Regaining GSP+ In Sri Lanka – Interview transcripts

Topic: Sri Lanka Regaining GSP+ – opportunities for firms

Speaker: Travis Gomez, CFA – Product Head

Video length – 9:10 mins

Starting point:

1:20:      How has the loss of GSP+ impacted local companies?

  • Between 2010 to 2017, companies that were traditionally more export oriented, were affected and the extent of this impact depended on their exposure to European Markets
  • A case in point is the HAYL’s group where some of its subsidiaries such as; Dipped Products, Haycarb and Hayley’s Fabric performance was affected due to the global slowdown
  • As a result, HAYL pivoted towards investing in the domestic sector and subsequently the contribution from these traditional export segments to the firm’s performance saw a dip
  • This shift was also facilitated by the ending of the war which opened up more opportunities in the local economy and the company invested heavily in sectors such as construction, power & Energy and Leisure.
  • Now with the regaining of GSP+, we could potentially see some turnaround in the performance of some of these s export segments of HAYL’s.

2:55: How important is GSP+ for Sri Lanka?

  • This is a somewhat controversial issue as we don’t have a lot of empirical evidence to gauge the impact
  • One reason for the difficulty is because we don’t have many listed companies that are exposed to European Markets and one of the few listed companies that have this exposure is Tee Jay Lanka (TJL)
  • Considering their revenue performance and margins over time, the loss of GSP+ seems to have had only a minimal material impact the benefit of GSP+ is in the form of allowing firms in certain sectors to get a leg up in terms of a cost advantage compared to competing countries.
  • This could explain the minimal material impact on TJL’s performance because in the case of Garments, companies like TJL, MAS, Hirdaramani do not attempt to compete in terms of cost with competitors such as Bangladesh (that also enjoys the benefits of GSP+).Instead they compete in terms of quality, use of new technologies as well as better lead times
  • Another reason in the case of large scale garment manufacturers is that they have been investing in manufacturing capacity in countries such as Bangladesh which enjoys the GSP+ benefit.

5:20 What has been the stock market’s reaction to the news of regaining GSP+?

  • Minor reaction from the market
  • The perception is that this has been talked about for a long time hence it’s been factored in
  • At the same time, it will take time for tangible benefits to materialize

6:08 What are the sectors that stand to benefit from the regaining of GSP+?

  • The obvious sector is garments, given the sector’s large exposure to the EU
  • Sri Lanka could benefit from the added cost advantage as well as the need of global garment buyers to diversify risk in terms of their geographical exposure
  • Hence, it is possible that some of the garment operations that were moved to countries like Pakistan to return to Sri Lanka
  • But the focus of garments should remain on the innovation side and competing on quality
  • An important point brought up by the EU delegation is that we need to diversify our exports to other segments. Hence other sectors that can benefit are the Agribusiness and fisheries segment.
  • Products such as Organic fruits and vegetables as well as canned fish and ornamental fish have high growth potential too.

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