CT CLSA forecasts stronger corporate earnings, economic growth in 2H

• Says further ease in borrowing costs would cushion corporate bottom lines
• Forecasts earnings upside of 15% for local listed entities in 2023
• Points at possible delay in debt restructuring as the single largest risk factor
• Expects 12-months Treasury bill rate to return to 12% by close of this year

CT CLSA became the latest to join the bandwagon offering an upbeat outlook for the Sri Lankan economy from the second half of the year buoyed by the recent rate cut by the Central Bank and the faster than anticipated deceleration in prices which would be followed through by further cuts in borrowing costs. 

The CT Holdings and Hong Kong’s CLSA Group Company forecast an earnings upside of 15 percent for local listed entities in 2023 turning from 17 percent decline in twelve months trailing earnings through the first quarter of 2023. 
These forecasts are premised on the growth expected in the overall economy in the back half of the year which could be possible with cooling inflation giving space for further rate cuts in the period ahead. 

The upside for earnings forecast was predominantly made possible by the ameliorating borrowing costs, which could specially provide an earnings fillip to some of the highly leveraged firms listed on the Colombo 
Stock Exchange. 

The profits of entities – large and small – had got equally hammered by the sharper rise in borrowing costs last year among other things such as falling demand and margin contraction, bringing the earnings and valuations sharply down. 
Many small businesses went totally out of business last three years, due to both policy driven and non-policy driven causes such as the pandemic. 
“The move by CBSL to cut policy rates by 250bps on 01 June 2023 is expected to support economic growth in 2H2023E,” the analysts at CT CLSA wrote in their mid-year strategy report released last week. 

However, they singled out a possible delay in debt restructuring as the single largest risk factor as there still appear to be differences existing among the parties, especially when it comes to domestic debt restructuring. 
“With an announcement on domestic debt optimisation also expected over the next few weeks and real rates likely to turn positive over the next couple of months as inflation continues to ease, we see market interest rates declining sharply in 2H2023E. Real rates turning positive would provide further space for the CBSL to potentially cut policy rates further in 2H2023E,” they added. 

HSBC Global Research also gave rather an optimistic view of the Sri Lankan economy recently while projecting another 500 basis point cut in policy rates in the next 
twelve months.
CT CLSA analysts expect the benchmark 12-month Treasury bill rate to return to 12 percent by the close of this year. 
They further expect the household consumption to start picking up from the second half of the year with the cooling inflation, declining rates and the economy’s recovery providing an impetus for the rest of the sectors of the economy which went downhill for nearly 18 months.