however, that the short term is at best going to be turbulent… sans anymore quakes, one hopes.
- LMD
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Business Sentiment
