JKSB optimistic over SL’s ability to return to dollar bond market

• Lauds government for handling pandemic “exceptionally well” 
• Expects CBSL’s dovish policy to continually support economy as inflation remains benign 
• Says monetary and fiscal stimulus key for supporting small biz, including travel & tourism 
• Expects current lower tax rates to remain as economy needs incentives

John Keells Stock Brokers (JKSB) remains optimistic about Sri Lanka’s ability to return to international capital markets to raise funds it needs as the economy normalises after the coronavirus-related lockdowns dealt a severe blow from April through May, though the fiscal condition remains a concern. 

In a research report titled, ‘Sri Lanka Market Strategy,’ which looked at the broader economy and the outlook for selected leading listed corporate entities, JKSB said the lower rates in major developed markets and the normalised domestic economy act as main triggers for the country’s ability to re-tap the global dollar borrowing market for the foreseeable future once the fiscal concerns are alleviated. 

“While Sri Lanka’s fiscal situation has deteriorated due to pandemic related pressures, we feel that the legislative super-majority received should help the government restructure the tax collecting apparatus and reassure markets,” the report said.

“With global rates also looking like they will continue to stay lower, Sri Lanka should be able to return to the Eurobond/ISB markets eventually which will help this government continue with their ambitious infrastructure drive, which we believe will alter the dynamics of the Sri Lankan economy over the next five years, and achieve the target of exceeding US$ 6,500 per capita GDP,” it added.

Moody’s Investors Service on September 28 downgraded the Sri Lankan sovereign to Caa1 from B2 revising the outlook to Stable citing concerns over the country’s ability to refinance its foreign debt, stretched fiscal deficit and possible governance issues.

However, Sri Lanka successfully settled a billion dollar sovereign bond with coupon payment due for October 4 last week.

JKSB estimated Sri Lanka’s fiscal deficit to expand to 10.5 percent of the GDP in 2020 with State revenues declining to 9-10 percent of GDP, before recovering to 12 percent in 2021 with the recovery of economic activities, as the stockbroking firm expects the economy to expand by 4 percent in 2021 from an estimated 3-4 percent contraction this year. 

JKSB, a unit of John Keells Holdings PLC, credited the Sri Lankan government for tackling the virus, “exceptionally well”, but said the complete cessation of tourism and imports would have knock-on effects on travel related businesses and SMEs, requiring stimulus from both monetary and fiscal policy.

“As such, we expect taxation to be rationalized but for tax rates to remain at these levels.” 

Hence, JKSB expects the Monetary Board to remain dovish and the current tax rates, which were slashed last December to stay, to support businesses and consumers alike as such will improve business earnings and consumer demand, rekindling the investment climate, which remained dormant for far too long. 

“Lower fuel and commodity prices should underpin low inflation levels and we see the CBSL keeping rates lower for the foreseeable future in order to maintain support for the economy,” the report stated.