Vaccination and accommodative conditions are driving the recovery cycle to its critical point.
Three big forces in 2021
These three forces are key factors that would shape the equity outlook for the remainder of the year
SL’s population over the age of 30 is likely to be fully vaccinated by year end with the mobilization of a mass vaccination rollout
Currently, 43% of the eligible population* have received at least 1 dose. We estimate that the full immunization of this age category should be completed by November 2021 assuming an average 175k jabs/day inoculation rate.

Percentage of SL’s total population immunized by year end
* Ages 30 and above, which account for c. 52% of SL’s population
CAL estimates that the current pipeline of vaccines is sufficient to support Sri Lanka’s vaccination drive for its total population

Current vaccine stock and pipeline for the remainder of the year (in millions)
No supply shortage expected in doses as China is steadily nearing full population immunization
77% of Sri Lanka’s current vaccine recipients have been inoculated with the Chinese Sinopharm vaccine. SL needs not fear on any shortfall in vaccine receipts as China is well on their way to completing vaccination of it’s population and exporting the excess manufactured vaccines.

China’s estimated vaccination export capability for 2H2021 (in millions)
*Calculated based on a manufacturing capacity of 18mn vaccines/day
China is nearing 20mn jabs/day. It is believed that maintaining this rate going forward might be a challenge once the vaccination drive moves out of large cities to rural areas. Assuming all citizens opt to be vaccinated, China can reach 100% population immunization by November 2021.

Percentage of China’s total population immunized by year end
43% of the total population in China has received at least 1 dose
Sri Lanka potentially within the priority list for Sinopharm vaccine receipt
Asia pacific accounted for 49% of total deliveries to the region
Sinopharm deliveries by Geographical Region (in millions)
Sri Lanka is within the Top 5 countries who predominantly receive vaccines from Sinopharm
Sinopharm deliveries within Asia (as a % of total population)
China has distributed vaccines of Sinopharm, Sinovac and CanSino globally
Global distribution of Chinese vaccines
Vaccination has been effective worldwide in mitigating the spread, hospitalization and subsequent deaths caused by COVID-19
Mass vaccination has proven to slow down the spread of COVID-19. Pfizer, Moderna, Johnson & Johnson among other vaccines have been able to control the spread of the virus in USA, UK and Germany with the increased immunizations resulting in a slowed down in COVID-19 induced deaths.

Progress of COVID-19 Immunization & Deaths
United States of America
United Kingdom
Despite the rise in cases, death rates display a declining trend among countries which predominantly use the Sinopharm vaccine
Based on available data, it is understood that deaths within these countries were predominantly among individuals who were either not vaccinated, had received only one dose or were over the age of 60.

Progress of COVID-19 Immunization & Deaths
United Arab Emirates
Sri Lanka is likely to be among the front runners in the post-pandemic tourism boom within Asia given the rapid vaccination drive
SL’s competition within the tourism industry is lagging in terms of vaccination rates. SL would be among the first to complete vaccination among preferred Asian countries by European travelers

Percentage of the population to receive at least 1 dose
When observing the top 10 tourist generating countries to SL in 2018, it is promising to see that c. 50% of these countries have exceeded the 40% mark in population immunization through at least 1 dose thus far

Percentage of the population fully vaccinated
Significant LKR depreciation experienced over the last three years makes Sri Lanka one of the most cost efficient travel destinations in Asia
LKR vs. peer currency (depreciation since 1st Jan 2018 to date)
Sri Lanka remains a budget friendly destination in comparison to its’ peers. For tourists arriving from the United Kingdom, a 12 day holiday with various activities and lodging in a combination of 4 star and 5 star resorts on average remains cheaper in Sri Lanka in comparison to its’ regional peers.

Tour cost per person travelling from UK (GBP)
Domestic tourism boom in countries which eased lockdowns is a precursor of the pent up demand in global travel post vaccination drive
The United States of America

Passengers passing through US airport security checkpoints (in millions)
The United Kingdom

  • The Prime Minister of the UK stated in early July that plans were being made to allow British citizens who are fully vaccinated against COVID-19 to be allowed to travel overseas during the year.
  • Fully vaccinated citizens who return from preferred tourist destinations such as Spain and France can avoid self-isolation as per guidelines.
  • China

  • Domestic trips taken within China have witnessed exponential growth and have neared, and in some instances, exceeded pre-pandemic levels
  • Europe

  • Re-open EU Platform: The European Commission launched the platform as one of the measures announced by the Commission in its Tourism and Transport package to help travelling and tourism safely resume in the EU while respecting the necessary health precautions.
  • Possible deregulation of gaming operations could accelerate Sri Lanka’s tourism recovery cycle
    If Sri Lanka were to follow the trajectory of peer countries, we believe that the deregulation of gaming operations along with the introduction of integrated resorts such as the Cinnamon Life Project and the Port City Project could speed up the tourism recovery and induce Sri Lanka’s post pandemic recovery cycle.
    Singapore legalized casinos in 2010
    Following the commencement of the operation of Marina Bay Sands and Resort Worlds Sentosa, Singapore experienced a +14% CAGR in tourist arrivals over the next 3 years.

    Singapore: Tourist arrivals (in millions)

    Vietnam legalized casinos in 2017
    Vietnam has seen a +22% CAGR in tourist arrivals within the first 3 years of legalizing gaming activities for foreign passport holders.

    Vietnam: Tourist arrivals (in millions)

    ‘Revenge spending’ is inevitable in post crisis periods as demonstrated historically
    The US is witnessing a significant increase in retail consumption over the last few months post easing of nationwide lockdown
    Monthly Retail and Food Services Sales (USD mn)
    The Spanish Flu (1918 – 1920)
    World War II (1939 – 1945)
    Post World War II consumption and investment saw a 41% growth from 1944 to 1947
    Countries which eased COVID restrictions showed recovery in equity markets well ahead of achieving optimal vaccination levels
    The foresight that a large part of the population could be vaccinated within a short span of time gave investors the confidence of an economic recovery. We anticipate this trend to replicate in Sri Lanka as well.
    NYSE Composite Index vs. Vaccination Rate
    FTSE All-Share Index vs. Vaccination Rate
    Historically, Sri Lanka’s equity market too has reacted well in advance in anticipation of significant events
    Ahead of the UNP winning the parliamentary elections in Dec 2001
    Ahead of the SLFP coming into power post presidential elections in Nov 2005
    Ahead of the war ending in May 2009

    Ahead of the 2015 consumption cycle

    Ahead of the 1st wave (27th Jan 2020) and 3rd lockdown (21st May 2021) of COVID-19
    Negative real yields and excess liquidity will continue to lure investors towards the equity market in the short term
    Real interest rates have reached negative territory since the beginning of July.

    Real Interest Rate (%)
    Real interest rates have been calculated considering the Average Weighted New Deposit Rate (AWNDR) and the YoY monthly inflation rate.
    As long as CBSL intends to maintain the accommodative monetary conditions, liquidity support will continue and find its way to alternative asset classes.

    CBSL Holdings of  Government Securities - Face Value (LKR bn)
    FX debt repayment pressure to ease for the remainder of 2021 following the sovereign bond settlement in July which may bring a temporary improvement in investor sentiment
    Sri Lanka will settle its USD 1bn sovereign bond obligation utilizing its existing reserves.

    Sri Lanka’s Sovereign and SLDB Amortization and Debt Servicing (USD mn)
    Reserve position will deteriorate to USD 3.1bn by year end.

    Sri Lanka’s Reserve Position (USD bn)
    Post 2021, Sri Lanka’s recurring foreign debt obligations will be at c.USD 4.5bn/annum for the next 3 to 4 years. Sri Lanka’s reserve position could be a cause for concern if tourism fails to pick up and GOSL is unsuccessful in securing bi-lateral funding lines.
    Commencement of construction within the Port City Project towards the latter part of 2021 to renew optimism on economic activity
    However, our equity view post 2021 will depend on the Government’s restructuring plans given the rising debt levels and draining reserves
    Revenue loss, higher domestic debt servicing and impact from tax reductions last year is widening Sri Lanka’s budget deficit to approximately 10.2% of the GDP in 2021E.

    Overall Fiscal Balance
    The continued deficit will further contribute to the debt burden and restrict access to further bilateral and multilateral funding.

    Government Debt as a percentage of GDP
    We also expect an upward rate cycle most likely towards 1Q2022E in anticipation of higher inflation expectations
    Aggregate demand recovery, producer margin expansions and administrative price hikes will most likely drive headline inflation above 6% in 4Q2021E.

    Headline CPI
    Given current external vulnerabilities, the USD/LKR is exposed to experience a sharper depreciation towards the remainder of 2021.

    Annual Average USD/LKR Exchange Rate
    Our top trade ideas for 2H2021
    Our investment theme over the next 3-4 months is increasingly focused on 1) entities that possess pricing power to pass on cost escalations due to the expected inflationary pressure and LKR depreciation, 2) entities that could see a mean reversion in demand with the easing of the pandemic and 3) Entities that have increased their exposure towards USD earnings which could shield themselves against a possible depreciation of the currency.
    Consumption cycle driven by relaxation of lockdowns and revenge consumption to drive profitability for F&B companies. With the prevailing import controls, consumer discretionary spending will be directed towards F&B consumption.
    Companies predominantly generating earnings in USD which did not see one-off demand due to the pandemic will see an upward earnings cycle. Recovery in global trade will also support earnings.
    Accelerated local and global vaccination drive to speed up tourism recovery for Sri Lanka. Pent up demand for tourism will come in by 2023E. Steady LKR depreciation positions Sri Lanka as a cheaper alternative to regional destinations.
    Suppliers of locally manufactured construction material who are unaffected by a price cap or have the pricing power to pass on global commodity price escalations.
    Impairment cycle to ease with the reopening of the economy and activity returning to normalcy. Steep discounts to NAV already take into account macro risks.