Consumer-driven rally to cool off soon with fiscal tightening: Brokerage     Follow

With monetary and fiscal tightening measures around the corner, the consumer-driven growth is largely expected to slow down, according to a research arm of a leading stock brokerage. 

During 2015, Sri Lanka’s growth to a larger extent was driven by the cheap bank credit-fuelled consumer spending which drove the economy to overheat amid high credit growth and increased currency pressures. 

However, this increase in domestic spending largely off-set the slowdown in the economy caused by the stalling of some of the mega infrastructure projects initiated by the last regime. 

“Consumer-driven rally to largely cool off in the near term with the current momentum of higher spending expected to wane in 1H’2016, led by anticipated tightening measures,” CT CLSA Securities (Pvt) Limited said in its Strategy Report for 2015. 

It is also expected that the 5-pronged strategy by the state which includes measures to curb vehicle imports will end the short ‘honeymoon’ period enjoyed by the banks and the finance companies as they built up their lending books in leaps and bounds, making use of the recovery in the credit growth. 

The host of tax concessions, state sector salary hike and the energy price reduction which came into effect in February 2015 enabled the people to stretch their consumption patterns and own assets partly through borrowed money. 

During the twelve months to July 2015, the private sector credit has grown by 21 percent or Rs.41 billion compelling the Central Bank to apply breaks to rein in a possible credit bubble. 

It was only this week Central Bank Governor, Arjuna Mahendran said he wouldn’t hesitate to tighten the rates if conditions warrant such an action. 
“Now I think private credit is faster approaching levels where we don’t want to see much more growth. By the end of the year—after Christmas is over—we have to stabilize things,” he said at media briefing this week. 

It was still unclear why the Central Bank wanted to surprise the markets in April 2015 by cutting the key policy rates by 50 basis points to a fresh historical low, knowing well that there was a long lag effect in monetary transition in the context of Sri Lanka.  

Due to lack of fundamentals, Sri Lanka’s monetary easing cycles in the past have always ended up overheating the economy and causing BoP pressures and the authorities having to intervene with tightening measures—an occurrence which happens in every 3 to 4 years. 

Economists blame the lack of a strong manufacturing culture when every easing cycle ends up with a massive import bill, putting pressure on the currency as the Central Bank resort to defend the rupee by selling its reserves. 

Nevertheless, the CT CLSA is of the belief that the Sri Lanka’s economy will be able to record a growth of 6.3 percent for the year – amongst the highest in the region – with an expected headline inflation around 2 percent levels. 

They are also of the view that the rupee which fell to its fresh record lows of Rs.141.25/30/US $ is expected to recover to Rs.139/US $ by the end of the year.   

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