Economy gains momentum; traders return to the market
Astrengthening currency, falling interest rates and sustainable corporate earnings have helped Sri Lanka’s economy to turn a positive corner, analysts say.
The consistent information on the soon-to-be-secured International Monetary Fund bailout package, has added to the general confidence in the economy, they say. While there is a sharp drop in earnings in corporates due to the deferred tax impact, they have increased prices which are more than covering for their volume drop. The country, which has hit rock bottom, is rising again.
This is why valuations are now attractive for traders to get back into the Colombo stock market, stockbrokers said. “Inflation is down, which means the rate of things going up in price has slowed down. Interest rates are down. The currency is strengthening. Now the economy is in a better position than what it was six months ago. Interest rates are declining, mainly because banks cannot lend right now at these rates,” a stockbroker said.
However, the next few quarters will be tough for the banking sector. Banking sector analysts said that banks' performance is shrinking. “They will see higher non-performing loans in the coming two quarters,” an analyst said.
He also noted that government spending has come down and international entities are also dispersing aid for essential items etc. “All these are factoring into interest rate declining along with the currency strengthening.”
An investment banker said that Port City may get some US investments. “These types of investments are coming slowly into the system now. The intended bailout package will accelerate such investments,” he added.
Another banker said that the country is not paying loans now, which is helping to put less pressure on the currency. “People also don't have the purchasing power to buy things like, for example, expensive medicines. So, we see fewer imports of such medicines now. This has also strengthened the currency as there is less foreign exchange going out.”
Separately, certain economists point out that there is a larger gap in the haves and have nots now as opposed to a year ago. “The middle class has virtually shrunk with the tax cuts and especially the high inflation witnessed during the past year.
The impact of the strengthening currency, declining inflation has not really trickled down to this class,” a second economist said.
“Overall, the country is starting to cement a better foundation but we must not get carried away as we need to solve rooted systemic issues,” he added.