Sri Lanka's financial services sector was the biggest earner for the country's stock market over its December 2011 quarter, contributing 25% to total market earnings. However, while this sector recorded a 2% year-on-year increase in earnings, it also showed a 2% drop when compared to the previous, September 2011 quarter, according to a research report by Asia Wealth Research, a unit of local stockbroker Asia Capital.
The report, titled "Sri Lanka Country Report - 2012", and based on data from the country's Central Bank, also added that earnings by this sector were followed by both the diversified and the beverage, food and tobacco sectors, each accounting for 17% of total market earnings.
It also noted that, in terms of the diversified sector, market earnings were dominated (58%) by two companies, John Keells and Aitken Spence. While, when it came to beverage, food and tobacco, the biggest earners were Ceylon Tobacco (36%), Nestle Lanka (11%), Ceylon Tea Services (9%), Ceylon Brewery (8%) and Ceylon Cold Stores (7%). Although, the report also signalled that top earners such as Ceylon Tobacco and Distilleries Company had faced declining corporate returns and, as a consequence, overall sector earnings for the quarter had been pulled down along with them.
Meanwhile, commenting on trends in the agriculture sector, the report went on to indicate that, while agriculture "continued to maintain its relevance", this was due to "backward linkages" to the industrial sector and exports rather than its import on essential goods. For example, a shift from growing potatoes and big onions, for local consumption, to maize and sesame, for export, was highlighted.
At the same time, the report also suggested that, while coconuts as an export was on the decline, the highly lucrative and in demand palm oil would, more and more, take its place as one of the country's top cash crops alongside tea and rubber. On the other hand, it was also opined that the latter, as an export, would always remain somewhat "limited".
Additionally, while signalling positive growth for the construction and the industrial sectors, mostly as a result of heightened expectation for tourism, the report also predicted that a new trend in the financial sector was a "tendency for the retail credit market and the economy's deposit base to shift towards finance companies from banking sector since former is free from the limits imposed on credit growth. Further, in this setting, medium scale finance companies that are more skewed towards meeting SME sector requirements will prosper over the major finance houses owing to the fact that credit growth of the latter is mainly channeled towards leasing and hire purchase of vehicles; and the vehicle imports are expected to fall 60% to 70% this year due to the rise in import taxes".
Further, the report was of the opinion that the "continued existence of an untenable fiscal mismatch concomitantly with one of region's highest consumer tax rate systems was the critical economic setting under which Sri Lankan governments have been planning its fiscal proposals over the years.
When austerity measures are regarded infeasible owing to socio-economic setbacks that carry with it, the persistence of high fiscal deficits averaging eight percent of nominal GDP for the past ten years along with 120% average duty implied that alteration of tax rates sans general macroeconomic planning, is incapable of curbing the fiscal deficit without exposing the economy to solvency problems...
Under this general backdrop, in 2011, government set about to curb the deficit by increasing tax rates on essential inflationary goods such as sugar, wheat flour, milk powder, etc., to which there is a degree of price inelasticity of demand attached, and on the other hand opted to lower taxes on non-essentials such as motor vehicles and consumer durables.
This is the critical terrain where a change in one factor does not fail to lead into another: high tax rates on essentials and low rates on non-essentials meant decreasing fiscal deficit at the expense of rising price levels, decreasing international competitiveness and promoting balance of payments issues. On the other, hand opting to the converse meant rising fiscal mismatch stemming from declining import tax revenue coupled with increasing cost of capital. This contradiction still persists providing an important glimpse into the future".
source - www.sundaytimes.lk
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