Sri Lanka consumer durables demand to slow down: Fitch

ECONOMYNEXT – Demand for consumer durables in Sri Lanka, which has one of the highest sales taxes in the region, is expected to be sluggish in 2017 due to a tightening in monetary and fiscal policies, Fitch Ratings said.

“Rising interest rates, an increase in indirect taxes and currency deprecation which affects the prices of products sold by retailers could make consumer durables less affordable,” the rating agency said in a report on the sector.

However, Fitch said it believes the long-term fundamentals driving demand for the sector to remain intact amidst a rise in per capita income and a growing middle class.

The report said Sri Lanka’s consumer durables sector has been hit by unfavourable tax changes.

Value Added Tax (VAT) was raised from 11% to 15%, which would not only increase the prices of consumer durables but also affect purchasing power, as certain products and services which had previously been tax-exempt – will be taxed at higher rates, it said.

Fitch estimates that about 60%-70% of the consumer-durable revenue of Fitch-rated entities Singer (Sri Lanka) PLC (A-(lka)/Stable) and Abans PLC (BBB+(lka)/Stable) could be subject to the increase in VAT.

And most consumer-durable products are imported, exposing companies to significant foreign-currency risks.

Fitch said it expects the Sri Lankan rupee to depreciate by a further 3% by end-2017 as government takes steps to strengthen its external finances.

“Similarly, prices of plastic – the major raw material for consumer durables – could go up in 2017 amidst a recovery in oil prices,” the report said. “The discretionary nature of consumer durables means that attempts to pass on these cost escalations could weaken demand.”

However, Fitch Rating said that since most retailers sell consumer durables through hire-purchase schemes (HP), this makes high-ticket items more affordable to consumers.

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Fitch said it believes HP sales will underpin demand for consumer durables to an extent as instalment schemes can veil the rise in prices.

Interest rates – which have a direct impact on HP sales – have been on the rise, but Fitch does not expect rates to rise to the peak prior to 2014.

Fitch said it believes the shift in revenue mix to IT and the mobile segment to be more pronounced in 2017 as shorter replacement cycles and low product prices make these products more defensible in a weak operating environment compared with high-ticket ‘white goods’.

“However, a greater contribution from the low-margin IT and mobile segment will continue to dilute retailers’ EBITDAR margins,” the report said.

Fitch said it expects leverage of the two Fitch-rated entities to remain at current levels in 2017 as weak EBITDAR generation will be offset by lower investment and capex.

“We do not expect significant deleveraging, due to the weak operating environment.”

Fitch said sustained improvement in the country’s external finances – leading to an improvement in interest rates and currency stabilisation which in turn can revive demand for consumer durables – could prompt the sector outlook to be revised to positive.

But a rise in interest rates to the peaks prior to 2014, and a continuous slide in the currency which causes a further of the weak demand environment, could have negative rating implications for the sector.
(COLOMBO, Nov 15, 2016)
 

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