Jan 12, 2016 (LBO) - The Sri Lankan economy is forecast to grow 6 percent 2016 with fiscal proposals to stimulate manufacturing, export and construction offering growth prospects in the medium term, CT CLSA Securities said in its Sri Lanka Outlook 2016 report.
"The 2016E fiscal proposals to stimulate manufacturing, export and construction sectors are expected to be key catalysts for sustainable economic growth in the medium term," the report said.
Signs pointing to a recovery in emerging markets together with improved valuations post correction may encourage investors to revisit emerging markets, CT CLSA said.
Some of these funds may also flow into frontier markets, as investors seek diversification opportunities, the securities firm said.
"Prospects for most Asian frontier economies, including Sri Lanka are brighter than its counterparts in the Middle East and Africa, as net commodity importers."
CT CLSA sees a forward market valuation of 13x for 2016 in view of modest earnings growth of 6 percent year-on-year.
Although island's market rates low in scale and liquidity, it offers relative stability and steady growth -- the market is also relatively insulated, the report said.
The Colombo ASPI and S&P SL20 declined 6 percent and 11 percent respectively in 2015, compared with gains of 23 percent and 25 percent respectively in 2014 largely due to weak investor sentiment and uncertainty in economic and policy direction.
Foreigners were net sellers in 2015, for the first time since 2011, with a net outflow of 4.3 billion rupees compared with an inflow of 22.1 billion rupees in 2014.
Despite closing on a negative note, intra year gains were witnessed amid positive quarterly earnings (1Q2015: +3 percent YoY, 2Q2015: +14 percent YoY, 4Q2014: +12 percent YoY)
Interest rates
In terms of interest rates, if the authorities continue to keep policy interest rates stable in the near term, real rates would likely enter into the negative territory in 2Q2016E.
"Thus we expect the CBSL to increase policy interest rates by at least 50bps during 2016E to avoid negative real rates amid forecast higher inflationary pressures in 2016E."
"We forecast 12 month Treasury yields to rise 150bps during 2016E and then remain broadly stable in 2017E."
The Rupee, currently near its lowest recorded level against the dollar at 144, a drop of 10 percent in 2015, is expected to stabilize at 149 rupees by end 2016 and 153 by end 2017.
Sectors
In terms of sectors, the banking sector is expected to undergo another challenging year in 2016 with the authorities expected to tighten credit expansion, and due to increased effective tax rates which increased by 5.5 percent in the 2016 National Budget.
The manufacturing sector is expected to rebound in 2016, amid recommencement of large scale government led infrastructure projects, such as the Colombo port city project, andn the Central Expressway.
Demand for private healthcare has increased, while continued momentum of consumption spending will support the beverage, food and tobacco sector.
CT-CLSA-Sri-Lanka-Outlook-2016-06-January-2016
Medium term growth prospects for Sri Lanka market: CT CLSA
