Sri Lankan companies expected to take a hit

Wednesday, 22 April 2020
Fitch Ratings predicts Fitch-rated Sri Lankan corporates in consumer goods retail, construction and hotels will be among the most affected by the coronavirus pandemic in Sri Lanka.
Companies in consumer goods retail and construction-related activities also have lower rating headroom than in most other sectors. The ultimate impact on ratings over the next one to two years is highly uncertain and will depend on its eventual spread, the knock-on effects of measures introduced to control it, and how long these effects last.
Our current base case is that demand for non-essential goods and services will be severely hit in 2Q20, given the economic impact of strict social distancing requirements. Even sales of essential items may suffer from supply-chain disruptions, at least in the near term.
We currently expect a gradual moderation of the impact in 3Q and 4Q – provided that the pandemic is brought under control, with a full recovery in operating cash flow at least 12-18 months away, the credit rating agency said.
Almost 50% of Fitch-rated Sri Lankan corporates operate in sectors that have ‘Moderate’-to-‘High’ levels of exposure to the effects of the coronavirus outbreak, and ‘Low’ or only ‘Moderate’ rating headroom to weather a prolonged downturn. Around 60% of companies have ‘Moderate’ to ‘High’ exposure to a prolonged weakening of the local exchange rate, because a significant portion of inputs are imported and sold domestically.
Fitch Ratings explained that the recent negative rating action on the two consumer durable retailers Singer (Sri Lanka) PLC (Singer: BBB+(lka)/Negative) and Abans PLC (BBB+(lka)/Negative) reflects its view of the weak demand for non-essential goods in the current economic environment, and potential supply disruptions stemming from a prolonged ban on the importation of consumer durables to the country.
We have downgraded Sierra Cables PLC (BB(lka)/Rating Watch Negative), as we expect it will face a prolonged decline in cash flows as both state and private-sector construction projects will be likely to face delays until economic conditions stabilise.
The government’s debt to GDP levels (which are already high) and lower revenues stemming from slower economic activity could leave little fiscal room for infrastructure development in the next two years in our view, Fitch Ratings said.