Economy and leisure poised to grow; mixed sentiment on banking : NDB Securities

Pioneer stockbroking and equity research firm NDB Securities (Pvt) Ltd (NDBS) has published three research reports in October. 

These reports provide a comprehensive overview of the Sri Lankan economy alongside banking and leisure sector analysis. 
These in-depth reviews of the current economic environment and future outlook were compiled by NDBS Research, recently named the country’s best stockbroking equity research team at the CFA Sri Lanka Capital Market Awards 2016. 
Scrutiny in detail 
Sidath Kalyanaratne, Head of NDBS Research noted, “It has been a while since some of these sectors have been scrutinized in such detail. 

Sri Lanka’s external trade is expected to be rather sluggish going forward, in keeping with the world. Some of our major trading partners that used to depend on commodity-driven exports are reshuffling their economic factors whilst some countries are trying to insulate themselves from the external global environment to a certain extent. 
Sri Lanka has to meet this frontier with a limited domestic market and a lack of investment capacity internally. The key question is whether opening up our economy further through FTA’s and FDI’s whilst improving the economic complexity of the export basket along with our geographical location can trump rather gloomy trade and growth outlook externally. These three research reports position themselves at the midst of this juncture, with a critical evaluation of what makes each sector tick.”
Aggravating govt. debt burden

Upul Atapattu, the NDBS economic analyst who compiled the report on the economy shared, “Sri Lanka’s unique location combined with peace dividends and improved infrastructure-especially road and data connectivity will prove instrumental for long-term prosperity. 
The post war growth momentum was undermined by the negative impact of unbalanced domestic policies and an increasingly difficult external environment. However lack of policy incentive towards private sector participation on development and investments, especially on tradable goods, will have negative consequences in the short term.”
Atapattu noted that increasing recurrent expenditure created by the high interest payment from government debt and declining government revenue as a percentage of GDP further has aggravated the government debt burden, adding strain to government fiscal policy. Concessionary loans for Sri Lanka will also reduce making it more costly to borrow - “fiscal consolidation is a key concern for the government, which will give policymakers more room to have a balanced policy framework to stimulate sustainable economic growth for the country.” 
He also added, “Ongoing discussions with regards to FTAs with India, China and Singapore alongside a balanced policy framework will help attract FDI and private sector involvement to build a resilient external sector. However, in the short term, we expect economic growth to be challenged by weak global demand for Sri Lankan exports coupled with policy implementation with respect to fiscal consolidation.”

Moderate banking sector growth
The banking sector, with its strong correlation to the country’s economy, is expected to exhibit moderate growth in the short term. “In the short term we estimate the economy to grow by 5.0 percent, 5.2 percent and 5.4 percent respectively in 2016, 2017 and 2018,” commented Assistant Manager - Research Dhinali Peiris. 
“This expansion will require banks to play a key role in financing expanding corporates and SMEs in particular, so we estimate the banking sector to grow alongside by 15.5 percent, 16.1 percent and 16.7 percent over the same period.”

In order to facilitate this growth, banks may need to shift focus from collateral-based lending to cash flow-based lending whilst expanding the virtual banking platform (currently a high banking density compared to peers), shared Peiris. 
“Currently five banks out of the 25 licensed commercial banks hold more than 70 percent of the total banking sector assets; high competition and additional capital requirements among smaller banks will threaten their return on equity in the long run. We strongly support banking consolidation to strengthen the system and improve banks’ access to financing via international capital markets. Furthermore, we expect most of the listed counters’ net interest margins to remain stagnant with banks rebalancing their loan and deposit portfolios.” 

Long-term growth prospects for leisure sector 
The leisure sector is similarly positioned for long term growth, with more robust progress expected in the short term in light of heavy investment in the sector. The sector report uses demand and supply dynamics to gauge their impact on listed hotels (as of 2015 only 27 percent of SLTDA registered rooms are listed in the CSE) whilst also assessing the cost structure in the sector, specifically with regards to construction. 

Commenting on the findings, senior analyst Raguram Ramakrishnan noted, “From a demand point of view, we expect Sri Lanka to record a 5-year CAGR of 16.5 percent in tourist arrivals from 2015 to 2020 bringing total arrivals to 3.8 million, a conservative estimate in comparison to SLTDA’s revised forecast of 4.2 million arrivals. 

The estimated average stay in the country is 11.2 days; to meet the estimated demand for 52,000 rooms the sector will need to add over 20,000 to the existing 30,000 rooms.”
The industry may also need to account for the steady growth witnessed in unregistered rooms, which can negatively affect profit margins. Significant growth in Chinese arrivals (currently Sri Lanka attracts 0.18 percent of total outbound Chinese tourists) is an encouraging sign for tourism, as the group tends to stay 7-10 days and spend more in comparison to others. 

Sri Lanka will need to focus on improving shopping and retail experiences in the country to meet this group’s needs, however. Raguram also advised the leisure sector to invest in skilled professionals to meet the service requirements of the growth in this sector. He estimates that 76,000 additional skilled employment will be needed in the hotels and restaurants segment by end of 2020 based on the estimated room requirement.

Overview into each sector
The full reports include a meticulously researched overview into each sector alongside short and long term forecasts. They also offer a glimpse into the listed space in each sector, with analysis of selected key counters. 
NDB Securities is a fully owned subsidiary of NDB Capital Holdings, the capital market arm of the NDB group.