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Govt may have to revise tax rates to improve coffers

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First Capital Research – Equity Strategy December -2021 says:
Business

Whether Sri Lanka goes through an IMF Program or not, the Government may have to revise its tax rates in the order to improve the government coffers, says First Capital Research –Equity Strategy December -2021

“ Considering the dire need for tax revenue , there seems to be a reasonable chance that tax rates are likely to be raised either at the consumer level or corporate or both.”

Current government revenue is less than half its expenditure and it is potentially the second consecutive year that the Government is likely to register a double digit (10%+) budget deficit. FC report says Sri Lanka’s foreign reserves have fallen to USD 1.6 billion in November 2021, the lowest level since 2009. With USD 7 billion foreign currency debt to be repaid over the next 12 months, Sri Lanka seems to be at a very critical juncture.

“Amidst the controlled currency worker remittances have started to drop by about 50% creating a further slowdown of currency inflows. With the Governor continuously reiterating that they are not willing obtain IMF support, it unclear as to the repayment plan of the Government. Therefore, we believe that Sri Lanka could be in for a major shock with the next 3-12 months creating a high -risk environment.

The weak environment could lead to a major depreciation in the currency and a spike in interest rates. Though the import restrictions and rise in inflation are supporting growth in the earnings, it is likely to be temporary on the face of the crisis. It will be prudent for investors to move into defensive counters out of which Dollar income companies are at the priority list, though it’s best to move into companies that have NOT surged in price.”

Furthermore Life Insurance Companies and Banks are expected to benefit from the rise in interest rates. First Capital would also recommend high dividend yielding counters. “For risk adverse conservative investors who are unwilling to take economic shock, we would recommend to further reduce equity exposure. From our previous cash allocation of 50%, it would be wise to increase to 75%. With the 1Yr T – Bill standing around the 8.0% mark and inflation spiking sharply to 9.9%, real interest rates have turned negative. This situation is unfavourable to towards fixed income instruments with value of money falling amidst higher interest rates.

The continuous quantitative easing strategy coupled with import restrictions and controlled currency are pushing inflation to higher levels while also keeping interest rates under check. This may lead to continued environment of negative real interest rates in the short -mid term. Further, the FD ceiling stands below the 10% at present, though it may inch above 10% by January 1 However, most large to mid finance companies are offering well below maximum interest rates due to the lack of lending opportunity, thereby market FD rates by most Finance companies may remain below 10% over the next 2-3 months.

Lower FD rates and negative interest rates are critical factors favouring the equity market as most investors search for alternative investments in such situations.

Wednesday, December 22, 2021 – 01:00











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