Pandemic to Cost Rated Sri Lankan Corporates LKR30 billion in Revenue : Fitch

Rated Sri Lankan corporates are set to lose around LKR30 billion in revenue in the financial year ending March 2021 (FY21) due to the coronavirus pandemic-led economic downturn, Fitch Ratings said yesterday (20). This is a 7% yoy decline in revenue compared with FY20. If the country’s two large telecom companies are excluded, the revenue loss deepens to LKR40 billion, it said. However,most corporates should recoup lost growth momentum by FY22 and generate higher revenue than in FY20.  “Our forecasts examine the effect of the March 2020 lockdown on revenue for the next 1824 months. We also refine our expectation of recovery trajectories to reflect easing socialdistancing requirements from May 2020 and gradual recovery in economic activity. Key risks to our assumptions include a second wave of infections that lead to further lockdowns and a prolonged weak global economic and travel environment,which could depress Sri Lanka’s economy for longer than we expect,” the rating agency said. Further, Fitch stated that they expect Sri Lanka’s real GDP to contract by 1.3% in 2020 due to the pandemic, worsening from their 24 April 2020 forecast of a 1.0%contraction. “This follows midto low singledigit economic growth in the last five years. However, GDP growth should rebound to historical levels in 2021,with 4.0%growth.The weakened operating environment will continue to dampen demand and challenge the nearterm operating performance and liquidity profileof most of our rated corporates,” it said. Fitch has taken negative rating action on 30% of the corporates in its portfolio to reflect the impact of the pandemic, with the majority of these entities remaining on Negative Outlook or Rating Watch Negative. This suggests the possibility of further downgrades should recovery prospects be delayed, although a faster recovery than we expect could lead Fitch to revise the Outlooks to Stable. “The hotel sector will see the sharpest revenue decline, with projected revenue losses of around 75% yoy in FY21, accounting for 35% of the aggregate revenue fall. Demand from domestic visitors has resumed, but we do not expect a meaningful recovery in hotel earnings until international travel normalises, which is at least nine to 12 months away,”the ratings agency said. Fitch-rated corporates’ exposure to hotels is limited and counterbalanced by exposure to more defensive sectors. However, hotels account for a disproportionate share of employment in the wider economy “We expect consumer durables retailers to account for the second-highest revenue drop; the sector represents 30% of the aggregate revenue loss. Demand for consumer durables has improved since the lockdown was lifted, primarily due to pent-up demand. However, demand may again weaken on falling disposable incomes after the initial post-lockdown enthusiasm dissipates,” it added. Fitch expects telecoms and pharmaceutical distribution and manufacturing to prove resilient during the post-lockdown period, while the fast-moving consumer goods and food and beverage sectors should record a fast recovery owing to their essential nature and defensive demand characteristics.

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