April, 5, 2020
First Capital Research has trimmed down its All Share Price Index (ASPI) target to a mere 5,000 for June 2020 as earnings of most companies are likely to be negative during the second quarter and third quarter of 2020.
"However, a possible recovery in 4Q2020 may push the index towards 6,000 by December 2020," First Capital said in its recent research report.
The current global situation poses a significant risk to the Sri Lankan economy with the inability to raise funds in the international market amidst the current volatility and the lack of interest in emerging and frontier market bonds,
“Thereby, SL may have to focus on bilateral loans, similar to the recent Chinese loan.” First Capital Research said.
" In addition with the budget deficit which estimated to 9-10% in 2020, rupee borrowing requirement is likely to significantly increase towards the 3Q and 4Q of 2020,” it added.
Sri Lanka recently managed to negotiate a couple of important loans from China which may support its reserves and/or support spending in this period of lower tax collection.
China extended Sri Lanka a concessionary loan of USD 500Mn, upon a request made by the government, to financially aid its efforts to combat the COVID – 19 pandemic. The loan would be given to Sri Lanka with a maturity period of 10 years and a three-year grace period along with concessionary interest rates linked to 6 Month USD LIBOR.
Sri Lanka would receive another USD 700 million in May as a concessionary loan from China Development Bank.
Meanwhile, with the rise in borrowing pressure, the research arm expects a gradual increase in bond yields throughout 2H2020.
“In Jan 2020 recommendation, we were focused on 3Q2020, as debt maturities were significantly lower in 4Q. However, following Covid-19 outlook, amidst the heavier budget deficit and the difficulty in raising funds in the international market, we expect local borrowing requirement to be significantly higher. We have moved up our targeted bond yield bands and expect the yields to enter the bands by 3Q and gradually move up further during 2H2020,” it said.
Further, with the lack of lending in the system and the subsequent impact from COVID-19, credit growth to remain significantly lower resulting in a dip in a further in AWPR.
Thereby, First capital research expects AWPR to fall to c.9.0% during 1H2020 and amidst the heavy Government borrowing requirement and to hover in a range of 9.0%-10.0% during 2H2020.
The exponential spread of coronavirus and the complete shutdown of most businesses is expected have a major adverse impact on all companies listed in the Bourse.
“Despite the tax cuts and the lower interest rate regime, the fear created among the public relating to the coronavirus may only result in a slow growth of consumption in the system and that too more towards 4Q2020. With earnings outlook negative with the closure of most businesses and the imposition of curfew, normalcy in business is only likely to return once the coronavirus spread is brought under control,” the research arm said.
“Tourism earnings will have the biggest impact as even though COVID-19 spread slowdown in Sri Lanka the major decline in global travel with spread of the virus across the world may take at least 6-8 months to normalize," it added.
The Central Bank (CBSL) also loosened Monetary Policy in line with the global trend and CBSL was also quick to put in place additional measures to support currency.”
These included; Suspend facilitating importation of all types motor vehicles during the next three months, suspend facilitating importation of non-essential goods, Suspend the purchase of Sri Lanka International Sovereign Bonds by licensed banks in Sri Lanka.
Meanwhile, the First Capital Research expects the budget deficit may rise to 9 to 10 %, higher than their original estimate of 7%.
According to the research arm, the GDP outlook appears grim, but the only thing that favors Sri Lanka is that Q2 is usually the country’s worst quarter in any given year due to the April New Year holidays.
“Sri Lanka & Myanmar have gone beyond a lockdown action into a complete shutdown by means of curfew with only a few selected essential services working at an early stage of the spread. This has proved to be successful so far. But we are yet to see the end of it," it further stated.
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