Retail businesses will likely be the fastest to recover from the coronavirus induced economic slowdown, says Dilshan Wirasekara, Director and CEO, First Capital.
Other sectors like the worst-hit tourist trade will take longer. Although there are fears that the stimulus measures introduced b government to cope with the crisis will stoke inflation, Wirasekara believes the regulator has enough tools to prevent inflation getting out of control.
“In such a situation the Central Banks have a number of tools that they are likely to use to slowdown inflation which may invariably affect growth, slowing down overall demand as well. The first line of defence for Central Banks is through open market operations where they reduce liquidity on a daily basis. This may lead to higher interest rates and slower growth but is likely to mop up liquidity and cap inflation. Second option would be to raise reserve requirements for banks while the third option is to increase policy rates. The second and third options are surely used to aggressively control inflation in the system,” he said in an interview with the Daily News.
Q: What are the worst affected sectors of the economy as a result of the economic freeze triggered by the coronavirus outbreak and how do you assess their chances and speed of recovery, when the pandemic is brought under control?
A: Almost all sectors of the economy are affected when an economy goes into this kind of a freeze on all economic activity. Tourism and construction/real estate development are two of the key areas of the economy that are likely to be significantly affected. With the current freeze of global travel even if the outbreak eases off, it will take a couple of months for global travel to normalize as the virus has spread to almost all the countries around the world. Therefore, for global travel to normalize the outbreak will have to be controlled in most of the countries. Tourism may at least take about 9-12 months to normalize.
Construction and real estate development are another area of significant impact as the world goes into recession. Housing and real estate products may dip amidst the lack of demand. Therefore, even construction and real estate development may take as much as 12-18 months to normalize. With global demand likely to get impacted, the apparel sector may have a sizable impact with large global apparel retailers likely to provide less orders due to lack of demand in the developed countries. They may be looking at the next season in relation to placing orders. Thereby, probably six months is the likely timeline for recovery. A similar situation is likely in the Banking and Diversified Financials sectors. The Government moratoriums and the policy rate cuts, and the relaxation of capital adequacy levels may have somewhat of a partial setting off effect, but the outlook is significantly negative with most SMEs struggling. Six to nine months is likely to be the most optimistic timeline to see signs of recovery in the banking and financial services after a major hit in the near term. Retail sector of the economy with high level of exposure to Food, Beverage and Tobacco are likely to have the fastest recovery in the economy.
Q: Which listed companies are most likely to be affected? Which are the ones heavily indebted and with weak cash flows and the ones best placed to withstand the crisis?
A: All hotel sector companies are likely to be evenly impacted by the crisis. The hotel groups led by Aitken Spence Hotel Holdings, John Keells Hotels, Asian Hotels and Properties and Serendib Hotels are likely to have significant impact due to the current pandemic.
Construction and real estate development companies are likely to undergo cancellations in their existing projects. They also will be unable to initiate new projects considering the macro economic outlook over the next 12 months and the decline in purchasing power of investors. We believe the companies such as Access Engineering Ltd., Kelsey Developments and Millennium Housing Developers are likely to be heavily impacted.
With the moratoriums being granted by the Central Bank all Banking sector counters and Diversified Financial counters are likely to undergo a major dip in their interest income over the next six months. In addition, despite the relaxation in the recognition of Non Performing Loans (NPLs), with most SMEs likely to struggle after the end of the curfew, NPLs are anyway likely to skyrocket over the next 12 months providing significant pressure to the Banking and Diversified Financials counters to stay afloat with sufficient level of liquidity.
Q: The global recession is forecast to reduce exports, but to what extent can Asian economies like China and India, which are still expected to grow, albeit at a slower pace, act as counter-weight to the recession in the industrialized West?
A: Covid-19 is currently having a severe impact on the Western world with economies expected to dip over the next couple of quarters. But India and China are likely to recover faster and grow. However, growth is likely to be significantly lower. China is significantly interconnected with USA and Europe, as a result, the major slowdown in those economies may significantly slowdown China as well. Similarly, over the last few years, we saw major FDIs into India which generated new jobs and strong growth in India, with benefits also flowing to the region. Going forward over the next couple of years the growth in India and China is likely to be via growth in internal demand of their economies, significantly reducing the overall impact towards global growth. Exports of both countries are likely to have a significant setback with the major trading partners slowing down.
Q: How concerned are you that the latest monetary and fiscal stimulus measures, like lower interest rates and government spending/subsidies/cash handouts to companies and households could trigger an inflationary spiral? How can governments prevent inflation running out of control with so much money pumped into the system?
A: The monetary measures and the fiscal stimulus introduced by most governments are primarily focused on maintaining high levels of liquidity in the system and thereby keeping the financial institutes afloat. The significant decline in commodity prices and the likely major contraction in demand due to lower purchasing power is unlikely to create inflation in the short term. However, as businesses and individual purchasing power recovers over the medium-to-long term we believe inflation is likely to pick up.
In such a situation the Central Banks have a number of tools that they are likely to use to slowdown inflation which may invariably affect growth, slowing down overall demand as well. The first line of defence for Central Banks is through open market operations where they reduce liquidity on a daily basis.
This may lead to higher interest rates and slower growth but is likely to mop up liquidity and cap inflation. Second option would be to raise reserve requirements for banks while the third option is to increase policy rates. The second and third options are surely used to aggressively control inflation in the system.
Q: China’s economy and capital markets are recovering from the coronavirus crisis. Presumably Sri Lanka’s economy too will eventually recover. How would such a recovery look like?
A: Recovery in Sri Lanka will depend on the length of the crisis situation. Revival in the economy is likely to start from the Food and Beverage sector and the Telecom Sector.
These are basic commodities in the system which the consumers use on the daily basis.
With the businesses recommencing operations, purchasing power is likely to gradually improve among consumers where first preference of consumption is likely to be towards Food and Beverage and Telecom related services.
Thereby we expect the retail businesses with basic commodities are likely to recover at a faster pace.
Afterwards, we are likely to see financial service sector led by the Banks and the Diversified Financials starting to recover amidst the gradual recovery of the SME segment. At this stage we are likely to record new job opportunities illustrating increased demand in the system.
Q: How should common peoples’ needs be addressed? Many will not have any income in this month?
A: Central Bank has already taken a number of measures in providing different types of moratoriums. The government also has taken measures to provide funds to the poorest of the community who are registered as entitled to Samurdhi. In addition various private sector initiatives are underway to ensure that the poorest of our country have at least the basic needs.
Q: What other thoughts would you like to share as we go through the toughest economic crisis and pandemic experiences in our lives?
A: This is an unprecedented crisis and something that has no experts to tackle the different issues it gives rise to; we are all learning as we go. We must appreciate all the work that is being done by the Government, the Police and the Forces and especially the Healthcare staff to contain and reduce the risk of mass infection. Once all these measures have managed to contain the spread, and the curfew situation is lifted, taking necessary steps to restart activity would be the first major call to action. We as Sri Lankans also need to be optimistic. We as a nation have faced many challenges in the past – a 28-year civil conflict, the 2004 tsunami and even last year’s Easter bombings – and have prevailed as a nation. Have no doubt this will pass too, and we will triumph and rise again as Sri Lanka.