Demand for alcohol to weaken amid economic contraction, roaring inflation: Fitch

Fitch Ratings expects demand for spirits to weaken in the coming months amid the projected contraction in the Sri Lankan economy in the next 12 months, unprecedented inflation and the erosion of purchasing power of consumers due to deterioration in the local exchange rate. 

“This is likely to weaken demand for spirits, as most consumers will prioritise essential food and medicine. We expect consumers to shift to cheaper beer from spirits and from formal channels to illicit liquor amid falling affordability, shrinking the spirits market,” the rating agency said.

Fitch Ratings yesterday affirmed National Long-Term Ratings of conglomerate Melstacorp PLC, and its subsidiary, Distilleries Company of Sri Lanka PLC (DIST), at ‘AAA(lka)’ with a Stable outlook.  

DIST is the largest spirits maker in Sri Lanka. The rating report said DIST has increased prices by 30-40 percent across most spirits products since March 2022 to recover rising costs.

However, the rating agency said further hikes could be challenging as consumers become more price-sensitive. 
Meanwhile, DIST continues to benefit from the ban on imported spirits because high-end consumers have shifted to locally-produced spirits, helping the company to recover some lost sales.

The rating report also noted that taxes on spirits have increased materially since November 2021, when the excise tax rose by 10 percent. 

The Value Added Tax has also been raised from 12 percent to 15 percent from October 2022, and a social security contribution tax of 2.5 percent on revenue has been imposed. 

This takes sales taxes for spirits to around 18 percent, compared with 8 percent last year. 
However, Fitch believes excise tax hikes will moderate in the next 12 months to limit consumer shifts to illicit spirits, which could lead to national revenue loss.

Meanwhile, the rating agency said Melstacorp’s international presence in leisure and maritime and logistics operations, through its subsidiary Aitken Spence PLC, will help to reduce risks from its exposure to Sri Lanka’s weakening operating environment.

Melstacorp group’s leisure sector made a full recovery in FY22, surpassing pre-pandemic performance. Growth stemmed from its Maldives hotels, which continue to see strong occupancy and pre-bookings amid increased post-pandemic travel. 

The rating report also highlighted that the maritime and logistics segment of Aitken Spence is seeing strong growth in its international port operations as global trade recovers. 

“Aitken Spence is expanding, especially in the Pacific region, to leverage on this demand. Melstacorp’s international operations are also raising the group’s profits through conversion gains, as the Sri Lankan rupee has depreciated almost 80 percent since March 2022,” the rating report said.