Business Sentiment
Posted on the June 15th, 2012 under Research & Views by Lanka Monthly Digest 
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Biz Confidence Index Stalls
The unique index that measures business confidence stalls in the
face of conflicting views on how Sri Lanka is faring these days
The performance of a country’s stock market is often viewed as a barometer of investor confidence, an uptick signalling that things are heading in the right direction. It comes as no surprise then, that a deal involving a state institution buying into a firm at what seemed like a highly inflated price would not only raise eyebrows but invite the scrutiny and wrath of many within the investment community.
Throw into this mix the doubt at the time, whether the transaction was reversible, coupled with connections to the judiciary that posed questions on possible conflicts of interest, and you have the ingredients for the story of the month! Businesspeople appear little amused by this turn of events, with the LMD-Nielsen Business Confidence Index (BCI) remaining virtually flat in May.
BIZ CONFIDENCE Shaheen Cader, who heads Nielsen Sri Lanka, notes that the May BCI (107 basis points) is broadly in line with the number (105) from a month back, indicating that business-sector concerns appear to be “bottoming out” following the post-war low recorded in April. “Concerns over the economy and future business revenue remain high and similar to the extent of concern felt a month ago,” Cader says, and this is evidenced by survey responses which affirm that 61 per cent feel the economy will deteriorate, versus 57 per cent in the previous month.
“The Consumer Confidence Index has continued its southward shift, which began in January, and consumer confidence has reached the lowest level in 14 months,” he reveals, adding that increasing concern about jobs and the state of personal finances in the immediate future are the main reasons for the decline.
THE ECONOMY External events, particularly in key export markets in Europe, will require close monitoring. What will the outcome of the Greek elections on 17 June be? Will the changing of the guard in France in favour of a socialist leader lead to a shift in Franco-German relations? How will all of this affect the euro, and the Eurozone and Europe? These are pertinent questions, particularly since they have far-reaching implications for the world at large, including the isle of Sri Lanka.
On the capital-markets front, the Colombo bourse’s course has remained lacklustre. Meanwhile, the rupee’s fall that exporters clamoured for continues to be a thorn in the side of just about everyone else, albeit that there’s been a moderation of sorts in recent weeks. “[The] rupee-value fluctuation is the right move and will take time to show positive results; but at the moment, we have to control imports, else our economy will worsen further,” states one survey respondent.
A fifth of those spoken to by the pollsters in the first 10 days of May believe that the economy is likely to improve over the next 12 months, compared to around a third in March and April. Another fifth or so (19%) feel that the economic climate would remain the same, with 61 per cent saying things can only get worse.
INVESTMENT PROSPECTS There is no end to the debate on whether the island’s business environment is conducive to further investment, with high-ranking businesspeople weighing in on the topic as follows: nearly a third say the investment climate is ‘good’ or better, 32 per cent view it as being ‘fair’ and the remainder wish to remain sceptical – they claim it is ‘poor’ or worse.
FDI targets set by the Central Bank meanwhile remain unchanged at US$ 2 billion by end 2012, with several ports and tourism-related projects (e.g. Shangri-La and Sheraton) in the pipeline. But events in the Eurozone and elsewhere in the developed world could dampen prospects for the medium term.
SENSITIVITIES Touching on the impact of inflation, one survey participant notes that “price levels are increasing drastically and it’s very difficult to do business. We do not have options other than to increase the price of our goods, but we know that consumers do not have enough money to spend.”
“Gas and milk-powder prices were raised, and this will add to the cost of living. I think we are heading towards dangerous times; and to be frank, Government policy measures are not effective,” another businessperson laments.
The recent decline in international oil prices, from the highs of late January, may offer some respite… but it remains to be seen as to what impact this would have on headline inflation.
PROJECTIONS For the most part, it is likely that the status quo would persist in the near term, barring any major breakthroughs on issues currently worrying the business community and the nation at large.
– LMD
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Business Sentiment
