Roll the dice on sentiment now

Investor confidence was boosted by President Ranil Wickremesinghe’s recent remarks about the IMF bailout during a forum of tea factory owners in Colombo. This was made on top of comments of inflation “peaking”, tourism rallying, predictions of a decent crop yield to be seen. While there are protests being staged against the recent tax increases, to come to be law mid-November with the budget being passed, sentiment remains in a dicey place.

Inflation in Sri Lanka’s capital city of Colombo decreased from 69.8% in September to 66% in the 12 months that ended in October 2022, according to figures from the state statistics office. Food costs also decreased by 2.0% during that time.

The closely-followed Colombo Consumer Price Index decreased by 0.4% in absolute terms to 243.8 points in October. In the year leading up to October, the food price index increased by 85.6%, while the index decreased by 2.0%. Investor mood improved as a result of these developments, according to stock market analysts.

The Colombo stock market has seen record net foreign inflows with year to date figure reaching Rs. 18 billion on Thursday, highest since 2013. Local investors who turned bullish from August onwards have lost heart and the optimism of late. Governance as well as upcoming 2023 Budget are among reasons. The market is also starved of liquidity after the most profitable and largest listed corporate Expolanka Holdings’ parent SG Holdings apparent buyback of shares. Some are awaiting SG Holdings return to the market but local investors need to be more realistic. 

Given the low Price Earnings Ratio, most research heads and analysts are emphatic that there is great value and the Colombo Stock Exchange remains attractive. Despite the rebound since August, local institutional investors have ignored the equity market. Perhaps the money market given its higher rates may be attractive but such a phenomenon is likely to be short term. 

Nevertheless the challenge before the President Ranil Wickremesinghe regime is to unleash growth via 2023 Budget. However it appears hell-bent on jacking up taxes to a single-minded purpose of raising Government revenue. It is agreed that taxes need to be increased but the question is what has the Wickremesinghe administration done in parallel to prune the bloated public sector. Revenue raised via new taxes will certainly go to fund public sector salaries and pensions. Wickremesinghe seems to prefer asking the masses to tighten their belts instead of the public sector. Most analysts have questioned the capacity on the part of the people, especially the middle class to pay higher taxation on income. 

Whilst it is hoped that Budget 2023 will ensure credible stability and pave the way for growth, Sri Lanka will have to come to terms with a recessionary international environment in the new year. 

But from a global perspective, things seem bleak, especially given that Russia is attempting to obstruct Ukraine’s grain exports to Europe and other markets. According to market commentators, this would eventually have a negative effect on international stock markets.

With the US Federal Reserve raising rates as expected by 0.75%, unprecedented in a developed economy in this climate the sentiment is clear that the world is not so positive on the economy and the need for monetary and fiscal tightening has a case to be made. In the midst of global recession cycles syncing, such local sentiment is a breath of fresh air, however, it may be one that comes at the cost of losing out on the gamble.