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, says Fitch Ratings.
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 recent negative rating action on the two consumer durable retailers Singer (Sri Lanka) PLC (Singer: BBB+(lka)/Negative) and Abans PLC (BBB+(lka)/Negative) reflects our view of the weak demand for non-essential goods in the current economic environment, and potential supply disruptions stemming from a prolonged ban on the importation of consumer durables to the country.
We have downgraded Sierra Cables PLC (BB(lka)/Rating Watch Negative), as we expect it will face a prolonged decline in cash flows as both state and private-sector construction projects will be likely to face delays until economic conditions stabilise. 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.
We also assessed companies by examining how close they were to breaching their issuer-specific negative rating sensitivities prior to the pandemic. Companies with limited rating headroom to withstand our base-case assumptions or a more prolonged disruption could be subject to negative rating action if we expect rating sensitivities to be breached for a sustained period. Corporates facing liquidity pressure could also see some stress on their ratings.