Challenges for business in 2016

As small and big businesses ring in the New Year, enormous challenges are ahead according to economic projections pertaining to growth, inflation and interest rates.One of the most-followed events would be as to how US interest rates – a trend-setter for global rates – would unfold next year. Last week red flags were raised in Sri Lanka’s economy after the US interest rate cut which, even though marginal, is seen to impact on foreign reserves and trigger other repercussions.

“What was speculated for many months has happened now and we could see an outflow of foreign funds,” W.A. Wijewardena, economist and former Central Bank (CB) Deputy Governor, was quoted as saying in a Sunday Times report.The US has been keeping interest rates low and unchanged over the past seven years but speculation has been rife in the past 18 months of a possible hike, which eventually happened last week.
Low interest rates saw US investors plough their money in high interest levying, emerging markets including Sri Lanka.

Economists have warned of an overheated economy particularly since the Government has reversed some tough economic reforms which would, even though unpalatable to the electorate, have put the budget deficit on even keel and curbed spending.Among the concerns to the economy, as listed by top economist Saman Kelegama in comments reported in this page, is that the flow of remittances has reduced in 2015 against 2014 and there is lower demand for overseas labour from the Gulf owing to lower oil prices which results in less prosperity with the net result being a widening of the balance of payments deficit.

Foreign reserves will be under severe strain with a large slice going to pay debt and repayments amidst reduced inflows. This would further put pressure on the exchange rate and according to some financial experts could see it hitting the 150-rupee mark vs the US dollar in mid-2016 from Rs. 142-143 this week. “You can prevent the depreciation by making use of your foreign reserves but it is counterproductive and unsustainable,” Kelegama has said.Among other scenarios emerging in early 2016 is that the Central Bank (CB) will be under pressure to increase rates. The CB’s Monetary Board is meeting on Wednesday to discuss trends in December and its announcement on policy (interest) rates for January is being keenly awaited by the markets and would set the tone for business next year.

A hike in policy rates would signal an increase in lending rates by commercial banks. In recent weeks, banks have been offering higher rates on fixed deposits to raise money for rising credit demand. Higher interest rates and a depreciating rupee would reduce imports while efforts to seek an International Monetary Fund (IMF) stand-by facility as a buffer against low foreign reserves could see some hard bargaining.The IMF has been concerned about the rising fiscal deficit and dropping revenues particularly owing to the many changes made in the original Budget 2016 proposals. The fund would inevitably seek an assurance from the government that it would cut spending including welfare measures and trim the fat as a pre-condition to any form of assistance.

The mood in the stock market is also gloomy even though there were benefits from Budget 2016. Higher interest rates could see an outflow from the market by high net-worth investors and others though some brokers believe the expected increase in interest rates have been factored in the market over the past few months.Another expectation is that credit growth is likely to see a bigger entry from the infrastructure sector with some Rs.100 billion (amidst reducing demand from the consumer sector) being raised from banks over the next three years to fund roads and highway projects by the state.Perhaps the biggest challenge Sri Lanka’s economy will be handling the plantation crisis.

Regional Plantations Companies (RPCs), once making good profits, have been struggling in the past few years due to falling tea prices from reduced demand from the Gulf (battling lower oil prices and less wealth) and Russia.Tea broker Forbes & Walker (F&W) said in an analysis of trends in 2016 that a global tea shortfall and a depreciating rupee could be of some benefit to the struggling tea industry.Losses by all the RPCs is set to reach Rs.6 billion in 2015, double that of 2014’s Rs. 3.4 billion loss. Some companies were contemplating looking for buyers while others are being sustained on a mixture of profits from other crops (rubber prices have also fallen) and bank loans. Recently workers from Mackwoods Group plantations protested in Colombo outside the group office over wage demands and delayed payments.

In the meantime, the demand for a wage hike is increasing with pressure mounting on plantations. Minister Lakshman Kiriella at a meeting in Kandy, where there are many plantations, is reported to have stated that the Government will take over plantations if the wage hike is not given. That prompted comments, through another media report, from Plantations Minister Navin Dissanayake that he was unaware of any such move by the state.Tea is still one of the mainstays in the economy and how the government handles the plantations that is facing one of its worst-ever crises, remains to be seen.

A global tea shortfall should in normal circumstances have spelt joy to an industry desperately yearning for higher prices. However, as F&W points out, a weak Russian currency, turmoil in West Asia and other negative economic factors is curbing any optimistic view of the tea sector.
With oil production in the US rising, crude oil prices are likely to fall further from already record lows of US$40-45 a barrel, further impeding any possibility of a rise in tea prices.Indeed 2016 poses many challenges to the Sri Lankan economy.