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Srilanka economy sector analysis

Srilanka economy sector analysis

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Published by Dilupa Tharaka
by NDB stockbrokers
by NDB stockbrokers

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Published by: Dilupa Tharaka on Jun 15, 2011
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02/18/2014

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   S  r   i   L  a  n   k  a   E  q  u   i   t   i  e  s
 Analysts – Ranmini Vithanagamaand Waruna SingappuliDate – 06.05.2011
Would short term focusspoil long term growth?
The growth thus far was strong and comprehensive
Sri Lanka’s economy grew at 8% in 2010, with impressivegrowth rates posted for all three sectors. Agriculture sectorbenefitted from increased land availability and highercommodity prices, while industry sector was boosted byconstruction and manufacturing activities. The tourismsector and transportation sector supported the service sectorperformance.
…But some concerns do remain
Inflation rose to 9.8% in April 2011, amidst supplyshortages in food and vegetables, and a rise in crude oilprices, and lately, excess liquidity in the market.The trade deficit in 2010 deteriorated 67% compared to thatin 2009, amidst a strong pick up in imports.
For a growth beyond medium term…
We believe that Sri Lanka could be more efficient in theimplementation of large scale projects, and pursue avenuesof diversifying export earnings and substitute selectedimports where feasible for a sustainable growth beyond 3-4years.
Equity market – we remain positive …
We remain bullish on the equity market, although webelieve that investment decisions based on logic rather thanspeculation is vital to sustain the positive momentum. Westill expect the ASPI to reach 12,000 levels by 2013, but donot believe the exceptional gains witnessed in 2009 and2010 are feasible in the immediate future.
 
However, for long term growth, the market needs to expandfurther, while improving liquidity and introducing effectivemeasures to curb manipulation.
 
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02468102008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3%
 
Sri Lanka’s Marco Economic Performance in 2010 – Best since 1978
Sri Lanka posted a Gross Domestic Product (GDP) growth of 8.0% in 2010, inline with our forecast. The growth was ahead of IMF estimates of 7.0% and thesecond highest since independence. The agriculture, industry and services sectorcontribution towards GDP was 12%, 29% and 59% respectively.
Source: Department of Census and Statistics
Agriculture Sector – Lives up to expectations
The agriculture sector posted a growth of 7.0%, compared to 3.2% in 2009.The 13.0% growth in the tea sector was attributed to a rise in production to arecord high of 329 Mn Kg due to favourable weather conditions in January-October period. The tea prices also continued to remain robust throughout theyear. The 12.7% growth in the rubber sector was mainly supported by an increasein average rubber prices (a 91% increase in RSS 1 category). Despite heavyrainfall in 2010Q2 and 2010Q4, production rose 12% YOY to 153 Mn Kg.Meanwhile, a 13% increase in the sown and harvested paddy land (with theresumption of cultivation in Northern and Eastern Provinces) helped a rise of 17.8% in paddy production.Quarterly GDP Growth Rate
 
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-20 -10 0 10 20 30 40 50CoconutLivestock FishingPaddyMinor Export CropRubberTea%
 
Source: Department of Census and Statistics
Thus far in 2011, we have seen a change in global socio-economic dynamics.The middle-eastern crisis and the continued rise in commodity prices,particularly crude oil, are likely to have a bearing on tea and rubber prices andglobal demand in 2011.Nevertheless, taking in to account strong global demand and productionshortfalls in India, we believe Sri Lanka’s average tea prices would likely remainabove Rs 385.00 per Kg over the next 3-6 months. Further, according to theInternational Rubber Study Board, the global rubber demand (synthetic andnatural) is likely to rise 7% in 2011. Automotive demand mainly from China anda pickup in the auto industry in the US would likely help maintain rubber pricesglobally (despite woes among Japanese auto manufacturers). As such, we expectrubber prices to remain around Rs 600 – 650 per Kg levels in 2011.At present, a significant level of expenditure is incurred in terms of subsidies tosupport the agricultural output. For example in 2008-2009, nearly Rs 65 Bn wasspent on fertilizer subsidies, according to government sources. Increased use of technology and equipment in cultivation and harvesting of paddy and thefisheries segment would help reduce higher costs associated with utilizing labourand increase productivity, thereby allowing for a reduction in subsidies bill.Growth in Agriculture Subsectors 2010

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