Consumer durables sector to languish on weaker economic conditions: Fitch

Sri Lanka’s consumer durables industry is expected to face fresh headwinds from weaker consumer sentiments, lower disposable incomes amid acceleration in inflation and the potential for further tightening of import controls amid the foreign currency crunch, according to 
Fitch Ratings. 

The ratings agency in a rating report released last week estimated the Sri Lankan economic growth to slow down to 2.2 percent, from a 3.6 percent earlier forecasted for this year before accelerating to 4.3 percent in 2023.  This is a much gloomier outlook compared to the 5.5 percent growth projected for the economy by the Central Bank following an estimated 4.5 percent growth for last year. 

The Central Bank officials are confident that the worst of the foreign currency troubles are behind them and the prices would ease in the months to come. 

As a result, the Central Bank left its headline inflation band between its original 4 to 6 percent for the medium term.  “Fitch believes Sri Lanka’s economy will weaken in 2022, as the challenging external position and exchange-rate pressure will have knock-on effects on economic activity. Foreign-currency shortages in 2021 hampered food and fuel imports and continued external liquidity stress could worsen supply shortages,” the rating agency said. 

Under this backdrop, Fitch expects the outlook for the consumer durables sector to turn dour, as foreign currency troubles could spill over into the sector, which depends largely on imports.  However, the rating agency ruled out the possibility of a complete cessation of imports of such products, similar to automobiles, due to the essential nature of such products to the companies that depend on them for income generation and also for the consumers to go about their  normal lives.

Contrary to expectations that the consumer durables sector would see a complete meltdown, the sector successfully weathered the pandemic-induced economic shocks and in fact emerged stronger during the two years of the pandemic with higher sales, profits and lower leverage. But the persistent foreign exchange troubles and the elevated inflation have dented the outlook for the sector, as Fitch slashed revenue and EBITDAR forecasts for some of the leading players in the market in the ongoing financial year.