Politically explosive week amidst favourable economic conditions

Monday, 24 March 2014 01:28 - - {{hitsCtrl.values.hits}}

Sri Lanka braces for what is likely to be a politically explosive week with a crucial vote coming up in Geneva and elections to two provincial councils amidst favourable economic conditions. The twin facets of political developments and economic fundamentals weren’t lost in the research and analysis of at least one stock broking firm. First Capital Equities dedicated its commentary on its weekly review on these pressing issues. Here are excerpts

Adding to increasing pressure on Sri Lanka’s political environment, the US Senate continued to push for a UNHRC (UN Human Rights Council) resolution to conduct an independent, international inquiry into Sri Lanka’s alleged war crimes. However, it was noted that the US Senate remained divided over the issue of Sri Lanka’s war crimes with two groups of US Senators submitting resolutions and one of the two groups submitting a counter-resolution calling a domestically-grown resolution and investigation by the Sri Lankan Government into the allegations. With momentum around the Geneva resolution against Sri Lanka building up, Britain also expressed its support to vote against Sri Lanka with British officials and Commonwealth Office Ministers lobbying for support for the resolution from UNHRC member states. Raising objections to the UNHRC resolution, the COYLE (The Chamber of Young Lankan Entrepreneurs) lobbied for support from foreign dignitaries in Sri Lanka while requesting them to vote against the UNHRC resolution. Members of COYLE argued that the enactment of the UNHRC resolution will have an immediate and a long term adverse impact on the Sri Lankan economy and will dampen the country’s economic growth. However China, a member of the UNHRC, remains resolute in its confidence in Sri Lanka’s future growth prospects with the Chinese government expressing its satisfaction at the economic progress made in Sri Lanka in the post-conflict era. In a sign of China’s confidence, China continues to extend its support for Sri Lanka’s economic activities with increased participation in the country’s infrastructure projects (including the construction highways and the development of the Colombo Port) and the agreement to sign a Free Trade agreement with Sri Lanka. Notwithstanding these various political pressures emerging internationally, Sri Lanka bourse has been able to attract a significant net foreign flow demonstrating the foreign confidence mainly from blue chip counters which has been consistently deriving better returns. Despite of various external and internal factors affecting the bourse performance, the macroeconomic indicators in Sri Lankan economy has given a positive signal for both local and foreign investors to enhance their confident in Sri Lankan Bourse. According to the Department of Census and Statistics, the economic output, GDP for 4Q2013 grew by 8.2% while it rose by 7.3% for 2013. Agricultural sector, Industry sector and Services sector grew by 10.4%, 10.7% and 6.5% respectively. This indicates a growth in consumer spending and domestic consumption which will in return increase the consumer demand. Therefore we expect the corporate margins to have a positive stimulus from the GDP growth which would give sanguine directional call on the Bourse. Furthermore the inflation rate which is expected to rise moderately but at a manageable level will provide an incentive for investors to enter in to the market with an optimistic sentiment.