Monday 21 December 2015

Sri Lankan shares little changed, turnover slumps to 5-month low

(Reuters) - Sri Lankan shares ended little changed in thin trading on Monday as investors kept to the sidelines ahead of holidays later in the week.

Turnover dropped to the lowest since July 21 at 360.6 million rupees ($2.51 million), against this year's daily average of 1.1 billion rupees.

The market is expected to be lacklustre with low turnover due to year-end holidays starting this week, stockbrokers said.

The markets will be closed on Thursday for a Buddhist religious holiday and Friday for Christmas.

Foreign investors sold a net 69.9 million rupees ($487,108.01) worth of equities, extending the net outflow to 4.24 billion rupees so far this year.

The main stock index .CSE ended 0.04 percent weaker at 6,881.75, after hitting its highest close since Dec. 1 in the previous session.

The country's top mobile phone operator, Dialog Axiata DIAL, and conglomerate John Keells Holdings JKH collectively accounted for over 55 percent of the market turnover on Monday. Dialog ended flat, while Keells edged up 0.06 percent.

Bukit Darah BUKI and Lion Brewery Ceylon plc LION fell 1.7 percent each. 

($1 = 143.5000 Sri Lankan rupees)

Concern over government’s ability to raise new revenues

During the general election in August, Sri Lanka saw renewed emphasis on economic reforms and fiscal consolidation which allayed concerns of many local and foreign investors, but nevertheless, concerns still remain over the government's ability to raise new revenues while reining in expenditures, a press release issued by Oxford Business Group states.

It further states: Until August, election delays had effectively created a wait-and-see approach in the private sector, with investors pressing pause on several high-profile projects Most notably, the country's largest-ever foreign investment — the $1.4-bn Colombo Port City real estate project funded by the China Communications Construction Company — remains on hold as the year comes to a close.

'Released in November, the 2016 budget signalled the new coalition government's first major policy declaration and included a reduction in investment ownership restrictions and a variety of tax incentives. The government will be looking for these reforms to help boost foreign direct investment (FDI), which has averaged just 1.5% of GDP over the last five years, compared to an average of 3.1% among other "BB"-rated countries.

'Nonetheless, concerns remain over the government's ability to improve revenues while also reining in expenditures. The government announced a 5.9% fiscal deficit target for 2016, only a slight decline over the 6% forecast for 2015, and according to ratings agency Fitch, the budget "provides no clear plan for fiscal consolidation over the medium term".

'Government revenues have been in decline since 2010, falling to just 12.3% of GDP in 2014 due to weak tax administration and collection structures. A further 6.4% drop in income tax collection is expected in 2016, placing greater pressure on other revenue streams to support the government's projected 38% rise in overall revenue.

Adding to the pressure is a continued rise in expenditures, which are expected to reach 22.3% of GDP in 2016, up from 19.1% in 2015, fuelled by major government investments in infrastructure, healthcare and education.

'The fiscal imbalance has been exacerbated by public sector salary hikes and increased social welfare spending in 2015 – some of the first moves made by the new coalition government –alongside price controls on green-leaf tea and subsidies on natural rubber and fertilisers.

To help fund the deficit, Sri Lanka's government visited international capital markets twice in 2015. In late May the country sold a $650m, 10-year sovereign bond at a rate of 6.125%, while the second 10-year oversubscribed bond offer, issued in late October, sold at a coupon rate of 6.85%, raising some $1.5bn.

The higher pricing of the second offer was attributed in part to a decline in Sri Lanka's foreign reserves –which fell from $8.8bn to $5.6bn in the 12 months to October 2015, according to figures from the Central Bank of Sri Lanka (CBSL) –as well as broader global economic uncertainty.

The rupee's decline, which mirrors a general weakening of Asian currencies this year, reached a record low of LKR143:$1 in late November, down some 10.5% year-to-date.

'Declining crude oil prices – which fell by more than 50% in 2014 – offered some relief for the country's balance of payments, and were ultimately passed on to consumers and businesses through state-led reductions in gasoline prices.

The country, which hopes to achieve 100% energy self-sufficiency by 2030, currently imports fossil fuels to satisfy around 44% of domestic consumption. Energy imports have traditionally cost the country $5bn per annum in foreign exchange, equivalent to roughly 25% of total import expenditure and nearly half of export income. According to the CBSL, declining prices and imports led to a 60.5% reduction in the nation's fuel import bill as of August.

However, these energy savings have been largely offset by Sri Lanka's rising import bill overall. An easing of duties saw consumer spending on imported motor vehicles nearly double y-o-y in the first eight months of 2015 to $905m, according to -the CBSL, though loan-to-value caps and higher taxes on vehicles, along with the depreciation of the rupee, are expected to curb consumer appetite into 2016.

Overall, exports continued to decline as a percentage of GDP in 2015, after falling by double digits in 2013 and 2014. On a cumulative basis, export earnings fell by 3.4% y-o-yin the first eight months of 2015, according to central bank data, largely due to weak global demand.

Industry stake holders continue to underscore the importance of diversifying and adding value to Sri Lanka's export basket and trade relationships, replicating the country's earlier success in the garment market. A variety of sectors, including branded tea, rubber products, gems, IT and business process outsourcing, are all seen as potential avenues for expansion.

Tourism, meanwhile, posted record growth in 2015. Thanks in large part to Chinese tourists, whose numbers have risen more than 10-fold since the civil war ended in 2009, Sri Lanka saw arrivals surge over the year, surpassing the 1.5m mark in November for an 18.1% y-o-y increase.

Tourism, along with inward remittances, represents an important component of Sri Lanka's foreign exchange earnings, though both are vulnerable to volatility in international economic conditions.

'Asmajor international hotels, including luxury players Shangri-La and Grand Hyatt, continue to emerge in Sri Lanka, the country will be looking to reinforce its tourism profile overseas in 2016 and beyond.
www.island.lk

Forbes list puts Sri Lanka ahead of China, India

The prestigious Forbes magazine’s annual list of best countries for business has placed Sri Lanka 91st out of 144 nations including China (94) and India (97).

In the 2015 rankings, Denmark topped the list followed by New Zealand and Norway. Singapore is the only nation from Asia to figure in the top 10 with a place at number 8.

Two other South Asian nations, Pakistan and Bangladesh, were ranked 103rd and 121st respectively.

Based on 2014 data, Sri Lanka fared well in innovation, placed at 41, followed by market performance at 46. Sri Lanka fared worst in Monetary Freedom with a rank of 128.

Forbes said Sri Lanka continues to experience strong economic growth following the end of the country’s 26-year conflict with the Liberation Tigers of Tamil Eelam.

The Government has been pursuing large-scale reconstruction and development projects in its efforts to spur growth in war-torn and disadvantaged areas, develop small and medium enterprises and increase agricultural productivity.

The Government’s high debt payments and bloated civil service have contributed to historically high budget deficits, but fiscal consolidation efforts and strong GDP growth in recent years have helped bring down the Government’s fiscal deficit, but low tax revenues remain a concern.

The 2008-09 global financial crisis and recession exposed Sri Lanka’s economic vulnerabilities and nearly caused a balance of payments crisis. Agriculture slowed due to a drought and weak global demand affected exports and trade.

In early 2012, Sri Lanka floated the rupee, resulting in a sharp depreciation and took steps to curb imports. A large trade deficit remains a concern but strong remittances from Sri Lankan workers abroad help offset the trade deficit. Government debt of about 80% of GDP remains among the highest in emerging markets. 
www.ft.lk

Volkswagen to go ahead with assembly plant at Kuliyapitiya-Premier

German automaker Volkswagen's global diesel emission cheating scandal will not have a negative impact on the company plans to invest in an assembly plant at Kuliyapitiya said Prime Minister Ranil Wickremesinghe.

He disclosed that this plant would have being set up even earlier if not for a US $ 5 million bribe which was demanded by members of the former regime of Mahinda Rajapaksa. "Volkswagen decided not to invest in Sri Lanka after this demanded of a five million dollars bribe," Wickremesinghe told Parliament during the committee stage debate of the budget.

"I have spoken to the German ambassador and the Volkswagen authorities and they have assured me that there are not changes to their plans," Wickremesinghe said.

Board of Investment Chairman, Upul Jayasuriya speaking to Daily News Business said the land in Kurunegala too has now been allocated for them.

"Volkswagen has agreed to invest US$30 million to set up a vehicle assembly plant of semi-knock down units in Sri Lanka," he said. Jayasuriya said that the controversy in Europe may give them an additional opportunity for them to concentrate in Asia and this plant will help them to peruse this goal.

Senok Automobile is the local agent for the project. As Volkswagen is currently the world's leader in automobile manufacture, overtaking Toyota of Japan, this project is a very high profile one and a statement about Sri Lanka's growing attractiveness as a destination for investment.(SS) 
www.dailynews.lk

'SL could export powdered milk if govt 'check' dairy imports now'

Sri Lanka should discourage importing powdered Milk which would result in the increase sale of local fresh milk and protect the local dairy farmer, said Chairman MasterDivers and Plewatta Sugar, Ariyaseela Wickramanayake.

If this is done Sri Lanka would be able to export powdered milk to countries like, Bangladesh, Middle East and China in a couple of years.

He said that the government should seriously look at introducing a permit for fresh milk importers similar to maize importation.

"This would certainly put a 'check' on milk imports as they have to seek permission from government at regular intervals."

He said Sri Lanka a few years ago had signed an agreement with the World Trade Organization (WTO) which prevent the government from increasing import tax more than 20%.

Speaking on the issue where the dairy farmers had to discard their fresh milk he said that it was because the local manufactures could not face the international competition and other local tax issues.

He explained that the government fulfilling an election pledge made by President Maithripala Sirisena asked us to purchase a liter of fresh milk at Rs. 70 which is Rs. 20 more.

"The government also ordered us to sell locally produced powdered milk at a reduced price of Rs.100. Though the government promised a subsidy of Rs. 70 per kilo we are yet to receive this. The industry cannot sustain this mismatch which has resulted in our 'buying power' being reduced. The end result is that the dairy farmer suffers without being able to sell their fresh milk. "

He explained that in contrast milk producing countries have excess milk and they have selected Sri Lanka as a country for 'dumping' them. He also said that during the presidential election the import duty of a kilo of milk powder was reduced from RS. 235 to 135. "However we made a representation to Prime Minister, Ranil Wickramasinghe and this has now increased to Rs. 235 again."

Wickramanayake said that Sri Lanka annually spends US $ 400 million for the import of powdered milk. There are two powdered milk manufactures, Palwate and Highland and more than 40 fresh milk producers which fulfill 55% of the local demand. "Sri Lanka has 240,000 milking cows and if the government supports the industry Sri Lanka can not only be self sufficient in milk but can be an exporter of powdered milk as in the case of butter. Then Sri Lanka can stop sending 'women' abroad for labour and instead export milk."

He said that the saw this potential and invested nearly Rs. 2.2 billion over the period of four years to have two plants in Buttala.

www.dailynews.lk