Construction sector to demonstrate resilience – ICRA Lanka

Construction sector is expected to demonstrate resilience compared to other economic sectors of Sri Lanka ICRA Lanka in their Construction Sector Outlook said, in the post-confinement period based on based on data collected as of end May 2020.

“We base our assessment on four key reasons; The construction projects are expected to gradually pickup pace and broadly stay within the original timelines, Current domestic raw material production level and inventories are expected to sustain ongoing projects, Construction companies are largely insulated from the adverse effect of raw material price volatility due to currency depreciation and availability of funding support.

However, ICRA Lanka would also like to highlight the fact that the effect of the four reasons mentioned above can be undermined by the following deterrents; new order inflows would be muted in the medium term, Moderation in profitability is expected due to the lockdown.

Sri Lanka’s economic activities had slowed down during Q1 CY2020 and the economy is expected to contract by 4.5% in Q2 as per ICRA Lanka’s assessment, amidst the outbreak of the COVID-19 virus.

Sri Lankan government has taken containment measures affecting the entire country for several weeks and construction activities have been stalled to an extent during this period. At the business entity levels, the ability of some construction companies to withstand the effects of COVID-19 pandemic, will depend on several factors such as duration and severity of the pandemic, parent company support, GOSL’s policies, availability of additional capital buffers etc.

Notwithstanding the relief package introduced by the GoSL, ICRA Lanka expects the disruption to have some impact on the operating income, profitability, and liquidity position of the construction companies in the short term.

However, this sector is expected to demonstrate resilience compared with other economic sectors of Sri Lanka. After the spread of COVID-19, the Government has imposed a set of import restrictions on selected items effective for 3 months from April 16, 2020.

Given the deteriorating external position of Sri Lanka, it is expected that GOSL may be compelled to extend the import restrictions further following the expiration dates.” Nevertheless, most imports for the construction industry have alternatives in Sri Lanka.”

One of the most critical input to the construction sector is cement. Main players in the cement industry in Sri Lanka involve two cement manufacturers, five bulk cement importers and 40 bag cement importers.

Sri Lanka can currently produce 8.8 million tonnes of cement with plants, running at 85 percent capacity.

Hence, in the short term, the requirements may be met with local production and existing stocks.

However, according to industry sources, higher value added input imports have no viable alternatives in Sri Lanka. Steel structures (used for the construction of bridges), energy efficient air conditioners etc, are few examples of these product categories.

The GOSL may need to lift the import restrictions for such product categories, considering the significance of this industry in the Sri Lankan economy.