Strategy Note /
Sri Lanka

Sri Lanka: Coronavirus impact report - East wind drives tourism headwinds

  • We see the largest impact on tourism

  • Drop in oil prices a positive for Sri Lanka

  • Any delay in re-starting operations in China could impact several sectors in Sri Lanka

Contributors
Isuri Munasinghe
Naveed Majeed
Mangalee Goonetilleke
Lakshini Fernando
Asia Securities
13 February 2020
Published byAsia Securities

The novel-Coronavirus (officially named Covid-19) has been declared a global health emergency, due to the highly contagious nature, although the mortality rate has been around 2.0% (vs. 10.0% for SARS). The first order impact is clearly on tourism. However, the outbreak coincided with the Chinese Lunar New Year holidays and resulted in a two-week delay in factory re-opening. The concern here is if delayed production could impact manufacturing as China exports raw materials for industrial production globally. 

For Sri Lanka, we see the largest impact on tourism. We expect the arrivals numbers to be weak in the peak Jan-Mar period. In addition, SL’s dependence on China is high for aluminum, fertilizer, fabrics and iron and steel. Accordingly, a prolonged delay in production in China could likely impact SL’s agriculture, construction and apparel sectors.

Drop in oil prices a positive for Sri Lanka. Brent prices have dropped ~25.0% since 01st January 2020, while WTI has dropped ~19.0%. In our view, this would be a positive for Sri Lanka as a net oil importer. In addition, with the dry weather prevailing currently, we expect higher dependence on thermal power generation in the coming months. Against this backdrop, low oil prices would lessen the burden on the external sector. 

Any delay in re-starting operations in China could impact several sectors in SL. From Sri Lanka’s perspective, we note that the import dependence on China remains significant for some of the key raw materials for industrial production and agriculture. As of end 2018, China was Sri Lanka’s second largest import destination, behind India, accounting for 18.5% of total imports. In terms of exports, the Chinese market accounted for 2.0% of market share in 2018. 

The negative impact from Covid-19 comes in a year where there is a likelihood of higher import demand, primarily driven by consumers. In the event of prolonged disruptions to consumer imports, higher prices for such non-essential goods could drive up overall inflation. However, in our view, this is an unlikely scenario given that Indian imports could make up for most of this. 

In our view, the major concern on the trade front would be the global impact from Covid-19 on key export destinations like the US and Europe. With a global slowdown already expected by the IMF, we expect the negative impact to further add pressure on global demand for local exports.

If manufacturing disruptions in China continue through February and March, we see the largest impact to sectors such as construction, apparel and agriculture in 2Q CY20. From a consumption perspective, the largest impact would be for electronic equipment. Although export dependence on China is relatively less, a shortage in textile imports from China could lead to medium-term weakness in apparel manufacturing, Sri Lanka’s largest export (accounts for 44.3% of exports from SL).

On page 3 of our report we identify the stocks that would see a major impact from coronavirus.