BUSINESS SENTIMENT

GLOBAL TURMOIL TESTS CONFIDENCE

Geopolitical tensions weigh on business sentiment despite a modest recovery 

With global crude oil prices nearing four year highs at the time of going to press, amid ongoing tensions in West Asia and the prolonged uncertainty surrounding peace negotiations, the Strait of Hormuz has remained largely constrained, depleting global energy supplies and causing ripple effects on import dependent economies such as ours.

The consequences are widespread: the fuel price hikes are likely to lead to a cost of living spiral, threatening to derail a fragile economy. 

Exacerbating the pressure on businesses and households, revised electricity tariffs came into effect on 1 April and then 11 May, driven by higher fuel costs linked to power generation. 

Against this backdrop, Sri Lanka’s official reserve assets fell by US$ 267 million at the end of April to 6.76 billion dollars. The decline has renewed concerns about the country’s economic resilience at a time when external vulnerabilities remain high.

At the same time, public anxiety is being fuelled by a growing sense of insecurity that extends beyond the economy. Rising incidents of cybercrime linked to banks and government institutions, alongside the arrest of several foreign nationals in connection with various incidents, raises concerns over digital and financial safety. 

Adding to the unease is a suspicious high profile death, which has sparked widespread speculation across the land. 

THE INDEX The latest LMD-PEPPERCUBE Business Confidence Index (BCI) rose by seven points to 148 in May – from 141 in the month prior – marking a modest recovery following the sharp decline in April. 

As for the big picture, the barometer remains 22 notches above its historic median of 126 although it sits 32 points below the 12 month average of 180. By comparison, the BCI stood at 196 in May last year. 

According to PepperCube Consultants, the May index reflects a gradual adjustment in business sentiment to geopolitical tensions and mounting external pressures. While confidence appears to be stabilising, businesses remain cautious in both their outlook and decision making, it asserts.

Offering an optimistic perspective, IMF Asia Pacific Department Director Krishna Srinivasan has stated that Sri Lanka is now in a stronger position to cushion the impact of rising energy costs, following improvements in revenue mobilisation, although vulnerabilities persist due to our dependence on fuel imports. 

PROJECTIONS Amid geopolitical tensions, the prospect of an improvement in the index appears limited in the short term. 

Persistent volatility in global markets could dampen corporate sentiment while the wider economic fallout from disruptions could take time to ease.

So uncertainty is expected to be a defining theme in the months ahead with confidence continuing to face downward pressure.

– LMD