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Political uncertainty seen dampening investor confidence

Economy Next – 16.07.2018

By First Capital Research

ECONOMYNEXT – Although economic fundamentals are improving with low inflation, stable interest rates and improving demand in overseas markets, political uncertainty in the run-up to elections may dampen investor confidence, First Capital Holdings said.

Economic growth is expected to pick up in the third and fourth quarters of 2018 and to accelerate further in 2019, they said in a research report.

“Stronger macro fundamentals, higher investments and pickup in consumer demand is likely to increase growth in 2019E to 5.0%,” the company’s mid-year economic outlook said.

“ Potential election in 2019 may also push authorities accelerate relaxation of para tariffs which may also support stronger consumer demand,” it said.

“With stable interest rates and low inflation, we expect the stability of the economy to further improve during 2018,” the research report said.

“The stable environment is expected to slowly improve business confidence and consumer demand towards 2H2018. We believe business confidence and consumer demand are currently below average and they are expected to normalize during the period.”

However, First Capital Holdings warned that the prevailing policy uncertainty is a major deterrent which may slow down the gradual improvement.

Following the local government elections, all eyes are on polls for Provincial Councils whose terms are in the process of expiring later this year and early next.

“A further defeat for the present government may worsen the prevailing political uncertainty. But an improvement in the voter base may provide some respite,” First Capital Holdings said.

Another major factor that is creating uncertainty is the forthcoming Presidential election in late 2019.

“None of the three major political parties have announced a clear candidate who would be contesting for the upcoming elections,” First Capital Holdings said.

“It is a major deterrent for any investor. It is an important step in forecasting possible policy direction for the future in order to assess the risk for long term investments.”

The research report noted that the government’s debt repayment pressure is easing with the central bank very successful in rolling over most of the debt at lower rates and spreading them over a period to prevent any bunching of debt in the future.

It also noted that economic growth in key markets in the US and Europe is reviving and that export growth momentum has been picking up over the last few months.
(COLOMBO, July 12, 2018)