Fitch-rated Sri Lankan corporates in consumer goods retail, construction and hotels will be among the most affected by the coronavirus pandemic in Sri Lanka.
Companies in consumer goods retail and construction-related activities also have lower rating headroom than in most other sectors. The ultimate impact on ratings over the next one to two years is highly uncertain and will depend on its eventual spread, the knock-on effects of measures introduced to control it, and how long these effects last.
Our current base case is that demand for non-essential goods and services will be severely hit in 2Q20, given the economic impact of strict social distancing requirements. Even sales of essential items may suffer from supply-chain disruptions, at least in the near term. We currently expect a gradual moderation of the impact in 3Q and 4Q - provided that the pandemic is brought under control, with a full recovery in operating cash flow at least 12-18 months away.
Almost 50% of Fitch-rated Sri Lankan corporates operate in sectors that have ‘Moderate’-to-’High’ levels of exposure to the effects of the coronavirus outbreak, and ‘Low’ or only ‘Moderate’ rating headroom to weather a prolonged downturn. Around 60% of companies have ‘Moderate’ to ‘High’ exposure to a prolonged weakening of the local exchange rate, because a significant portion of inputs are imported and sold domestically
The government’s debt to GDP levels (which are already high) and lower revenues stemming from slower economic activity could leave little fiscal room for infrastructure development in the next two years in our view.
Hotels will be one of the hardest-hit sectors, with tourist arrivals unlikely to resume to pre-pandemic levels until the COVID-19 spread is contained worldwide.
However, Fitch-rated Sri Lankan corporates which are exposed to hotels such as Melstacorp PLC (AAA(lka)/Stable) and Hemas Holdings PLC (AA-(lka)/Stable), also have exposure to other diversified business segments which are more defensive, and/or have high rating headroom, which mitigates the impact.
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