BIZ CONFIDENCE
BOUNCES BACK
There’s been a groundswell of opinion on what the future
holds, ahead of a crucial budget vote next month.

here’s welcome news for the President and his beleaguered Government in this issue of LMD. Firstly, an exclusive islandwide opinion poll commissioned by LMD and undertaken by TNS Lanka finds that President Mahinda Rajapaksa – who will soon celebrate two years in high office – continues to be popular with the masses.

Then, the bourse has regained its lost momentum in recent weeks, all but shedding the bearish sentiment that has dogged the equities market since April this year. Fundamentally strong counters are setting the pace, on the back of an encouraging flow of healthy corporate results… but there may be roadblocks ahead of a budget that is widely expected to call for more belt-tightening measures and draconian tax provisions.

And the tourism industry – which does bring in valuable foreign exchange and provides hundreds of thousands of jobs for our people, no matter that the Governor of the Central Bank of Sri Lanka (CBSL) deems it to be ‘insignificant’ – is preparing for a make-or-break winter season. Its Chairman Renton de Alwis reveals in this issue that there is now a push to tap the lucrative MICE market with special packages that offer substantial price advantages to corporates, especially those cost-conscious high-fliers from neighbouring India.

And contrary to expectations, the economy is seemingly in check and performing reasonably well. In the second quarter of this year, Sri Lanka’s GDP accelerated at a solid 6.4 per cent and there’s also been a narrowing of the crucial trade gap.

The CBSL’s highly unpopular stance on interest rates (which have stayed put for months on end) has at least partially achieved its objective of stemming the cost-of-living spiral. That said, there’s been little respite for consumers and businesses alike, with inflation and interest rates continuing to be unbearably high.

Then, there’s the extraordinary hype surrounding the forthcoming fiscal budget – not, it has to be said, because of what it is likely to contain (most of this has possibly been gazetted already!), but in the wake of a crucial budget vote that many view as being an opportunity for ‘regime change’.

It may be for this reason that The Nielsen Company’s monthly survey for LMD suggests there’s been a ground­swell of business sentiment in recent times – a factor that we touched on in this column last month.

The news filtering in of Government forces infiltrating the northern borders that surround LTTE territory in the Wanni may also be raising boardroom spirits, in that there may now be a glimmer of hope that the war can be won or the rebels be forced back to the negotiating table – in Oslo, recently, the Norwegian facilitators took us all by surprise when they announced that there’s now a chance of the Tigers agreeing to another round of peace talks.

INDEX REBOUNDS TO A FIVE-MONTH HIGH: The LMD-ACNielsen Business Confidence Index (BCI) gained as much as 25 basis points in September, to register 93 – a quantum leap in the context of its recent track record (it had previously edged its way down from 78 to 68 between May and August). As for averages and psychological barriers, the BCI is still 33 points below its all-time average of 126, but ahead of its 2007 mean of 90. It is also within striking distance of the century mark – and importantly, it is now clear of its all-time low of 31.

12-MONTH ECONOMIC OUTLOOK JITTERY: But the number of businesspeople saying that our economy will “improve” or “stay the same” (26%) hasn’t changed from a month ago. So, around three-quarters of Nielsen’s sample population from amongst the business community have contended that the economy will “get worse” for five successive months; whereas in April this year (prior to the LTTE’s attack on our international airport and air strikes on the commercial capital on the night of the cricket World Cup finals), only 42 per cent said so.

SRI LANKAN ECONOMY STILL IN SHAPE: Our external-trade performance continues to improve. In June, exports increased by 43 million US Dollars to US$ 675 million (the resumption of exports of vegetable fats and oil preparations under the Indo-Lanka free-trade agreement, and higher sales of rubber-based products being amongst the primary reasons), whilst imports dropped to US$ 832 million, thanks to a tapering-off of petroleum imports. The result: an improvement in the trade balance, to US$ 157 million – a drop of nearly 50 per cent compared to the same time last year.

The current account deficit, too, is being contained by rising private remittances from Sri Lankans working overseas. In the first half of this year, they brought in 1.3 billion rupees, an increase of 18-plus per cent over the comparable term in 2006.

The end product of all this good news is that Sri Lanka’s gross official reserves at the end of June stood at US$ 2.7 billion, which is the equivalent of some three months worth of imports, with a balance of payments surplus to the tune of US$ 192 million.

On the inflation front, however, the storyline remains unchanged. Whilst the Colombo Consumers’ Price Index (CCPI) on a point-to-point scale dipped by three decimal points to 17.3 per cent in August, average annual inflation nudged upwards by a decimal point to 17.3 per cent. A CBSL press release of 4 September attributes this slightest of improvements to the Yala harvest and its impact on agribusinesses. “The temporary removal and lowering of taxes on certain essential food imports, too, helped,” it adds.

As for the future, it predicts a declining trend (we’ve heard that before!), in response to the “tight monetary-policy stance of the Central Bank” (that, too!) and a reduction in the price of rice “with the onset of the Yala harvest”.

But despite what the CBSL says, the Sri Lankan Rupee is taking a beating. In the second half of August alone, it plummeted by one percentage point (24% annualised) and it has since hit record lows against the greenback.

The CBSL, of course, insists that all’s well. “Such depreciation is not based on any fundamental macroeconomic factors,” a media communiqué released on 30 August assures a sceptical media and analysts who are up in arms over what’s taking place both at the CBSL and the Treasury.