The report has been compiled by a team of Capital Markets professionals headed by N.L. Equities.
Head of Research Anjula Nawaratne said: “The government has somewhat softened its stance on reaching out to the IMF though no concrete information is yet available.”
“However, some of the recent austerity measures taken by the government will halt further deterioration of the macroeconomic front in our view (eg: fuel price mechanism, lifting price ceiling of essential commodities, improving state revenue, reforming State-Owned Enterprises). Though eventually, this will create a spike in inflation, medium-term stability could be envisaged. Interest rates should gradually move up through a negative interest rate scenario which is unlikely to change anytime soon. Hence it will be positive for the equity markets and if the pandemic situation is contained similar to as of now, tourism income also is likely to generate around USD 2Bn in 2022E.
The government has also taken measures to ease the external stress to minimise the instability of the economy. “We also expect a partial recovery in tourism earnings which could generate an income of over USD 2 billion by end of 2022 as it could surpass one million tourists amid relaxed travel restrictions.”
Sri Lanka’s FDI’s has also grown by 13% YoY in the first ten months of 2021 (USD 400 million) despite multiple downgrades, which would continue especially on the back of already sealed agreements like the development of Western Container Terminal (WCT). However, although there is a pipeline of inflows, the uncertainties surrounding COVID 19 invariably could delay the planned inflows, creating some stress when paying USD 4-5 billion external debt payments spreading over 2022.’
“We are still hopeful that the government would seek IMF assistance to avoid default as it would not only help to restructure debt but also bring about much needed economic and price stability. The multilateral, bilateral loans and short-term currency SWAPS could address the short-term stress in the economy, while talks with the IMF, if begun immediately, could successfully resolve the rest of complications, bringing confidence amongst investors.”
In terms of the equity markets, we remain bullish. “Although tighter monetary policy stance could stay to safeguard the LKR, we expect real interest rates to remain muted especially on the back of rising inflation that would prompt investors to stay with the equity market.”
The earnings potential of the listed companies would remain challenging yet buoyant especially in sectors like consumer, material, exports and banking likely recording higher gains resulting in the valuations of CSE remaining attractive.