Sri Lanka budget promotes inclusive growth: Lanka Securities

Nov 15, 2016 (LBO) – Sri Lanka’s budget 2017 promotes inclusive growth with an emphasis on education, infrastructure, SMEs and incentives for business, although growth and deficit targets seem ambitious, Lanka Securities said in a research note.

“The projected 6.7 percent growth in economy, in our opinion is quite ambitious given the volatility in the operating environment both domestically and internationally,” the note said.

“The emphasis on local borrowings over foreign debt in 2017 can impact the interest rates adversely. The trickle-down effect of increase in indirect taxes in the recent period can continue to nudge inflation.”

The government presented its budget for 2017 with several measures to boost education, healthcare and populist measures such as price reductions on essential items, despite the need to tighten a bloated budget deficit.

“In our opinion, the new 3-tier income tax structure will have the most impact on the companies. Based on the available data, construction, tourism, healthcare would see rise in income tax from 12% to 28%. However, further guidance is required.”

“With LKR 6,500bn earmarked for investment in infrastructure and related activities during next five years, we believe construction sector to be the winner of this budget. In particular we are bullish on TKYO (PE – 9.8x). AEL (PE – 10.8x) is the other stock that we are keen on, however, the impact of increase on income tax need to be further assessed.”

Listing of entities such as Hyatt, Watersedge, GOH and Mobitel is positive for the market, while the revamped SEC act, demutualization, Securitizations Act, SME board, and RIETS would support the financial sector, the securities firm said.

“Increase in income tax on dividends from 10% to 14%, removing tax exemptions on investments in listed debentures are some of the other proposals that can negatively affect investors.”

Changes to PAYE, personal income tax (especially for the high brackets – changes from 16% to 20-24%), and the rise in indirect taxes can impact the disposable income which can be negative for the consumer staples and durables segment, the note said.

“The capital requirement of banks has increased to LKR 20bn in Licensed Commercial Banks and to LKR 7.5bn in Licensed Specialized banks. Accordingly, PABC, NTB, UBC, ABL, HDFC (Merger proposed with SMIB) and SDB may require to raise capital.”