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Business Sentiment – Index Falls To a Postwar Low

October, 4, 2018

Negative global reports fuel discontent among members of the business community

There’s hardly a shortage of bad news when it comes to Sri Lanka these days with the most recent bombshell coming from certain global economic entities, which have pointed to vulnerabilities in the country’s external debt servicing outlook and exchange rate volatility.

Responding to these reports, Prime Minister Ranil Wickremesinghe told CNBC recently that “we and many others are running deficits in Asia, and that certainly would be a matter of concern. But so far, we have been able to negotiate with the rating agencies and it has certainly not affected our borrowing capacity.”

Wickremesinghe also dismissed claims that the country would be among the most susceptible to an [exchange] rate crisis as being “false.” Nevertheless, a sense of pessimism has evidently percolated into the corporate sector given the far from upbeat reactions gauged by the latest LMD-Nielsen Business Confidence Index (BCI) survey.

THE INDEX Recent media reports asserting that Sri Lanka is amongst the seven emerging markets that are most at risk of an exchange rate crisis have done the damage so to speak – the BCI is now at its lowest level since April 2009 (that was when the country was in the final stages of the decades long war against terrorism).

Accordingly, the index fell to 87 in September, which is eight basis points lower than where the BCI stood in the previous month (95) and a disconcerting 22 notches shy of its average for the last 12 months (109).

Nielsen’s Managing Director Sharang Pant comments: “The fact that year on year inflation has also crept up from 2.5 percent in June to 3.4 percent in July has not helped and businesses are worried about how this will impact consumption, which was displaying signs of a recovery.”

He explains that “the improvement in the external sector and trade in services (exports and earnings from tourism) is not helping tide over local macro concerns.”

SENSITIVITIES High taxes, the ongoing depreciation of the rupee, political interference and policy instability remain the chief concerns for business in Sri Lanka. Respondents say they expect the policy makers to release statements on the outlook for the economy and help mitigate anxiety caused by the bad press surrounding the Sri Lankan economy.

One businessperson laments that “there is a lack of forward thinking by the government when it comes to policy implementation.”

PROJECTIONS The BCI has registered a decline for a fourth consecutive month and remains well below the psychologically important 100 mark. So it goes without saying that this doesn’t bode well for the index in the near term.

That said, there could be a slight uptick in sentiment next month if the business community raises its hopes that Budget 2019 will bring some respite. What transpires following the presentation of the budget proposals to parliament on 5 November is however, anyone’s guess.

All in all, a major turnaround in the barometer of business confidence is seemingly no more than a distant dream – for the time being at least.

– LMD