Sri Lanka gearing up for recovery – CT CLSA Report
With Sri Lanka’s macro environment stabilizing, CT CLSA – Strategy Report says that they expect 2023 year-end earnings to hit an upside of +15% with GDP numbers also likely to turn green in the second half of 2023 end.
The move by CBSL to cut policy rates by -250bps on 01 June 2023 is expected to support economic growth in 2H2023E, the report adds. YoY Inflation is declining steadily, primarily due to the higher base effect. “We believe that this trend will continue in the coming months, with the help of the LKR appreciating and fuel prices decreasing.”
“With an announcement on domestic debt optimization also expected over the next few weeks and real rates likely to turn positive over the next couple of months as inflation continues to ease, we see market interest rates declining sharply in 2H2023E.”
Real rates turning positive would provide further space to the CBSL to potentially cut policy rates further in 2H2023E. We forecast the 12-month T-bill rate to decline to 12% by December 31, 2023.
The LKR appreciated +25% against the USD in 2023 YTD until 08 June. However, with some import restrictions being removed from 09 June 2023 the LKR has started to depreciate. More import restrictions are expected to be relaxed in the coming months as well.
“Although the LKR has depreciated quite sharply over the last few days, we expect the volatility to reduce over the next few weeks. We maintain our exchange rate forecast at Rs.340/US$ as of December 31, 2023.”
These macro-developments are expected to provide better TSRs in Conglomerates, Banking, Consumers and Highly Geared Companies in 2H2023E – 2024E. In addition, we expect the leisure segment to continue its ongoing recovery with tourist arrivals and sector margins improving over 2H2023E and 2024E. “Despite the Sri Lankan CSE’s All-share index growing +10% YTD in 2023 after falling -31% in 2022 (the second highest drop after Vietnam’s -33% fall in 2022), its 7X market PER offers a good entry point with many top blue chips exhibiting upside potential as Sri Lanka gears up for recovery.