E&Y forecasts SL to grow by only 0.5-1.5% in 2020 due to COVID-19 crisis

Ernst & Young is forecasting Sri Lanka’s GDP growth rate in 2020 to be between 0.5% to 1.5%, with apparel, tourism and hospitality, and transport sectors significantly affected by the novel coronavirus (COVID-19) pandemic.

E&Y (Sri Lanka & Maldives) Partner and Advisory Leader Arjuna Herath

The estimate is contained in E&Y’s special report titled “COVID-19 Industry Market Overviews.”

The report said global GDP will take a significant hit from COVID-19 and is expected to grow only by 1.5% in 2020. Ramp-up of production in Asian economies will support local demand recovery, while most of their export markets are still affected by COVID-19-related shutdowns and consumer uncertainty.

E&Y (Sri Lanka & Maldives) Partner and Advisory Leader Arjuna Herath said the COVID-19 outbreak has become one of the biggest threats to the globe and has pushed humanity to uncharted territory.

He emphasised that Sri Lanka is no exception to the COVID-19 crisis. “Whilst having its own repercussions, the slowdown in our key export markets would also have significant impact on the Sri Lanka economy,” he said.

“However, each day we are gaining a greater understanding of the impacts, as we talk with businesses in Sri Lanka and across the world about the issues they face, and their concerns for the future. These industry market overviews highlight the latest market intelligence E&Y has received, our view on the cross-sector impacts of the crisis, and the potential actions organisations can take to navigate these uncertain times,” Herath added.

The COVID-19 outbreak, he said, has formed looming clouds of uncertainty and disrupted economic activities across the globe. Drastic measures taken by governments to combat the spread of the virus are in the process of delivering a global recession. As such, Herath said, the disease is much more than a health crisis, and has the potential to create devastating social, economic, and political crises that will leave deep scars.

It was pointed out that the spread of the disease is impacting all industries from various directions. Considering that economies will have to bear demand as well as supply side shocks, the repercussions on individual economies would depend on the initiatives and programs of the respective governments.

Beside the more visible disruption of production, supply chain and customer uncertainty, there are risks and challenges in relation to crisis management and people. Even after COVID-19 is under control, companies will face a financial, regulatory, and legal aftermath, which is not yet foreseeable.

E&Y also said global trade is the essential backbone of the world economy. It has already been in a state of crisis before COVID-19 as tariff tensions, protectionism and sanctions disrupted established business models. COVID-19 is adding additional challenges from disrupted trade routes, capacity bottlenecks and trade finance environment.

With regard to oil price, E&Y said it is estimated to remain depressed after global GDP and demand recovery, helping various industries to recover from the pandemic. According to the latest Oxford Economics forecasts, the oil price is expected to stay below 2019 levels for the near future.

“The shutdown of operations and cutback in consumption is draining liquidity reserves of companies while financing conditions might become more challenging with increased credit risks and defaults,” E&Y said.

The risk of credit defaults is increasing with time and will hit SMEs as well as larger corporates. This will impact the ability to ramp up production after the crisis and could have a knock-on effect along supply chains. Financial constraints will also impede investments, e.g., in technology, to prepare for future events.

E&Y said at a global level the slowdown in syndicated lending will accelerate trends that began during the Global Financial Crisis, which gave rise to the private credit industry. Private credit firms will become increasingly active in financing larger deals ($ 1-3 billion) that only a few years ago would have been syndicated by traditional banks. They will also be active buyers of existing public debt, in some instances putting an effective floor on the market. They are part of a larger shift in capital formation from public sources of finance to private. Over the near term, Private Equity funds will be active as acquirors of minority stakes in public companies (PIPEs) because of the relative transparency and ease of execution. Take-private transactions could also see an increase, as volatility in the public markets outpaces declines in valuations in the private markets.

The E&Y report assess the challenges and opportunities in several sectors, including: advanced manufacturing and mobility; consumer; energy and resources: power and utilities; financial services; government and public sector; real estate, hospitality and construction; health sciences and wellness; private equity and technology, media and entertainment, and telecom.