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Thursday June 8th, 2023

Sri Lanka consumer goods face challenges, driven by essentials: retailer

ECONOMYNEXT – Sri Lanka’s consumer landscape is facing challenges in 2023, but the supermarket sector is more stable supported by essentials, a consumer goods manufacturer and retailer with a network of more than 130 stores, has said.

“Manufacturing Sector is expected to face challenges in immediate to short term in lieu of the current macroeconomic landscape,” Krishan Balendra, Chairman of Ceylon Cold Stores, which makes Elephant House branded foods and runs the Keells Super market chain, told shareholders in the annual report.

“Consumer discretionary spending is likely to continue to moderate in the short-term on the back of a reduction in disposable income, which is envisaged to hamper growth in demand for non-essential items.

“The Supermarket business is envisaged to remain insulated, despite the ongoing macroeconomic challenges, considering that essential and regular grocery and household items constitute a large portion of a consumer basket.”

In 2022 the rupee collapsed to 360 to the US dollar from 200 after two years of money printing to mis-target rates, leading to supply disruptions and 12-month inflation rising to 73 percent.

Rising inflation had led to smaller basket sizes of customers at supermarkets

Ceylon Cold Stores also manufactures ice creams and beverages.

In the first and second quarter of 2022 financial year frozen confectionery volumes had grown 31 percent in the first quarter, 6 percent in the second. In the third and fourth quarters volumes had fallen ending the year 7 percent down.

“Keeping price increases at moderate levels was a conscious strategy adopted by the group as CCS managed margins and absorbed a proportion of input cost increases to ensure relative affordability of the products as this was a key concern for customers,” Balendra said.

“Operating profits recorded strong improvement of 324% in the first half of the year, but this declined significantly in the second half of the year as household budgets were affected by increased inflation, fuel cost hikes, electricity tariffs and direct and indirect taxation.”

For the full year revenues grew 49.2 percent to 126 billion rupees in the year to March 2023, cost of sales grew 50.3 percent to 113 billion rupees, and gross profits grew 39.5 percent to 12.7 billion rupees.

Finance costs doubled to 4.1 billion rupees from 2.0 billion a year earlier.

Profits grew to 2.5 billion rupees from 2.06 billion a year earlier due to deferred tax adjustment, though pre-tax profits fell from 2.7 billion rupees to 2.2 billion rupees.

Inflation has now started to ease with monetary stability returning and some prices falling with the rupee being allowed to appreciate.

“The decrease in global commodity prices from their peak levels, lower freight costs, stabilisation of the country’s foreign exchange liquidity, appreciation of the Rupee, and improved availability of raw materials are likely to alleviate margin pressures,” Balendra said.

“The gradual reduction in interest rates and normalisation of working capital will further support profitability.

“Although the macroeconomic conditions have improved tremendously, the impact on consumer discretionary spend and overall growth remain uncertain.” (Colombo/May22/2023)

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Sri Lanka’s shares slip on profit taking and selling pressure

ECONOMYNEXT – Sri Lanka’s shares closed lower on Wednesday after four consecutive gains in previous sessions spiraled into selling interest and profit taking, an analyst said.

The main All Share Price Index was down 0.28 percent or 24.39 points to 8,722.06, this is the lowest the index has been since May 02, while the most liquid index S&P SL20 was down 0.40 percent or 9.92 points to 2,468.44.

“The market was gaining in the previous sessions and there is selling and profit taking present today, due to continuously being on green,” an analyst said.

In the previous sessions the market was seeing gains, due to lowered policy rates and low inflation stimulating buying interest and driving the sentiment up, an analyst said.

Sri Lanka’s inflation in the 12-months to May 2023 has eased to 25.2 percent from 35.3 percent a month earlier according to a revised Colombo Consumer Price Index calculated by the state statistics office.

The central bank cut the key policy rates by 250 basis points to spur a faltering economic growth as inflation was decelerating faster than it projected.

“There are gradual improvements in the market sentiment, with positive sentiments coming in from lowered policy rates and inflation,” an analyst said.

The market generated foreign inflows of 12 million rupees and received a net foreign inflow of 18 million rupees, due to low share prices and discounted shares followed by a dividend announcement.

The market generated a revenue of 554 million rupees, this is the lowest the turnover has been since May 10, while the daily turnover average was 1 billion rupees. From the total generated revenue, the banking sector contributed 120 million rupees, Diversified Banks contributed 115 million rupees and the Capital Goods Industry generated 78 million rupees.

Top losers during trade were Sampath Bank, Commercial Bank and Aitken Spence. (Colombo/June06/2023)

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Sri Lanka Treasuries yields plunge, 12-month down 318bp

ECONOMYNEXT – Sri Lanka’s Treasuries yields plunged across maturities at Wednesday’s auction with the 12-month yield falling 318 basis points, in one of the biggest one day falls, data from the state debt office showed.

The 3-month yield fell 244 basis points to 23.21 percent.

The 6-mont yield fell 339 basis points to 21.90 percent, along with the 12 months to 19.10 percent.

The short-term yield curve is inverted.

The central bank last week cut its policy rate 250 basis points in a signaling move but is not printing money to enforce the rate cut.

The debt office sold all 140 billion rupees of offered securities. (Colombo/June07/2023)

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Sri Lanka forex reserves rise US$722mn in May 2023

ECONOMYNEXT – Sri Lanka’s foreign reserves grew 722 million US dollars to 3,483 million US dollars in May 2023 from 2,761 million US dollars in April, official data showed as deflationary policy and weak credit reduced ‘above the line’ outflows.

Sri Lanka lost almost all its reserve in over two years as the central bank sold reserves and printed money to keep rates down (sterilized reserves sales) including borrowed dollars from India.

Gross official reserves fell to a low of 1,705 million US dollars in September 2022.

Sri Lanka’s central bank hiked rates in April 2022 to slow credit and also stopped printing money after it ran out of borrowed Asian Clearing Union dollars from India.

Sri Lanka’s gross official reserves are made up of both monetary reserves of the central bank and any balances of the Treasury account from loans or grants it gets.

The central bank’s net foreign reserves are still negative after busting up borrowed reserves to suppress rates. By April (before the collection of reserves in May) the central bank’s net reserves were negative by 3.7 billion US dollars.

In May alone 662 million US dollars were bought from the market, Central Bank Governor Nandalal Weerasinghe said.


No pre-determined level to stop Sri Lanka rupee appreciation: CB Governor

Borrowing dollars through swaps and busting them up, was invented by the US Federal Reserve as it was printing money and breaking the Bretton Woods system in the early 1970s.

Sri Lanka received a 350 million US dollar tranche from the Asian Development Bank and 331 million US dollars from the IMF to the Treasury for budget support.

The loans can be sold to the central bank by the government to generate rupees and spend. However, since credit is weak, not all the inflows go out of the country particularly as the central bank is conducting deflationary open market operations on a net basis.

By allowing the rupee to appreciate unlike in previous episodes of recovery in an IMF program, after a bout of money printing, the central bank is bringing down inflation – in some cases absolute prices – and restoring confidence and easing the ‘pain’ of ‘monetary policy’ or stimulus.


Why is Sri Lanka’s rupee appreciating?

Though exports are falling, tourism revenues are also picking up.

The budget support loans, tourism receipts less the reserve collected will widen the trade deficit. Building foreign reserves involves lending money to the US or other western nations and is similar to repaying foreign debt. (Colombo/June07/2023)

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