ECONOMYNEXT – Some Sri Lankan businesses could be affected while essential goods businesses could be less affected and import substitution businesses could benefit if import controls are tightened on weak external finances, Fitch said, a rating agency.
“… The weak external finances of the ruler of Sri Lanka will affect more businesses that import non-essential finished products such as consumer durables than companies that import essential finished products such as pharmaceuticals, food or clothing.” , Fitch said.
“At the same time, we believe restrictions are less likely in the short term on the import of raw materials for domestic manufacturing of essentials such as personal care, or for industries serving as substitutes for imports such as manufacturers. tires and shoes. “
Inflated reserve currency
Sri Lanka’s central bank injected liquidity (inflating the monetary reserve beyond the external monetary peg or peg), keeping interest rates and credit out of the balance of payments and causing shortages of currencies.
The central bank lost foreign exchange reserves as the liquidity was used in state wages and later in cascading bank credit, and the news money was repaid against foreign exchange reserves for imports or the payment of the debt to a non-credible connection (convertibility commitment).
The convertibility commitment has increased from around 185 to 203 for the US dollar since early 2020. After convertibility was restricted for business transactions, as well as for some capital transfers, banks began to ration dollars.
Parallel exchange rates have also increased accordingly.
Due to mercantilist beliefs – which are also taught in Keynesian universities – monetary instability was blamed on imports, and authorities attempted to control imports.
In Sri Lanka, oil is often blamed for falling currencies, although cash injections in 2015 created a currency crisis as global oil prices plummeted.
However, as the credit driven by the new liquidity moved to allowable areas, the trade deficit had exceeded 2019 levels by May 2021.
In June, some import restrictions were relaxed.
Among the companies listed by Fitch, sellers of consumer durables were probably the most affected.
“Singer (Sri Lanka) PLC (AA (lka) / Stable) and Abans PLC (AA (lka) / Stable) are the most exposed among Fitch-rated companies to more stringent import controls, due to the discretionary nature of their products. Said the rating agency.
“Tighter import controls can put pressure on the ratings of both entities, due to little room for maneuver. However, the availability of buffer stocks, some degree of local manufacturing, and potential group synergies in Singer’s case could help mitigate the short-term impact. “
Meanwhile, businesses that critics call the girlfriend import substitution businesses that have actively lobbied politicians for protection in the past to create a high-priced national “black market” could benefit.
“We expect domestic manufacturers’ sales volumes to increase in the near term as they attempt to fill the shortages created by the import restrictions,” Fitch said.
“Therefore, companies such as national tire manufacturer Ceat Kelani Holdings (Private) Limited (CKH, AA + (lka) / Stable), shoe manufacturer and retailer DSI Samson Group (Private) Limited (DSG, AA (lka ) / Stable), as well as power cable producer Sierra Cables PLC (AA- (lka) / Negative), may be long-term beneficiaries as their products serve as substitutes for imports.
The impact on alcohol, beverages and pharmaceuticals can be neutral.
“We believe pharmaceutical manufacturers and distributors such as Hemas Holdings PLC (AAA (lka) / Stable) and Sunshine Holdings PLC (AA + (lka) / Stable) are less likely to see tighter import restrictions despite significant exposure. to imports, ”Fitch said.
“This is due to the essential nature of their products and the limited availability of their products in the local market.
“Hemas and Sunshine have limited domestic manufacturing capabilities for some generic drugs, while about 90% of the pharmaceuticals they sell are imported.
“This is because domestic pharmaceutical manufacturing is at an early stage, with producers lacking short-term technological know-how and infrastructure as they attempt to fill the shortages created by import restrictions.”