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Political uncertainty is extracting a heavy toll on business confidence in Sri Lanka

January, 2, 2019

Business Sentiment - Index Takes A Hit In Hard Times

Profits of Sri Lanka’s listed companies declined by as much as 10 percent year on year in the quarter ended 30 September 2018, according to a report filed by First Capital Holdings, which also points to lower consumer spending during this period.

The report notes that earnings in the food, beverage and tobacco, telecommunications and material sectors weakened during the quarter in the face of subdued economic growth.

Meanwhile, it reveals that banking and insurance sector earnings continued to grow on the back of higher interest rates, “thereby improving margins and spreads, which negated the effect of [an] increase in impairment provisioning.”

The latest edition of the LMD 100 echoes the fact that bottom lines are under fire with Sri Lanka’s leading listed corporations showing signs of facing shrinking profits as the nation faces multiple uncertainties on many fronts.

To this end, the aggregate profit after tax of the LMD 100 Leaderboard reflects an increment of only five percent (to slightly over Rs. 64 billion) compared to the corresponding period of the previous year.

Not surprisingly therefore, the LMD-Nielsen Business Confidence Index (BCI) failed to hold out – as reflected in the results of the latest survey conducted in the first seven days of December.

THE INDEX The Sri Lankan Rupee has depreciated by over 10 percent in recent months, rating agencies have downgraded Sri Lanka’s credit ratings and uncertainty prevailed over all matters related to parliament, all of which contributed to a slump in the BCI to 90 basis points in December following a temporary uptick from 85 to 110 in the previous month.

Nielsen’s Managing Director Sharang Pant points out that “on the macro front, inflation was down to 0.1 percent year on year in October 2018, exports grew by six percent for the period from January to August 2018 and tourist arrivals also rose by 11 percent from January to November 2018.”

“However, political instability is outweighing the positives amid question marks hanging over investments by local and foreign investors,” he explains.

SENSITIVITIES Politics, the health of the economy (encom­passing taxes and the rupee value), not to mention bribery and corruption, feature among the main sensitivities cited by the corporate community.

A survey respondent corroborates this view: “The public does not have money to purchase goods, businesses are struggling and investments are on hold – and the only people who should take responsibility for this crisis are the politicians who’ve created this political and economic turmoil.”

PROJECTIONS Last month’s edition took stock of the changes on the ground that had seemingly led to a sense of optimism in business circles. But there was an inkling of the turnaround in sentiment being ‘too good to be true’ given the state of the nation.

And in the absence of a lasting solution to the political crisis, the index may come under further pressure although there could well be another U-turn following the resolution to the dissolution so to speak – because after all, things couldn’t have got much worse.

– LMD