A YEAR OF CONSOLIDATION?

The year ahead may turn out to be one of consolidation against a backdrop of a potential economic resurgence

 

The Economic and Social Statistics 2024 report – compiled by the Central Bank of Sri Lanka – reveals that provisionally at the time of its release, year 2023 witnessed a GDP contraction of 2.3 percent in comparison to the 7.3 percent upside recorded in 2022.

And it was reported that unemployment stood at 4.3 percent of the labour force in 2023, reflecting a slight decrease from 4.7 percent in the previous year.

In its external sector performance report in October, the Central Bank stated that “expenditure on merchandise imports recorded an increase of 22 percent year on year to US$ 1,646 million in September 2024. Expenditure increased across all major import categories with the largest increases in intermediate and investment goods.”

BUSINESS SENTIMENT The LMD-PEPPERCUBE Business Confidence Index (BCI) saw considerable fluctuations during the 2023/24 financial year.

After hitting its lowest point of 63 in February 2023, the index surged to a high of 108 in April. However, it remained volatile for the remainder of the calendar year, ultimately ending at 85 in December 2023, reflecting ongoing uncertainty regarding business prospects.

Amid ongoing uncertainties, the BCI recovered to 93 in March 2024, closing the financial year on a positive note. This turnaround may have largely reflected the business community’s ‘wait and see’ approach as the country looked ahead to the election season.

Since then, the BCI has by and large continued to gain ground with the next marker being the budget for fiscal year 2025.

BUDGET 2025 President Anura Kumara Dissanayake is expected to introduce key measures designed to support diverse segments of the population and drive economic growth.

Prior to the general election, Dissanayake outlined the main components of the upcoming budget, stating: “This budget will include salary increases for public servants, allowances for purchasing school supplies for children and increased pensions for the elderly.”

The government’s budget focus is expected to be on economic relief and stability in line with agreements with the IMF. As part of its strategy, the government plans to address state salary anomalies and implement biannual wage adjustments based on purchasing power.

Dissanayake has assured that under his leadership, social spending would be allocated effectively with a focus on tackling child poverty and malnutrition while also providing enhanced support for differently able individuals.

REFORM AGENDA To the president’s relief, the IMF team and Sri Lankan authorities reached a staff level agreement in November on the economic policies required to conclude the third review of Sri Lanka’s economic reform programme under the Extended Fund Facility (EFF).

Once approved by the International Monetary Fund’s management and executive board, Sri Lanka will have access to around US$333 million in further financing.

However, the IMF has reiterated that the government must meet its conditions, which include implementing prior actions. These involve submitting a budget that aligns with the programme’s objectives and completing a financing assurances review.

This review will verify the financing commitments from multilateral partners and assess the progress of debt restructuring, ensuring that it remains on track for timely completion and meets the programme’s debt targets.

The IMF’s statement states: “The ambitious reform agenda supported by the EFF is yielding commendable outcomes. The economy expanded by an average of four percent year-on-year in the four quarters ended June 2024.”

“High frequency indicators demonstrate continued growth across all sectors with average headline and core inflation staying low at 0.8 percent and 3.8 percent respectively during the third quarter,” it observes.

Additionally, the IMF notes that “public finances have strengthened due to substantial fiscal reforms. While inflation has slowed faster than expected, ongoing monitoring is essential to maintain price stability and ensure macroeconomic stability. In light of global uncertainties, it remains vital to continue building external buffers through strong reserve accumulation.”

Meanwhile, credit rating agency Fitch observes that any improvement in Sri Lanka’s sovereign credit profile, following a successful debt restructuring, will positively impact the operating environment (OE) assessment and overall credit profiles of local banks.

Fitch states: “Sri Lanka is nearing completion of its foreign currency debt restructuring. A successful outcome, consistent with the proposed framework for local bondholders, could significantly reduce challenges for banks, thereby strengthening their financial profiles.”

“Pressures on both foreign and local currency funding and liquidity have substantially decreased, thanks to improved external sector flows and banks’ efforts to safeguard liquidity. We anticipate that banks will regain access to foreign currency wholesale funding once the sovereign’s creditworthiness is restored,” it adds.

That said, 2025 is shaping up to be a pivotal year, particularly following the election of a new administration. Hopes are high among the public that the cost of living will continue to come down with inflation projected to remain around five percent, despite the VAT increase and various external challenges.

INTERIM RESULTS A review of the latest interim results of the LMD 100 Leaderboard for the period ended 30 September 2024 suggests that Sri Lanka’s leading listed entities are showing a degree of stability with both top and bottom lines on the rise.

The collective revenue (nearly Rs. 1,727 billion) of the top 10 listed companies increased by three percent year-on-year. For the sake of comparison, at the same time in financial year 2022/23, the 10 leading lights saw a decline in turnover of 14 percent over the prior year.

As for the aggregate profit after tax (PAT) of the LMD 100 Leaderboard for the period ended 30 September 2024, the collective bottom line has improved considerably – on the face of it, at least: their cumulative PAT rose by 60 percent to a whopping 143 million rupees, compared to Rs. 90 million at the same time in the prior year.

However, four of the top 10 leading corporates reported a decline in after-tax profits. And in terms of turnover, three companies from the LMD 100 Leaderboard announced lower top lines.

Hayleys, the Leaderboard champion and diversified conglomerate, posted a 17 percent hike in consolidated income, reaching 236 billion rupees – up from slightly over Rs. 202 billion for the same period in financial year 2023/24.

And its PAT took off, increasing by 122 percent to record over seven billion rupees for the same period.

Chairman and Chief Executive Officer Mohan Pandithage comments: “With today’s global reality being one in which ambiguity and constancy of change outweighs any semblance of certainty, the Hayleys Group performed credibly to generate a consolidated revenue of Rs. 436.8 billion and profit before tax of 25.3 billion rupees.”

“While these numbers represent a normalisation from the record highs of the previous year, I believe this year, it is important to look beyond the financial statements to truly appreciate the group’s underlying achievements, which have strengthened the group’s resilience and positioned it for transformational growth,” Pandithage comments.

He continues: “While we are likely to be faced with critical choices and opportunities that require our attention, the consequences of inaction are more serious than ever. The complexity of the challenges does not mean that they are insurmounta­ble and as always, I reiterate my belief that optimism is critical for resilient and adapta­ble leadership and better outcomes, particularly in times of rapid change.”

Commercial Bank of Ceylon (ComBank), ranked No. 2 in the 2023/24 LMD 100, reported a six percent decline in consolidated income for the first nine months of its 2024/25 financial year, totalling slightly under Rs. 242 billion.

However, the bank’s bottom line saw a substantial improvement, rising by 114 percent to exceed 31 billion rupees for the nine months ended 30 September 2024 – compared to nearly Rs. 15 billion for the same period last year.

The 2023 ComBank annual report titled In Context states: “Amidst macroeconomic pressures, significant challenges surrounding impairment provisioning and diminishing profitability, maintaining a robust capital base is imperative for sustained growth and resilience.”

Managing Director and Chief Executive Officer Sanath Manatunge says: “In 2023, despite the challenges stemming from Sri Lanka’s economic revival and reform, Commercial Bank showcased unwavering resilience and adaptability. Through focussed strategies and a commitment to stakeholder equity, we navigated these transformative times, embracing reforms and innovative approaches to ensure stability and sustainable value creation.”

Third placed LOLC Holdings recorded a six percent growth in its top line, which reached 166 billion rupees for the six months ending 30 September 2024. And the group’s bottom line enjoyed a remarkable surge with profit after tax soaring by 916 percent to nearly Rs. 31 billion, compared to three billion rupees during the same period in the preceding year.

Deputy Chairman Ishara Nanayakkara says of the conglomerate’s plans for the future: “Looking ahead, we are committed to creating a more significant impact towards enhancing the quality of life of our clients with greater financial inclusion through our efforts in the financial sector.”

Hatton National Bank (HNB) reported a consolidated income of over Rs. 206 billion, marking a 20 percent shrinkage for the nine months ended 30 September 2024. However, the bank’s nine month post-tax profit rose to almost 24 billion rupees (reflecting a 26% increase compared to the same period in 2023).

Diversified conglomerate John Keells Holdings (JKH) remained profitable in the first half of its 2024/25 financial year, reporting a PAT of Rs. 556 million. Meanwhile, the group’s top line accelerated by 15 percent, exceeding 146 billion rupees compared to the same period in the previous year.

Meanwhile, another diversified conglomerate Carson Cumberbatch reported an 11 percent growth in turnover for the first half of its financial year, recording in excess of Rs. 149 billion. However, the company’s post-tax profit for the six months ended 30 September 2024 contracted by 20 percent, totalling 10 billion rupees.

For the first six months of calendar year 2024, Bukit Darah ranked seventh, reported a consolidated turnover of nearly Rs. 150 billion, reflecting a modest 11 percent increase. However, despite the top line growth, the company’s bottom line contracted by 21 percent with profit after tax recording just over 10 billion rupees – compared to Rs. 13 billion in the previous year.

Lanka IOC on the other hand, posted a notable 26 percent increase in its top line, reaching nearly 147 billion rupees for the first six months of financial year 2024/25. Despite this strong revenue growth, the company’s PAT saw a decline of 16 percent, amounting to marginally in excess of 6.3 billion rupees.

Banking entity Sampath Bank experienced a nine percent decline in its consolidated top line with income totalling slightly under Rs. 162 billion for the first nine months of calendar year 2024. Despite this shrinkage however, the bank’s bottom line soared by 50 percent growth with PAT surpassing 19 billion rupees.

Diversified conglomerate CT Holdings, ranked 10th on the LMD 100 Leaderboard, recorded a seven percent increment in consolidated revenue, reaching almost Rs. 121 billion. In addition, the company’s bottom line saw impressive growth with PAT increasing by 24 percent to surpass 3.5 billion rupees.

LMD100 OUTLOOK Based on the interim financial results for the period ended 30 September 2024, the landscape at the top of the LMD 100 Leaderboard for 2024/25 is taking shape. The numbers suggest that Hayleys could maintain its position as the top performer in financial year 2024/25, securing its spot atop the podium for a second consecutive year.

At this stage of the race to the finish line, it appears that the battle to watch could be for second place between ComBank and LOLC Holdings.