In Sri Lanka, much of the focus in recent times has been on one of two major concerns: the enduring aftermath of 4/21 as well as the outcome of the presidential election in November – and indeed, the prospect of a general election in 2020 will test their nerve even further.
The economy didn't survive unscathed as the Central Bank of Sri Lanka (CBSL) publication titled 'Recent Economic Developments: Highlights of 2019 and Prospects for 2020' highlights: "The growth of the Sri Lankan economy moderated in the first half of the year amidst challenges emanating mainly on the domestic front including the spillover effects of the Easter Sunday attacks."
According to the all-encompassing report, the economy grew at a slower pace of 2.6 percent in real terms in the first half of 2019 compared to 3.9 percent in the corresponding period of the previous calendar year. The unemployment rate also increased in line with subdued economic growth.
Headline inflation remained within the anticipated range "with occasional volatilities due to supply side developments." Accelerated core inflation in January is attributed mainly to a one-off adjustment in house rentals, the impact of which is expected to wear off in January 2020.
The Central Bank says it continues to shape monetary policy in a forwardlooking manner – within an enhanced monetary policy framework aimed at stabilising inflation in the mid-single digits while progressing towards transitioning to fully fledged flexible inflation targeting.
"Against the backdrop of well anchored inflation and inflation expectations, the Central Bank adopted an accommodative monetary policy stance in 2019, considering sluggish economic growth, the continued slowdown in monetary and credit expansion, and global monetary policy easing," the monetary authority explains.
However, it cautions that forward guidance on monetary policy needs to be tempered by salary increases that are in the pipeline.
Despite monetary easing, market interest rates remained high both in nominal and real terms, prompting the Central Bank to impose caps on deposit interest rates of financial institutions in April, to expedite monetary policy transmission.
CBSL elaborates: "With deposit interest rates and [the] cost of funds declining, the Central Bank removed the caps on deposit interest rates of licensed banks and imposed caps on lending rates in September, to support economic activity."
In the meantime, the external sector remained resilient amid setbacks to the tourism industry following the Easter Sunday attacks. The trade deficit contracted substantially in the first eight months of 2019 versus the corresponding term of the preceding year in the face of lower import expenditure and higher earnings from exports.
"The contraction of the trade deficit and healthy inflows to the services account helped record a surplus in the current account in the first quarter of the year, although a notable moderation in tourism earnings and workers' remittances in the second quarter caused a marginal deficit in the current account in the first half of the year," the monetary authority notes.
And CBSL reveals that "the financial account improved particularly with the issuance of international sovereign bonds… Gross official reserves increased to US$ 7.6 billion by end September from 6.9 billion dollars at end 2018."
On the fiscal front, budgetary operations weakened as reflected in the movement of major indicators in the first seven months of 2019. Government revenue declined during the period, reflecting the impact of policy measures to curtail imports of personal motor vehicles, sluggish economic activity following the 21 April attacks and delays in implementing certain revenue proposals announced in Budget 2019.
In the wake of reduced revenue and increased expenditure, the budget deficit deteriorated to 4.4 percent of estimated GDP in the seven months to 31 July – from 3.2 percent in the equivalent period in 2018 – according to the Central Bank. Meanwhile, the current account deficit widened, indicating a savings crunch in government.
The primary balance (i.e. the difference between revenue and non-interest expenditure) resulted in a deficit in the first seven months of 2019, reversing the surplus maintained in the two years prior.
As for the government's structural reform programme – which is supported by the Extended Fund Facility (EFF) of the IMF – upon completion of the sixth review, the seventh tranche under the facility was disbursed in November.
Outlining recent developments and its outlook, the global lender notes: "The Sri Lankan economy is gradually recovering from the severe impact of the Easter Sunday terrorist attacks. Real GDP growth was revised to 2.7 percent in 2019, from 3.6 percent at the fifth review, and is expected to strengthen to 3.5 percent in 2020 as tourism and related activities normalise. The slowdown in growth and decline in imports have significantly impacted fiscal revenues."
The IMF also observes that "the authorities remain committed to complete the EFF supported programme despite recent setbacks."
"While the fiscal targets are no longer within reach due to the significant revenue shortfalls after the attacks, they are taking corrective actions to mitigate the fiscal underperformance. The end-June net international reserve target was met and CBSL is committed to rebuild reserves while allowing for greater exchange rate flexibility," it adds.
With regard to the key challenges ahead, the International Monetary Fund remarks: "The Sri Lankan economy is gradually recovering, supported by the authorities' security and policy efforts to mitigate the impact of the attacks. Nevertheless, the economy remains vulnerable to shocks given high public debt and low external buffers, with higher downside risks since the attacks amid heightened external and domestic uncertainty."
It is the view of the IMF that "sustained policy discipline and efforts to rebuild reserve buffers remain critical to address Sri Lanka's vulnerabilities and strengthen the economy's resilience, while supporting investment and growth."
Turning to CBSL's most recent Monetary Policy Review, the Monetary Board of the Central Bank decided to maintain policy rates at prevailing levels.
Moreover, CBSL states: "The global economic outlook continued to deteriorate largely on account of trade tensions and geopolitical uncertainties, while the global inflation outlook remained subdued with weak demand and low commodity prices. The weak global growth momentum and dampened inflation dynamics have paved [the] way for central banks of many advanced as well as emerging market economies to become increasingly accommodative."
In addition to these pressing economic concerns, politics has also played a part in shaping the course of the nation's short to medium-term development agenda – especially in the light of the all-important presidential poll held in November.
Regardless of its outcome however, the foremost listed companies in the island will have to continue to surmount numerous barriers as they did in financial year 2018/19. To this end, the latest edition of the LMD 100 sheds light on the performance of the 10 leading listed entities, which together comprise the Leaderboard.
Hayleys remains the highest ranked corporate in the LMD 100 by virtue of reporting a consolidated revenue of Rs. 219 billion for the year ended 31 March 2019 with its top line expanding by 34 percent year on year.
However, the leading conglomerate's profit after tax (PAT) dipped by 16 percent from the prior year to 2.8 billion rupees in the year under review.
In a communiqué issued in March to coincide with the release of the group's 2018/19 annual report, Hayleys attributed its constrained bottom line performance to increased net finance expenditure, which is "largely as a result of rising interest costs, consolidation of finance costs of Singer (Sri Lanka) and acquisition costs of recently acquired businesses."
Consumer and retail, transportation and logistics, purification products, hand protection, agriculture, plantations, textiles, leisure, industry inputs and eco solutions account for Hayleys' primary business segments.
In the 2018/19 financial year, 30 percent of the group's revenue stemmed from the consumer and retail sector, which owns and operates consumer durables player Singer (Sri Lanka), and represents the global brand Procter & Gamble.
Transportation and logistics accounted for a little over a fifth of Hayleys' revenue in the period under review. With a strategic focus on pursuing transformational growth opportunities in 2018/19, this segment witnessed the launch of its B2B platform Advantis Ultra and the acquisition of courier service provider Citypak.
Ten percent of the group's top line reflects the contribution of purification products, which relate to the manufacture of coconut shell based activated carbon, as well as water and waste purification systems. In financial year 2018/19, the segment sought deeper penetration of US and European markets, alongside CIS countries, China, Africa, Southeast Asia, South America and the Middle East.
In Hayleys' 2018/19 annual report, Chairman and Chief Executive Mohan Pandithage informs shareholders that "revenue growth was broad based with all sectors contributing positively despite moderating economic growth in our domestic and export markets."
Outlining future prospects, he asserts: "The shift in growth to regional markets and a growing number of bilateral trade agreements points to opportunities for growth in markets located closer to the country, with the ability to leverage speed to market models and historical relationships. Escalating trade tensions between the US and China also point to growth opportunities in advanced economies as global brands look to diversify supplier bases."
"The group will continue to take strategic and focussed measures aimed at rationalising finances; however, as a group we are ready for a challenging macroeconomic environment," he states.
A 19 percent year on year uptick in revenue – to Rs. 178 billion – means that LOLC Holdings (LOLC) retains the number two spot in the 2018/19 LMD 100. Moreover, the highly diversified financial services heavyweight's post-tax profit of 19.6 billion rupees (up 2% from the prior year) is the highest in this edition of the LMD 100 – in addition to which LOLC crossed the Rs. 1 trillion mark in assets.
LOLC's major group segments include financial services, manufacturing and trading, long-term and general insurance, plantations and power generation, and leisure and entertainment.
Financial services accounted for the lion's share (81%) of the group's revenue in the period under review amid ongoing forays into international markets to sustain its growth momentum.
This sector includes three local financial services institutions – viz. LOLC Finance (LOFC), Commercial Leasing & Finance (CLC) and LOLC Development Finance (LODF) – with the latter's bottom line being impacted by economic issues in the microfinance sector as confirmed by Deputy Chairman Ishara Nanayakkara in the group's 2018/19 annual report.
He remarks: "Against this backdrop, LOFC, CLC and LODF proactively realigned their short-term strategies to focus on collections and recoveries with a conscious decision to control lending…"
"Local operations took a judicious approach against the considerable macroeconomic pressures in the year under review and opted for a policy of consolidation, reinstating the group's international investments," Nanayakkara adds. And he believes that the LOLC group "is poised to reach its vision of becoming a global player with a multi-currency, multi-geographic microfinance and SME platform in the future."
As for LOLC's other major operating segments, manufacturing and trading contributed to 13 percent of its consolidated revenue in 2018/19, while long-term and general insurance accounted for four percent. Meanwhile, plantations and power generation, as well as leisure and entertainment, made a contribution of one percent to the conglomerate's top line. Looking ahead, LOLC's Group Managing Director and CEO Kapila Jayawardena envisions a future strategy whereby the conglomerate "will continue to focus on the SME and microlending sectors, and look to harness the dividends from its overseas investments."
Commercial Bank of Ceylon (ComBank) recorded nearly Rs. 140 billion (up 20% compared to 2017) in income for the year ended 31 December 2018 to secure third place in the latest LMD 100. This means that ComBank has moved up two spots from its ranking in the prior year. Meanwhile, the bank's bottom line of 17.9 billion rupees in 2018 reflects a year on year increase of seven percent.
In the calendar year under review, ComBank generated 85 percent of its revenue by way of interest income, and nine percent from fee and commission income.
Commenting on ComBank's financial results in 2018, Chairman Dharma Dheerasinghe states that "the bank turned in a robust performance in all key sectors while staying on plan and within budget in spite of an environment that was continually in flux."
In addition, he notes that the bank "navigated through the challenges posed by higher impairment provisioning arising from changes to accounting standards, increased capital adequacy requirements arising from Basel III, volatile and rising interest rates, a shortage of liquidity and the steep depreciation of the rupee."
ComBank's Managing Director and CEO Sivakrishnarajah Renganathan attributes limited growth in group PAT to "the debt repayment levy paid since October  and increased taxation on financial services due to the revocation of a substantial portion of the tax concessions allowed in the past."
He is also on record saying that "profit retention remains paramount for banks given the ever increasing capital requirements arising from Basel III implementation and higher impairment provisioning due to SLFRS 9 adoption. Yet, the regime of taxes imposed on banks has a significant impact thereon."
Another leading representative of the banking sector, Hatton National Bank (HNB) is placed No. 4 in the 2018/19 edition of Sri Lanka's leading listed entities. Its consolidated income rose by 15 percent on an annual basis to surpass Rs. 138 billion for the year ended 31 December 2018. HNB's post-tax profits grew in tandem with this and recorded 19.1 billion rupees (up 14% year on year) for the calendar year.
Chairman Dinesh Weerakkody describes 2018 "as a year marked with many challenging policy changes globally and domestically."
He highlights the fact that rising interest rates in the US posed challenges to emerging markets as capital inflows slowed, leading to balance of payments and exchange rate pressure in emerging economies.
"Inaction on climate change remains a key concern as many economies including our own deal with its impacts, which include declines in agriculture sector output, increased costs of disaster recovery, food supply chain disruptions, and knock on effects on industry and commerce," Weerakkody cautions.
Interest income accounted for 84 percent of HNB's top line in 2018 while fee and commission income, and insurance premium income, registered eight and five percent respectively.
"Net interest income increased by 20 percent, supported by portfolio growth of 17.2 percent and increased net interest margins, reflecting both rising interest rates and careful attention to pricing risk. Fee and commission income increased by 13 percent albeit below expectations due to the fiscal measures imposed to curtail imports," HNB's Managing Director and CEO Jonathan Alles explains.
He goes on to note that HNB's corporate banking business was driven by "customer relationships, combined with a relevant portfolio of products that enabled delivery of customised solutions," while citing specialised offerings such as trustee and custodian services, and cash management, as drivers of fee income in 2018.
In terms of HNB's retail banking business operations, Alles notes that "personal loans and leasing were the highest contributors to growth of the retail loan book." As for 2019 and beyond, he observes that the major concerns will include high interest rates, a weaker rupee, tighter liquidity, government consumption and political uncertainty.
"We expect our operating environment to present challenges, and have put in place strategies and processes to drive performance towards realising our 'Vision 2020.' On a positive note, we expect our exports to strengthen as the rupee becomes more competitive, and the decline in oil prices will also support both the trade deficit and an easing in inflationary pressures," Alles concludes.
John Keells Holdings (JKH) drops to fifth place (from No. 3 in 2017/18) in the latest LMD 100 rankings. Whereas the highly diversified group's top line rose by 12 percent year on year to almost Rs. 136 billion, PAT slumped by 30 percent to 16.2 billion rupees in 2018/19 from Rs. 23.1 billion in the preceding year.
The group's main sources of revenue include the retail, leisure, transportation, consumer foods and financial services segments.
With reference to the conglomerate's retail business, which accounts for the bulk (41%) of consolidated revenue and primarily encompasses supermarkets, its Chairman Krishan Balendra informs: "The refit and rebranding of all outlets was completed by November 2018, and the new 'Keells' brand was formally launched during the year under review."
As for the leisure sector, JKH's city hotels had a tough financial year and according to Balendra, this was "predominantly due to the increase in room inventory within Colombo and the… political developments within the country, which impacted MICE (meetings, incentives, conferences and exhibitions) and corporate travel during the reporting period."
He continues: "The Sri Lankan resorts segment maintained average room rates and occupancies in the year – despite the political volatility that affected the country, and the intense competition from both graded and informal sectors particularly in the coastal areas of the island."
In the financial year ended 31 March 2019, the Port of Colombo and South Asia Gateway Terminals (SAGT) – which come under the umbrella of the group's transportation arm – recorded a year on year volume growth of 11 percent, Balendra notes.
"Revenue and profitability of the group's bunkering business improved as a result of a six percent growth in volumes and an increase in base fuel prices during the year. The Hambantota Port presents opportunities for expansion of the business, which can have a positive impact on overall bunkering volumes of the group," he adds.
The triumvirate of banks on the LMD 100 Leaderboard is completed by Sampath Bank, which retains its No. 6 ranking from the prior year. Although the bank's bottom line contracted by one percent, revenue increased by 25 percent for the year ended 31 December 2018 – to almost Rs. 122 billion.
Nevertheless, Chairman Channa Palansuriya foresees the pace of change in the banking sector to intensify further in the medium term.
He believes that "a framework of stable and consistent business policies is the first step towards creating a conducive environment, for local businesses including the banking sector to grow and continue to prosper in the long term," whilst also noting that Sampath Bank is poised to achieve a one trillion rupee balance sheet by 2020.
Turning to the year that was, Managing Director Nanda Fernando opines that 2018 may have been one of the most challenging periods in recent history: "We saw global economic growth being moderate against the backdrop of weakening international trade and investments, as well as escalating trade tensions among major economies.
"Low economic activity, the widening trade gap and the sharp depreciation of the rupee were the other major distress points for the local economy in 2018," he declares.
A broad based lending approach and efforts to take advantage of higher gold prices to grow the pawning portfolio are credited for the expansion of Sampath Bank's retail advances portfolio.
And Fernando reveals that "the corporate loan book too continued to grow throughout the year amidst the consistent-demand from the financial services and renewable energy sectors … On the deposits side, we continued with our strategy to mobilise mainly low-cost funds primarily to drive CASA (current account savings account) growth."
In the words of the Managing Director, Sampath Bank's immediate priority is to secure its place as the leading digital bank by 2020, to which end its long-term strategy is to be reinvented as "the country's top technology company providing financial solutions for the mass market."
Dialog Axiata also stays put in the 2018/19 rankings to occupy seventh place in the latest list of Sri Lanka's leading listed entities. The telecommunications company's revenue surpassed the Rs. 100 billion mark in 2018 (up 16% year on year) although it suffered a 31 percent drop in PAT, which stood at 7.4 billion rupees for the period under review.
In the year ended 31 December 2018, Dialog's mobile, fixed and broadband, and television business segments contributed 79 percent, 14 percent and seven percent respectively to the group's consolidated turnover.
With respect to the mobile business segment, Dialog attributes revenue growth to mobile data, international business and digital services. Meanwhile, fixed telephony and broadband revenue growth is reported to have been driven by the fixed home broadband segment due to aggressive subscriber acquisition, supported by the expansion of LTE network coverage and transfer of the group's international wholesale business to Dialog Broadband Networks in 2018.
Chairman Datuk Azzat Kamaludin points to a subscriber market share growth of 0.5 percentage points, positioning Dialog as the fastest growing operator. In addition, the telco's mobile subscriber base expanded to 13.8 million Sri Lankan residents.
Furthermore, he asserts that "the Dialog group continues to be a significant contributor to the country and the communities in which we operate by way of remitting a total of Rs. 34.1 billion to the Government of Sri Lanka (GoSL) during the financial year ended 31 December 2018."
"Total remittances included direct taxes and levies (Rs. 8.5 billion), as well as consumption taxes collected on behalf of the GoSL (Rs. 25.6 billion)," he adds.
In aggregate terms, Dialog had invested US$ 2.5 billion by the end of 2018, thereby "delivering on its commitment to invest in technology to support communities and society, and build a digitally inclusive Sri Lanka," Kamaludin's statement in the telecom giant's 2018 annual report notes.
Meanwhile, Group Chief Executive Supun Weerasinghe informs shareholders that Dialog invested 30.6 billion rupees in network related investments with mobile 4G coverage reaching 91 percent of the population while 4G fixed broadband reached two-thirds of Sri Lankan homes.
In 2018, Dialog upgraded over 20 percent of its fixed 4G base stations to '5G ready status' by deploying Massive multipleinput multiple-output (MIMO) technology enabling transmission at 5G speeds upon the licensing of commercial 5G services.
"We plan to upgrade the remaining base stations over the upcoming years by investing in the technology, and working with the Telecommunications Regulatory Commission of Sri Lanka (TRCSL) and Ministry of Digital Infrastructure to empower Sri Lanka's socioeconomic transformation," Weerasinghe maintains.
Moreover, he affirms that "cybersecurity and data privacy will be key priorities that have to be driven at a frenzied pace to measure up to global threats, which include money laundering and identity theft, and increasing expectation of civil society for the policing of communication networks."
The No. 8 slot in the 2018/19 LMD 100 goes to a new entrant in the rankings – Melstacorp – whose revenue (nearly Rs. 99 billion – up 121% year on year) was derived from diversified, beverages, plantations, telecommunications and financial services business segments.
In terms of the diversified sector (which accounts for 59% of its consolidated revenue), with the group holding exceeding 50 percent, Aitken Spence – which has been an associate company of the group since the 1990s – completed its first full year as a subsidiary of Melstacorp. The Collision Repair Centre at Melsta Logistics, textiles, power generation, business process outsourcing, IT, leisure, and media and creative services also feature as part of this business segment.
Commenting on the beverage sector, which sourced 31 percent of group revenue in financial year 2018/19, Chairman Harry Jayawardena says: "We have noted a substantial decrease in alcohol volume during the year and as a result, our tax contribution to the state was reduced."
As for the plantations segment, the tea industry "was affected by the weak economies, and political climate in most Middle Eastern countries and some of the other main tea importing countries," according to Jayawardena, in addition to which "rubber production decreased in 2018 when compared with the previous year due to adverse weather, which prevailed during most part of the year, and smallholders not tapping due to poor prices."
Melstacorp's chair is of the view that "the plantations industry is faced with continuous challenges such as steadily rising cost[s] of production due to high wages and input costs, inconsistent prices, a diminishing labour force and… rapidly changing weather patterns."
Telecommunications and financial services, both of which accounted for three percent of consolidated revenue in the year ended 31 March 2019, are represented by Lanka Bell and Continental Insurance respectively.
Jayawardena discloses: "The telecommunication industry is grappling with declining bottom lines due to low pricing, high taxes, and ever increasing operational and capital expenditure. We continue to look at the most desirable options to exit this industry."
A 22 percent year on year increment in revenue to over Rs. 97 billion enables Carson Cumberbatch to advance by two notches – to ninth place – in the LMD 100 for financial year 2018/19.
As part of his message in the group's annual report, Chairman Tilak de Zoysa claims that operating conditions relieved somewhat in the major sectors – viz. beverage and oil palm plantations, which contributed to 46 percent and 30 percent of the diversified entity's top line respectively.
Accordingly, he explains that beverage sector volumes "improved with the tourism boom coupled with the growth in our export business"; but towards the end of the period under review, "beer taxes were increased by 12.5 percent when compared to a lower 7.5 percent increase in arrack taxes whilst taxes on popular extra special arrack remained unchanged. These changes could negatively impact our volumes in the coming year.
He outlines policy consistencies, economic stability and the gradual growth in tourism, as being crucial to strengthening the revenue and profitability of the beverage sector.
The oil palm plantations segment "reemerged with a recovery from the past two years' drastic El Niño weather conditions, witnessing a bumper crop in the first six months of financial year 2018/19," says the chairman, who adds that "although volumes improved, prices within the sector were negatively impacted due to lower soybean prices resulting from US-China trade barriers with crude palm oil [CPO] prices reaching a 10 year low."
In the oils and fats sector (which accounts for 23% of consolidated revenue), a decline in the price of the main feedstock (i.e. palm kernel) is ascribed to decreasing prices of lauric oils. De Zoysa elaborates: "This price decrease along with a dedicated supply from our own upstream plantations in Indonesia enabled our plant to increase its utilisation, resulting in increased production and sales of specialty fats during the year."
Meanwhile, there was a considerable narrowing (72% year on year, to be precise) of Carson Cumberbatch's after-tax profits in the year under review, which is primarily attributed to a one-off income in the 2017/18 financial year and the effects of changes to accounting standards.
Bottom line constraints come into play in the case of Bukit Darah as well, which is the ultimate parent and controlling entity of Carson Cumberbatch.
Chairman Hari Selvanathan stresses that the drivers of this lower profit were "a change in accounting standards (i.e. the adoption of SLFRS 9) that affected the portfolio and asset management bottom line, and lower CPO prices that reduced the operating profit of the oil palm plantations segment."
"Weakened economic growth and consumption, an unstable political environment, tight monetary policy and high sovereign debt repayments have slowed down the investment backdrop of Sri Lanka," he further explains.
Growth in the oil palms entity's leisure sector has also remained muted, according to Selvanathan.
Nonetheless, Bukit Darah's revenue of slightly over Rs. 97 billion denotes a 22 percent hike compared to the prior year and sees it round off the top 10 listed corporations for financial year 2018/19.
When considered in aggregate terms too, while registering a revenue increment of 25 percent compared to 2017/18, the LMD 100 Leaderboard has been pegged back in the context of its cumulative bottom line, which has declined by eight percent year on year in the period under consideration.
The mood in the boardrooms of the largest listed corporate establishments in Sri Lanka therefore, appears to be one that mirrors what is an overcast operating environment. And we're inclined to add that financial year 2019/20 may not see a reversal of this as the business community grapples with the 'wait and see' sentiment on the part of both consumers and investors amid the 'twin election season.'
On the other hand, and as far as business prospects in the near term are concerned, the good news is that the likelihood of concessions and incentives promised during the presidential election campaign coming to pass will bring temporary respite at the very least to the nation's engine of growth.
Calendar year 2020 could well be make or break for the private sector.