Saturday 31 December 2016

‘Elpitiya Plantations Firing up the Palm oil Engine’

Elpitiya Plantations PLC (ELPL) is a listed regional plantation company engaged in Tea, Rubber and Palm oil cultivation. ELPL is expected to grow its earnings at a CAGR of c.36% FY16-FY19E, to c. LKR 500Mn in FY19E. Earnings will grow on the back of Palm oil having segment margin improving and contribution to revenue portfolio increasing. FC Research expect ELPL to provide an annualized return of 46% with a fair value of LKR 27.0 by FY18E. STRONG BUY

Palm oil to drive bottom line growth: ELPL’s top line is expected to grow at a CAGR of c.10%YoY in FY16-FY19E. FC Research expect that performance will be on the back of earnings from Palm oil improving with a CAGR of c.28%YoY. As of FY16 Palm oil contributed 17% to ELPL’s revenue portfolio which FC Research expect to increase to c.27% by FY18E. This growth is on the back of global Palm oil prices moving upward due to expectations of global shortages in supply matching demand and mature palm oil plantations hectarage of ELPL increasing by CAGR of c.13%.

Multiplexing revenues through investments: ELPL has diversified from its principal activities to manufacturing specialty tea Hydro power generation, hotel and adventure park operations through its investments which will create additional revenue streams to ELPL. FC Research expects ELPL to benefit substantially from Elpitiya Dianhong Jin Ya Tea Company (Pvt) Ltd as it will provide an edge to acquire market share in China, 10th largest customer of Ceylon tea and a high growth market, and AEN Palm Oil processing (Pvt) Ltd will provide synergy to ELPL by boosting margins in the segment.

ELPL to provide a return of 46% by FY18E: FC Research estimates ELPL’s fair value at LKR 27.0 (DCF based LKR 30.5, PER based LKR 24.3) providing an annualized return of 46% in FY18E.

Investment risk: Impact from government policy actions in estate worker wage hike and cap on land held by plantations Company is yet to be seen. ELPL is also exposed to the risks of key currency rates’ fluctuations and volatility of product prices.
-First Capital

www.island.lk

Sri Lanka's Bank of Ceylon sells out of Mireka Capital Land

ECONOMYNEXT - Sri Lanka's Overseas Realty (Ceylon) Plc, said it had bought a 40 percent stake in a property unit from state-run Bank of Ceylon boosting its stake to 100 percent.

Overseas Realty said it had paid 3.88 billion rupees to buy the 40 percent stake in Mireka Capital Land Ltd.

Mireka Capital Land is involved in Colombo's Havelock property project.

Sri Lanka Amana Bank seeks foreign investors for capital enhancement

(LBO) – Sri Lanka’s Amana Bank today said its director board is currently in discussions with prospective foreign investors to enhance their capital in line with Central Bank requirements.

The budget 2017 proposed to increase the minimum core capital level from the current 10 billion to 20 billion rupees for all licensed commercial banks.

It also proposed to increase the minimum capital of licensed specialized banks to 7.5 billion and primary dealers to 1.5 billion rupees.

“The Bank is seeking to enhance the required capital as per CBSL requirements,” Amana Bank said in a stock exchange filing.

Amana Bank said such raising of funds, by way of equity would be subject to the approvals of the Central Bank, Exchange Control Department, SEC, CSE and shareholders.

“The Bank would make further Announcements to the market, on the progress of such discussions, upon receiving firm commitments.”

The government is of the view that consolidation of financial institutions will be beneficial in the long term and encourages voluntary consolidation especially for the private banks.

The government said it will enhance the size of the banks, facilitate the fund raising from diversified sources, enhance risk taking capacities and enable banks to participate in large state and private sector projects.

Sri Lanka’s banking sector is relatively polarized with 6 banks out of the total 34 banks in the country accounting for almost 65 percent of the assets at around 5,600 billion rupees.

Newly listed Melstacorp wants to blend revenue streams

(LBO) – Sri Lanka’s newly listed Melstacorp is to blend the revenue streams the group receives through its different sources to ensure an appropriate blend, Managing Director Amitha Gooneratne said.

He emphasized that the company wants to maintain its diversified interests and income generation going forward.

“The greatest challenge of Melstacorp would be to blend the fusion of the income the group receives through its different sources,” Gooneratne said.

Gooneratne was speaking at the commencement of share trading of Melstacorp at the Colombo Stock Exchange today morning.

“Our main objective is to ensure that the income from the non-alcoholic beverage sector becomes almost equal, which would ensure an appropriate blend of revenue streams.”

Directors Royle Jansz, Jagath Kahanda, Vyjayanthimala Senaratne, Corporate Consultant Damien Fernando and the senior management of Melstacorp were present at the ceremony.

The listing of Melstacorp by way of an introduction follows a decision by the shareholders of the Distilleries Company of Sri Lanka to establish Melstacorp as the holding company of the group, marking a modification in the ownership structure.

The shares, which were listed by introduction on the Main Board of the CSE have been classified under the ‘Diversified Holdings’ sector.

Melstacorp Limited is a diversified conglomerate with its business interest spanning beverage, plantations, telecommunication, financial services and other diversified sectors.

The Distilleries Company, Balangoda Plantations and Browns Beach Hotels which are listed on the CSE are subsidiaries of the Melstacorp Group.

CSE listed conglomerate Aitken Spence and Madulsima Plantations are associate companies of Melstacorp.

Monetary Policy Review – December 2016 - Policy rates unchanged

According to the provisional estimates of the Department of Census and Statistics (DCS), the Sri Lankan economy is estimated to have grown by 4.1 per cent during the third quarter of 2016 compared to the growth of 5.6 per cent in the corresponding period of the previous year. Services activities grew by 4.7 per cent, while Industry activities grew notably by 6.8 per cent during the third quarter of 2016. However, Agriculture related activities continued to report a contraction, for the second consecutive quarter, by 1.9 per cent, impacted by the adverse weather conditions that prevailed during the third quarter of 2016. Favourable developments in leading economic indicators as well as the lower base in the fourth quarter of 2015 are likely to steer economic growth upwards in the final quarter of 2016 in spite of the effect of adverse weather conditions and global economic uncertainties.

Headline inflation, as measured by the Colombo Consumers’ Price Index (CCPI, 2006/07=100), increased to 4.1 per cent, on a year-on-year basis, in December 2016 from 3.4 per cent in November 2016. In the month of November, headline inflation as measured by the National Consumer Price Index (NCPI, 2013=100), declined to 4.1 per cent, year-on-year, compared to 5.0 per cent in October 2016. Core inflation increased noticeably during December 2016 mainly reflecting the effect of government tax changes. Consequently, core inflation as per the CCPI accelerated to 6.3 per cent (year-on-year) in December 2016 from 5.1 per cent in November 2016, while core inflation based on NCPI increased markedly to 6.8 per cent in November 2016 from 5.7 per cent in October 2016. Despite these transitory movements, inflation is likely to remain at midsingle digits in the period ahead, on average.

In the monetary sector, year-on-year growth of credit extended to the private sector by commercial banks witnessed the anticipated deceleration, and was 22.0 per cent in October 2016 compared to 25.6 per cent in the previous month. However, the net increase in credit extended to the private sector, in absolute terms, remained high at Rs. 79.0 billion during October 2016. Meanwhile, credit to the public sector from commercial banks increased modestly in October 2016. Accordingly, broad money (M2b) growth decelerated to 17.8 per cent, on a year-on-year basis, in October from 18.4 per cent in September 2016. Rupee liquidity in the domestic money market returned to surplus levels in December, while market interest rates, which increased in response to monetary tightening measures adopted by the Central Bank, appear to have broadly stabilised during the month.

In the external sector, mainly due to the effect of a one-off increase in the expenditure on imports, the deficit in the trade balance increased substantially in October 2016. Earnings from tourism as well as workers’ remittances continued to grow at a healthy pace. Gross official reserves were estimated at US dollars 5.6 billion by end November 2016, while the Sri Lankan rupee has depreciated by 3.6 per cent against the US dollar thus far during the year.

Taking into consideration the developments discussed above, the Monetary Board, at its meeting held on 30 December 2016, was of the view that the current monetary policy stance of the Central Bank is appropriate. Accordingly, the Monetary Board decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank unchanged at 7.00 per cent and 8.50 per cent, respectively.

Friday 30 December 2016

Colombo Stock Exchange 2016 Year Review by LSL

The performance of the final day of the year clearly sums up this year’s performance of Colombo Bourse. Negative returns amid low turnover dominated the market for the most part of the year with the exception of few months in-between.

ASI closed with back-to-back losses with index declining 9.7% in 2016 (-666.24 index points) after the dismal -5.5% performance in 2015. S&P SL 20 index suffered a loss of 3.6% this year.

Daily average turnover fell to LKR 743mn* (-30%YoY) marking the weakest performance since 2009. The attractive returns in the fixed income market drove out the domestic investors while foreign investors were more cautious amid the rising rates elsewhere in the world.

Foreign investors closed the year as net buyers of LKR 2.0bn* worth of shares thanks to several strategic deals in the latter part of the year. With the absence of the domestic investor activity, foreign investor participation shot up to 42% of the year’s turnover marking the highest foreign participation since 2008.

Most of the economic indicators faltered in 2016. Interest rates inclined by 287bps while rupee depreciated nearly 4% creating challenging circumstances for the equity market. The political as well as policy uncertainties and the decelerated economy growth (1-3Q GDP growth at 4%) added to the woes, making it increasing difficult for the equities to outperform the other asset classes.

We believe 2017 to be an equally challenging year for the equities, especially in the first-half. Presence of the above mentioned challenging circumstances may affect the performance in the early part of 2017 but we expect this to smoothen in the latter half. We will discuss our take on the stock market for 1H2017 in our semi-annual report which will be published in January 2017.

*Kindly note that the figures mentioned in the annual review includes the sale of Seylan Bank shares by BOC (LKR 1.3bn) since there is no official announcement from CSE or SEC regarding the cancellation of the transaction yet. Excluding this transaction, the daily average turnover is LKR 737mn and the foreign inflow is LKR 663mn.

Colombo Stock Exchange Market Review – 30th Dec 2016


Colombo equities closed the final trading day of 2016 with losses amid thin-trading. ASI lost 17.45 index points (-0.3%) to close at 6,228.26 while S&P SL 20 index lost 6.69 index points (-0.2%) to close at 3,496.44.

The highlight of the day was Melstacorp which commenced trading after the share swap with Distilleries. The counter started trading at LKR 65.00, below the indicative price of LKR 69.00 and witnessed heavy trading throughout the session. The counter closed at LKR 59.30, down 14.1%.

The drop in price of Melstacorp affected the broad index performance along with Lion Brewery (LKR 465.00, -3.0%), Ceylon Tobacco (LKR 806.50, -0.6%) and Dialog Axiata (LKR 10.50, -0.9%). Market breadth was equally divided where out of the 198 counters traded today, 68 declined while 66 managed to record gains.

Market turnover was LKR 202mn with the absence of negotiated transactions. The biggest contributions came from Melstacorp (LKR 43mn), John Keells Holdings (LKR 20mn) and Nations Trust Bank (LKR 20mn). 


Apart from Melstacorp, relatively heavy trading was seen in Softlogic Life Insurance (LKR 20.70, +3.5%) and Chevron Lubricants (LKR 157.10, -1.2%). Property Development managed to gain some interest after the announcement of the LKR 15.00 per share interim dividend. The counter closed at LKR 104.50, up 33.8%.

Meanwhile, Overseas Realty increased its shareholding in Mireka Capital Limited to 100% by acquiring remaining 40% shareholding at a total consideration of LKR 3.9bn.

Foreign investors were net sellers with net foreign outflow of LKR 6mn. Top net outflows were seen in Melstacorp (LKR 25mn), John Keells Holdings (LKR 7mn) and Seylan Bank (LKR 5mn) while top net inflow was seen in Nations Trust Bank (LKR 16mn). Foreign investors accounted for 33% of the market turnover.
Source: LSL

Sri Lankan shares fall about 10 pct in 2016; directions on rupee, rates awaited

Reuters: Sri Lankan shares fell on Friday, posting a yearly decline of about 10 percent, in thin trade due to year-end holidays, while investors waited for directions from the central bank on the rupee and interest rates.

The central bank is most likely to keep its key interest rates steady at a monetary policy meeting later in the day, even as some economists expect further tightening to ease pressure on the rupee following a rate hike by the U.S. Federal Reserve earlier this month, a Reuters poll showed.

Speculation over possible depreciation of the rupee and rate hikes weighed on sentiment, stockbrokers said.

The Colombo stock index closed 0.28 percent lower at 6,228.26, declining 9.7 percent in 2016, its second straight yearly fall.

In terms of dollar value, market capitalisation fell 13 percent, making Sri Lanka a worse performer than emerging Asian markets like Malaysia, Thailand, Indonesia and Singapore.

Stockbrokers said factors like failure to attract foreign direct investments and lack of investor confidence due to a reversal in some budget policies weighed on the market this year.

"We are going with positive expectations, though it is going to be a challenging year for all," a stockbroker said asking not to be named.

"Politically the government has to prove its policies while the private sector will see some challenges amid possible volatile external environment."

Foreign investors sold a net 6.4 million rupees of equities on Friday, but purchased a net 633.5 million rupees ($4.24 million) in 2016, compared with a net sell of 4.43 billion rupees last year.

Turnover stood at 202 million rupees, less than a third of this year's daily average of 737.2 million rupees. Last year's daily average was 1.06 billion rupees.

Large cap Ceylon Tobacco Co Plc fell 0.6 percent, while Lion Brewery (Ceylon) Plc lost 3 percent. 

($1 = 149.4000 Sri Lankan rupees) 

(Reporting by Shihar Aneez; Editing by Subhranshu Sahu)

GREG buys near 10% of Pan Asia Bank for Rs. 614 m

Lanka Century Investments Plc (GREG) yesterday bought a near 10% stake in Pan Asia Banking Corp Plc for Rs. 614 million.

It said the investment as “strategic” in diversifying its investments into the financial sector as part of its future growth strategy.

GREG has interests in Ceylon Leather Products Plc, Dankotuwa Porcelain Plc, Colombo City Holdings Plc, South Asia Textile Industries Lanka Ltd., Royal Fernwood Porcelain Ltd., and Browns Investment Plc . Yesterday’s investment signals its direct equity exposure to the banking sector.

Around 29.257 million PABC shares traded for Rs. 614.15 million accounting for 85% of the day’s turnover at the CSE. The share traded between a high of Rs. 20.40 and a low of Rs. 18.90 before closing at Rs. 19.80, up by 30 cents. The net asset value of PABC is Rs. 22 per share.

The deal, when it took place, triggered some excitement in the market which remained less buoyant due to the seasonal holiday mood.

However, the deal appeared almost like a transfer since the seller was CHC Investments, which is a joint-venture, equally owned by Galle Face Hotel Group fame Sanjiv Gardiner, investor Ajit Devasurendra and diversified family business Hirdarmani.

Tabrobane Holdings and Taprobane Equities control 83% of GREG. CHC Investments owns 57% of Taprobane Holdings.

Major shareholders of PABC include business leader Dhammika Perera (29.9%) and Japan’s Bansei Securities (15%). GREG is now the third largest shareholder. 
www.ft.lk

Thursday 29 December 2016

Sri Lanka Melstacorp share trading commences from tomorrow

(LBO) – Sri Lanka’s newly formed Melstacorp, the holding company of Distilleries, said its shares will commence trading on the Colombo Stock Exchange from tomorrow.

In a stock exchange filing, the company said these shares will be classified under the ‘Diversified Holdings’ sector.

A total of 1,165,397,072 ordinary voting shares are to be listed on the main board under the security code of MELS-N-0000 by way of an introduction.

Melstacorp limited further said deposits will be accepted by the CDS with immediate effect.

In September, shareholders of the Distilleries Company approved a special resolution to make Melstacorp the holding company of the group, in a reversal of the structure.

From 1st October Melstacorp became the holding company of Distilleries as well as Lanka Bell, Continental Insurance Lanka, Melsta Regal Finance, Balangoda Plantations and Browns Beach Hotels.

It also owned a significant percentage of shares in Aitken Spence and Madulsima Plantations.

Distilleries earlier announced that Harry Jayawardena is still the Chairman of both DCSL and Melstacorp while Amitha Gooneratne is the Managing Director of Melstacorp Ltd.

Sri Lankan shares hit more than 1-wk closing high; PABC boosts turnover

Reuters: Sri Lankan shares touched a more than one-week closing high on Thursday led by financials, with shares of Pan Asia Banking Corporation Plc accounting for 85 percent of the day's turnover.

The Colombo stock index finished 0.28 percent higher at 6,245.71, moving away from its lowest close since April 6 hit on Tuesday.

Turnover stood at 720.9 million rupees ($4.82 million), less than the daily average of around 740 million rupees for this year.

Foreign investors bought a net 12.3 million rupees worth shares on Thursday, extending the year-to-date net foreign inflows into equities to 639.8 million rupees.

Pan Asia Banking gained 1.5 percent, while shares in Ceylinco Insurance Plc jumped 17.8 percent

($1 = 149.6000 Sri Lankan rupees) 

(Reporting by Shihar Aneez; Editing by Biju Dwarakanath)

Colombo Stock Exchange Market Review – 29th Dec 2016


Colombo equities continued the positive momentum for the second straight-session with benchmark ASI gaining 17.20 index points (+0.3%) to close at 6,245.71. However, the blue-chip S&P SL 20 index closed 2.65 points (-0.1%) lower at 3,503.13.

Out of the 190 shares traded, 64 gained, 46 declined while 80 stocks remained unchanged. Gains in Ceylinco Insurance (LKR 1,471.40, +17.8%), Ceylon Tobacco (LKR 811.30, +1.4%) and C T Holdings (LKR 125.00, +4.2%) pushed the ASI higher. Among the blue-chips Nestle Lanka (LKR 1,979.50, -3.1%) and Hatton National Bank (LKR 225.00, +1.5%) led losers droving the S&P SL 20 index to the negative territory.

Market activity remained lackluster but the turnover reached LKR 721mn supported by the single crossing in Pan Asia Bank which accounted for 85% of the market turnover. The bank recorded the only crossing of the day where 29.1mn shares (9.9% of the issued cap) changed hands at LKR 21.00. Accordingly, Pan Asia Bank (LKR 614mn), Commercial Bank (LKR 24mn) and Sansa Development Bank (LKR 13mn) made the largest contribution to the turnover.

Pan Asia Bank (LKR 19.80, +1.5%) and Sansa Development Bank (LKR 106.20, +3.1%) attracted the retail investor interest today along with Union Bank (LKR 15.20, +1.3%) and Lanka IOC (LKR 31.00, +1.3%).

Foreign investors were net buyers with net inflow of LKR 12mn. Foreign participation was mere 4%. Top net inflows were seen in Commercial Bank –voting (LKR 23mn), Commercial bank – nonvoting (LKR 3mn) and Asiri Hospital Holdings (LKR 2mn) while top net outflow was seen in Dialog Axiata (LKR 7mn).
Source: LSL

Wednesday 28 December 2016

Sri Lanka seeks billion dollar 3-year loan

ECONOMYNEXT - Sri Lanka has called proposals from banks to borrow one billion US dollar for up to three years, which lenders can provide on a floating or a fixed rate, the Ministry of National Policies and Economic Affairs said.

Interested international and domestic banks should make offers by January 20, 2017, with rates quoted being valid for the next two months.

Banks investment houses should submit proposals in multiples of 50 million US dollars up to a maximum of 1000 million dollars.

Repayments can be in bullet or in tranches. Interest can be paid half yearly.

Group Lease appoints two directors to Commercial Credit board

Group Lease Holdings, a Singaporean subsidiary of Thai-listed Group Lease Public Company Limited (GL), has appointed two directors to the Colombo Stock Exchange listed Commercial Credit and Finance PLC after purchasing a 29.9 percent stake in the Sri Lankan entity. 

GL Group Chairman and CEO Mitsuji Konoshita, and GL Director and CFO Regis Martin, a Frenchman, were appointed as directors of Commercial Credit and Finance last week, with approval from the Central Bank of Sri Lanka. Konoshita, who graduated from the Osaka University in Japan with a Masters and Bachelors in Law, has been the Chairman of the GL Group since 2007, and had taken on the role of the CEO in 2012 as well. 

In addition to heading GL subsidiaries, he is also the Chairman of the Engine Holdings Asia Pte. Ltd, another subsidiary of GL’s parent Wedge Holdings Co. Ltd, which is based in Osaka. Martin has a Bachelors and Masters of Science in Applied Economics and an MA in International Business from the University of Paris IX Dauphine. He had been employed at the French Ministry of Economy and Finance prior to transitioning to the private sector, where he has since held many portfolios, including but not limited to being the L’Oreal Paris Sales Forecast Controller, Morison Kak & Associes Senior Auditor and Finance and Devenco Investment Portfolio Manager. 

Since joining as the Business Performance Manager at GL Finance Plc, Martin has gone on to become a director at various GL Group companies. 

The GL Group recently bought 29.99 percent of the shares of Commercial Credit and Finance for Rs.10.56 billion, and also purchased a controlling share of Commercial Credit and Finance’s associate company BG Microfinance Myanmar Co. Ltd.
www.dailymirror.lk

Sri Lanka’s Abans Finance to raise capital with Rs277mn rights issue

(LBO) – Sri Lanka’s finance sector player, Abans Finance, is to raise 277.34 million rupees by way of a rights issue, the company said in a stock exchange filing.

The company has obtained the Central Bank approval in compliance with Finance Companies (Structural Changes) Direction No. 01 of 2013 by their letter dated 27th December, 2016.

Subject to the exchange and shareholder approval, the company is to issue 11,093,595 ordinary shares at 25 rupees each in the ratio of one new share for every five shares held.

“The proceeds will be utilized to expand the lending and investment activities of the company,” Abans Finance said.

“Proceeds will also be utilized to upgrade the company into a well capitalized status to meet any possible increases in the minimum capital requirements applicable for Finance Companies.”

The current stated capital of the company is 844,073,080 rupees represented by 55,467,978 ordinary shares.

If the rights issue is fully subscribed the stated capital will increase by a further 277,339,875 rupees represented by 11,093,595 ordinary shares.

Sri Lanka 03-month Treasuries yield rises to 8.72-pct

ECONOMYNEXT – Yields on Sri Lankan Treasury Bills rose at Wednesday’s auction with the 03-month bill yield up 07 basis points to 8.72 percent, the debt office of the Central Bank said.

The 06-month t-bill yield rose 02 bp to 9.63 percent at the auction while the yield on one-year bills rose 03 bp to 10.17 percent, a statement said.

The debt office got Rs23 billion worth of bids and accepted bids worth Rs8.5 billion.

Colombo Stock Exchange Market Review – 28th Dec 2016


Colombo Bourse closed higher on Wednesday led by gains in banking sector stocks. ASI closed 25.68 points (+0.4%) higher at 6,228.51 while S&P SL 20 index closed 28.76 index points (+0.8%) higher at 3,505.78.

Commercial Bank (LKR 145.00, +2.1%) and Hatton National Bank (LKR 228.30,+2.7%) drove the index to the positive territory along with John Keells Holdings (LKR 144.90,+1.1%) and Trans Asia Hotels (LKR 94.00, +8.7%). Market breadth remained positive with gainers outweighing losers 77 to 46.

Bulk trades in Sunshine Holdings (16mn shares at LKR 47.50 per share) and Commercial Bank (5.0mn shares at LKR 145.00) pushed the turnover to LKR 1.7bn and the negotiated deals accounted for 86% of the market turnover. Apart from Commercial Bank (LKR 835mn) and Sunshine Holdings (LKR 761mn), John Keells Holdings (LKR 32mn), Ceylinco Insurance (LKR 11mn) and Hatton National Bank (LKR 8mn) made noteworthy contributions to the turnover.

Retail activity was mostly centered on Lanka IOC (LKR 30.60, +0.7%), John Keells Holdings and Ceylon Grain Elevators (LKR 83.00, +1.8%). Subsequent to the announcement of the rights issue, Abans Finance declined 10.9% to LKR 32.00. The company intends to raise LKR 277mn via rights issue in the proportion of one new share for every five existing shares at the price of LKR 25.00 per share.

Foreign investors were net buyers of LKR 16mn worth of equities. Foreign participation accounted for 51% of the market activity. Top net inflows were seen in Commercial Bank (LKR 13mn), Hatton National Bank (LKR 6mn) and Three Acre Farms (LKR 1mn). Top net outflow was seen in Chevron Lubricants (LKR 2mn).
At the weekly Treasury bill auction held today, the yields increased across the board with 3-month yield increasing by 7bps to 8.72%, 6-month yields increasing by 2bps to 9.63% and 12-month yield increasing by 3bps to 10.17%. Central Bank offered LKR 11.5bn worth of T-bills and the auction was oversubscribed by two times. It was decided to accept LKR 8.5bn worth of T-bills.
Source: LSL

Sri Lankan shares rise nearly 0.5 pct in high turnover

Reuters: Sri Lankan shares closed about half a percent higher on Wednesday, recovering from a more than eight-month closing low hit in the previous session, led by blue chips such as John Keells Holdings and Hatton National Bank.

Turnover was 1.73 billion rupees ($11.59 million), more than twice the daily average of 739.5 million rupees for this year. Commercial Bank of Ceylon and Sunshine Holdings accounted for 48.3 percent and 44 percent of the turnover, respectively.

The Colombo stock index finished 0.41 percent higher at 6,228.51, bouncing back from its lowest close since April 6 hit in the prior session. It shed around 2.1 percent in the 10 sessions through Tuesday.

"Blue chips lifted the market. I think it was mostly due to window dressing ahead of the year-end," said Atchuthan Srirangan, a senior research analyst with First Capital Equities (Pvt) Ltd.

Foreign investors bought a net 16.2 million rupees worth shares on Wednesday, extending the year-to-date net foreign inflows to 627.5 million rupees in equities.

Top conglomerate John Keells rose 1.1 percent, while Hatton National Bank gained 2.65 percent. Commercial Bank of Ceylon closed 2.1 percent higher, while Sunshine ended flat. 
($1 = 149.3000 Sri Lankan rupees) 

(Reporting by Shihar Aneez; Editing by Subhranshu Sahu)

Businessman Dhammika Perera buys Beach Resorts for Rs330mn

(LBO) – Sri Lankan business tycoon Dhammika Perera has bought control of Beach Resorts limited for 330 million rupees, Amaya Leisure said.

The Board of Directors of Amaya Leisure announced to the Colombo Stock Exchange that it has taken a decision to divest its entire shareholding in The Beach Resorts Ltd, a subsidiary of the Company.

“Board of Directors has taken this decision to rationalize the investment portfolio of the company,” Amaya Leisure said.

As a result, the Company disposed 6,176,790 shares which constitute 84.30 percent of the equity stake of The Beach Resorts Ltd today.

The company has sold the stake for 330.11 million rupees to K.D. Dhammika Perera who is also a Director of Amaya Leisure and The Beach Resorts Ltd.

La Forteresse buys into Alila Hotels with Rs 364 mn investment

La Forteresse (Private) Limited, a fully owned subsidiary of The Fortress Resorts, made an initial investment of Rs.364 million in Alila Hotels and Resorts for a 66 roomed five star hotel at Thalaramba,Weligama to at an estimated cost of Rs.2.1 billion, which includes the cost of land for over Rs.345 million.

The hotel project is undertaken by Alila Hotels & Resorts and La Forteresse (Private) Limited now holds 99.99% of the issued shares of Alila Hotels & Resorts which will be subsequently diluted to 51%.

Citing the rationale for entering into this transaction, the company said that as any expansion of the existing hotel ‘The Fortress’ is limited, the board has decided to invest in a new hotel project to maximise future potential in the long run by optimising strengths within the company and harnessing the expected growth in the tourism sector. (IH)

www.dailynews.lk

Sri Lanka’s Hayleys plans 55-storey twin towers at Deans Road

ECONOMYNEXT – Hayleys said it plans a property development project at its head office premises in the Sri Lankan capital Colombo consisting of twin 55-floor towers each with 3.8 million square feet of “A” Grade commercial space.

The proposed venture would be carried out by a newly incorporated company with 100% of initial equity investment made by Hayleys.

The towers will come at the Hayleys head office premises at No. 400, Deans Road, Colombo 10, a stock exchange filing said.

The implementation of the proposed venture would depend on it receiving infrastructure development incentives offered by the government in the recent past to similar development projects in the country, it said.

Sri Lanka’s Fortress Resorts to build Rs2.1bn 5-star beach hotel

ECONOMYNEXT – The Fortress Resorts, a hotel that’s part of the group of businesses controlled by Sri Lankan businessman Dhammika Perera, is to build a 66-room five-star beach resort on the south coast for Rs2.1 billion.

The Fortress Resorts said in a stock exchange filing that its fully owned subsidiary La Forteresse (Private) Ltd. invested Rs364 million in Alila Hotels & Resorts (Pvt) Ltd. to set up the hotel at Thalaramba, Weligama.

The hotel is to be built by Alila Hotels & Resorts (Pvt) Ltd. at a cost of Rs 2.1 billion which includes the cost of land of Rs345.8 million.

La Forteresse now owns 99.9% of Alila Hotels & Resorts (Pvt) Ltd. which will be subsequently diluted to 51%, the statement said.

The investment by La Forteresse in Alila Hotels is to finance the purchase of three acres of land at Weligama which Alila had bought for Rs345.8 million from LB Finance, a finance firm controlled by Perera.

Sri Lanka sells Rs55bn in bonds below secondary yields

ECONOMYNEXT - Sri Lanka sold 55.58 billion rupees of 4, 7 and 10-year bonds after calling offers for 57 billion rupees, at yields below the secondary market prices earlier in the day, auction data show.

The debt office, which is a unit of the Central Bank sold 18.58 billion rupees of 4-year bonds maturing on 01 March 2021 to yield an average of 11.94 percent.

The same 4-year bonds were quoted at 11.95/05 percent before the auction dealers said.

18.6 billion rupees of 7-year bonds maturing on 01 August 2024 were sold to yield an average of 11.98 percent.

The exact maturity was quoted around 12.20/40 percent before the auction.

18.4 billion rupees of 10-year bonds maturing on 01 August 2026 were sold to yield an average of 12.11 percent.

10-year bonds were quoted around 12.30/45 percent before the auction.

It is not clear who bid at rates below secondary market at the auction. Whether state-controlled (captive source) bid at lower yields or real investors bid low expecting yields to drop is not known. In January some sales proceeds of Hambantota Harbhour is expected. Revenues will also be up, with no salary hikes.

After the auction secondary yields did not drop, but dealers say due to late auction results, there was no active trading.

If secondary rates drop exiting foreign investors who could only sell a 7-year bonds at 98.62 rupees (12.20-pct) would be able to sell at 99.56 rupees (12.00 percent) tomorrow.

A foreign investors who sold a 2026 bond today at 100.22 rupees (12.30 percent) would be able to sell at 101.31 (12.10 percent) tomorrow, if rates fall. A similar profit would be found if the rupee appreciated by one rupee.

Sri Lanka's central bank printed money for 70 days or more through outright purchases of Treasuries, from November loosening policy, pushing longer yields also down rates down, (Sri Lanka loosens policy; signals longer term rates) giving larger profits to exiting foreign investors than if credit markets operated freely, critics say.

Over the last three years, money markets show excess liquidity which is usually the result of dollar inflows or a central bank profit transfer.

Tuesday 27 December 2016

Colombo Stock Exchange Market Review – 27th Dec 2016


Colombo Bourse slipped back to negative territory on Tuesday in another weak trading session. All Share Index fell back to eight-month low of 6,202.83 with a loss of 13.73 index points or 0.2%. S&P SL 20 index fell 5.19 index points (-0.2%) to 3,477.02.

Out of the 171 counters traded, 52 declined and 41 gained while 78 remained unchanged. Ceylon Tobacco (LKR 800.20, -1.8%), John Keells Holdings (LKR 143.30, -0.9%) and Ceylinco Insurance (LKR 1,249.20, -6.5%) led the losers while Seylan Bank (LKR 92.90, +8.3%), LOLC (LKR 73.00, +1.4%) and People’s Leasing (LKR 17.90, +1.7%) managed close positively.
Market turnover stumbled to one-month low of LKR 111mn. Seylan Bank (LKR 28mn), John Keells Holdings (LKR 19mn) and Hayleys Fabric (LKR 18mn) made the largest contributions to the turnover. No crossings were witnessed today.
John Keells Holdings dominated the trading activity. Further, Lanka IOC, Seylan Bank voting and nonvoting were among heavily traded stocks.

Foreign investors were net sellers today with a net foreign outflow of LKR 10mn. Top net outflows were seen in John Keells Holdings (LKR 11mn), Seylan Bank (LKR 3mn) and Hayleys (LKR 1mn) while top net inflow was seen in Commercial Bank (LKR 3mn). Foreign participation accounted for 19% of the market activity.
Source: LSL

Sri Lankan shares hit more than 8-mth closing low; turnover slumps

Reuters: Sri Lankan shares closed at their weakest in more than eight months in typical year-end holiday-thinned trading on Tuesday, with turnover slumping to a near 33-month low as investors stayed away.

The Colombo stock index ended 0.22 percent lower at 6,202.83, its lowest close since April 6. It has shed around 2.1 percent in the 10 sessions through Tuesday.

Turnover stood near its lowest since March 17, 2014, at 111.2 million rupees ($745,308), around a seventh of this year's daily average of 735.4 million rupees.

"Most of the investors and brokers are on holiday. We may see little price adjustments in shares, but the trading volume will be very low," said Hussain Gani, deputy CEO at Softlogic Stockbrokers.

Foreign investors sold a net 10.2 million rupees worth shares on Tuesday, but they have been net buyers of 611.3 million rupees worth equities as of Tuesday this year.

Top conglomerate John Keells Holdings fell 1 percent, while large cap Ceylon Tobacco Company closed 1.8 percent lower, dragging down the overall index. 

($1 = 149.2000 Sri Lankan rupees) 

(Reporting by Shihar Aneez; Editing by Biju Dwarakanath)

Sunday 25 December 2016

Basel Three compliance seen as having implications for local banks

By Hiran H.Senewiratne

"The maintaining of a capital adequacy ratio under the Basel Three international compliance requirement from next year would have some implications for the local banking sector, Sampath Bank Managing Director Nanda Fernando said.

" The Basel Three international compliance requirement of maintaining a minimum capital adequacy ratio will become mandatory for all banks in the country and it would have some issues for the sector since those banks have to increase their capital, Fernando told the media yesterday..

He said that Sampath Bank has the capability for this adaptation because of the Bank's financial stability and because of the confidence of the Bank's customers in it.

Fernando also said that next year would be a challenging year for the sector because of the anticipated increase of US Federal Reserve interest rates since the US economy and the dollar are growing strong.

" This would have some challenges for the national economy but could be managed if we take measures to stabilize the rupee with proper and prudent regulatory measures, Fernando said.

The Sampath Bank Managing Director also said the interest rates and the rupee will not depreciate next year, as in the case of this year, because the Central Bank and the Ministry of Finance will take proper measures to control the situation.

Sampath Bank, launched in 1987, is now a leading commercial bank in the country with more than 200 branches island-wide. It has 4000 employees and positions itself as a post innovative and modern bank in Sri Lanka.
www.island.lk

Tax uncertainty hovers over listed debentures

By Azhar Razak

A state of uncertainty and lack of clarity prevails over the tax-free concession presently applicable to incomes received from listed corporate debentures as the recently enacted Budget 2017 has plainly stated this concession is removed but not given details, industry officials said last week.

The Budget 2017 presented by Finance Minister Ravi Karunanayake said "the present exemption on certain dividends and interest or profits from investment on listed securities (corporate debt securities etc.) and other instruments will be removed". The Budget however did not specify the exact date this removal will be made effective or whether it will apply to both current and newly listed debentures.

"We still don’t know whether the Budget proposal will be applied immediately, or January 1 or April 1 .The next big question we have is whether this proposal will only apply to new debentures which are going to be listed in the future or will it take retrospective effect and include listed debentures offered in the past?" several stock market analysts who spoke to the Sunday Island on condition of anonymity, opined.

Since 2013, listed corporate debentures on the Colombo Stock Exchange has been a major attraction for investors mainly due to the totally tax free concession accorded to them. There is no Withholding Tax or Income Tax. For example, if a company pays Rs.100 as interest for a listed debenture, the debenture holder will get that entire Rs.100 and he does not need to declare the same as part of his taxable income.

On the other hand, if the debenture is not listed on the Colombo Stock Exchange, Withholding Tax (WHT) which is deducted at source will be applied. In addition, the interest income earned by a non-listed entity will be categorized as a taxable income and the corporate tax component applied.

Senior Vice President at Acquity Stockbrokers, Shehan Cooray, said they have made representations to the Treasury and are presently awaiting an outcome on that. However, elaborating on what the Budget statement had meant, he said listed debentures will no longer be tax free or rather WHT will in future be applicable on debentures.

"So, on the coupons or interest there will be a 14% tax and there is no notional tax which means in addition to the 14%, you can’t set off that against your final tax liability. So, on the remainder you will be paying at the individual tax rate applicable such as corporate tax," Cooray noted.

However, he said that the government might not apply the tax with retrospective effect but they may be applicable to the future coupons on the already listed debentures.

Chief Executive Officer of the NDB Investment Bank Limited, Darshan Perera , confirmed that they also made representations to the Finance Ministry on the issue.

"But apart from what was said in the Budget there is no clarity or change in the position from the government’s point of view on this so far," he said.

Last year 25 corporates raised as much as Rs.83.4 billion via listed debentures while the corresponding amount for 2014 was Rs. 54.2 billion and Rs. 68.3 billion in 2013. It has also been reported that during the last three months, eight issuers of whom five were banks raised as much as Rs.49 billion through listed debentures. The most recent was the Bank of Ceylon’s Rs.5 billion issue which was oversubscribed on opening day last week.

The main players in structuring issues in the listed debenture market are Acuity Stockbrokers Pvt Ltd., Capital Alliance and NDB Investment Bank. Agora Securities (Pvt) Ltd., Arevaand First Capital Holdings Plc also handled issues this year. Commercial Bank and People’s Bank are involved in related party issues.

The listed debentures are seldom traded on the Colombo bourse with investors preferring to hold them for tax free interest. Most such issues have been oversubscribed on opening day.

"They were an attractive parking place for spare cash particularly by companies," an analyst said. "Other fixed income instruments like fixed deposits attracted 28% tax. This is not so for individual investors."
www.island.lk

Pre-budget rush spikes vehicle registrations

Sri Lanka’s motor vehicle registrations in the majority of categories and specifically motobikes has recorded an acceleration during the month of November 2016 compared to a month earlier, an analysis by JB Securities released on Friday showed.

Accordingly, total cars registrations recorded 3,574 units in November up from 3,402 unit the previous month but down from a very high number of 10,084 a year months ago.

Brand new registrations recorded 2,098 units in the month, slightly down from 2,185 units in the previous month and significantly down from 6,732 units 12 months ago.

Pre-owned car registrations recorded 1,476 units in the month, up from 1,217 units the previous month. Toyota maintained its market share recording 708 units followed by Suzuki with 482 units and Honda with 233 units. Financing share was 65.6%.

The premium brand segment recorded 73 units in Nov., up from 61 units the previous month and slightly down from 74 units 12 months ago while the SUV segment recorded 476 units in November up from 451 units in October but down from 806 units 12 months ago.

Electric cars recorded 25 units in the month, slightly up from 23 units the previous month but massively down from 494 units 12 months ago. Hybrid registrations recorded 1,605 units in November up from 1,358 units the previous month but significantly down from 3,247 units 12 months ago.

Meanwhile, van registrations in Nov. recorded 100 units, down from 119 units the previous month and significantly down from 802 units 12 months ago.

Three-wheeler registrations recorded 6,098 units in Nov., significantly up from 4,495 units the previous month but significantly down from 13,668 units 12 months ago while two-wheeler registrations recorded 32,084 units in November up from 30,373 units the previous month and slightly up from 31,262 units 12 months ago.

Pickup trucks accounted for 529 units in Nov., up from 470 units the previous month and also up from 462 units 12 months ago. Tata was the market leader claiming a share of 65.2%. Financing share was 78.1%.

Buses recorded 217 units in Nov., down from 281 units the previous month and 244 units 12 months ago.

Maruti reclaims market leadership

India’s popular car brand, Maruti retained its market leadership in Sri Lanka during the month of November recording 751 units (Alto – 506, Celerio – 229) outdoing new entrant Renault Kwid, recent analysis showed. Renault Kwid, which became the market leader in October 2016 notching up 854 units claimed the second position with 582 units being registered.

The duo were followed by Nissan – 170 units (Go – 165), Perodua - 122 and Micro - 118 units.

"Small cars dominated the car registrations recording 1,930 units (92% share) while the financing share is a high 69.1%, in comparison for mid sized cars it is 57.8% and 33.9% for large cars," JB Securities said in a report. (AR)

www.island.lk

High Motor Vehicle Lenders Facing Challenges

Budget 2017 has created a challenging environment for NBFIs with high exposure to motor vehicle lending due to lowering of Loan-to-Value (LTV)(25% for Three Wheelers, 50% of Motor Cars and Vans) and increase of import duties, LOLC Securities said in an equity research report on Central Finance.

Further removal of income tax exemption on debentures’ interest income creates more level playing field with instruments such as Fixed Deposits, creating more opportunities for NBFI’s like CFIN to enhance its deposit base.

However with ongoing interest rate rise we see slow down of private sector credit creating a downward trend of leasing and loan volumes of NBFI sector while increased vehicle taxes and currency depreciation further intensifying the negativity. But CFIN historically has been maintaining a LTV ratio of 70-80% in its vehicles advances with a balanced vehicle leasing portfolio.

Thus we believe that impact of LTV rule will be limited for CFIN. CFIN on the other hand will benefit on increasing LTV of commercial vehicles to 90% and upcoming construction sector projects.
www.thesundayleader.lk

Japanese buyer in BOC-Seylan deal shell-shocked

By Duruthu Edirimuni Chandrasekera

The Japanese buyer in the deal that went sour involving Seylan Bank’s 7.5 per cent stake in Bank of Ceylon (BOC) this week is shell-shocked.

Murtaza Jafferjee, CEO JB Securities which did the transaction, told the Business Times that his client, the Japanese investor is in Colombo now and is not a happy man. “The Japanese investor is totally shell shocked as to what has transpired. One is not sure in future when transacting with state controlled institutions as to where lies the ultimate authority,” he said. Largely dealing with foreign and local institutions and high net worth investors, Mr. Jafferjee said that what occurred is a blow to the capital market.

Meanwhile, the BOC directors except its chairman, who’s still in London, have made statements to the Criminal Investigations Department (CID) on this deal.

The BOC’s chairman left for London on Friday, Dec. 16. The board comprises Ronald C. Perera (chairman), S.R. Attygalle, Ranel T. Wijesinha, Charitha Nissanka Wijewardane, Asela Sanjaya Padmaperuma and Ajith Gunawardana.

None of the board members was available for comment but a source close to the BOC board told the Business Times that the directors had told the CID that this sale was to augment the capital augmentation plans of BOC. “These plans are discussed at board meetings. The Seylan holding is a potential divestment as was stated in BOC’s annual report. It was a unanimous decision by BOC’s Investment Committee which was given the autonomy to dispose stakes in their portfolio,” the source explained at length.

He added that the capital augmentation strategies of the BOC at each board meeting are duly communicated to the Ministry of Public Enterprises on a separate document by the BOC. “So the Ministry was aware of it – more or less,” he said. However when queried about the Ministry of Public Enterprises circular that’s in question prohibiting acquisition or disposal of business assets or significant transactions in state entities without ministry permission, he said this 7.5 per cent in Seylan isn’t ‘significant’.

He refuted all claims that this was an ‘under-the-table’ transaction saying that the miscommunication is on the government’s part for not being clear about disposing state assets.

Analysts say that this transaction shrouded in controversy is raising issues about state policy, unclear direction and bad signals to the capital market.

www.sundaytimes.lk

Central Bank (CB) orders curbs on Perpetual Treasuries

The Central Bank (CB) has ‘curtailed’ primary dealer, Perpetual Treasuries Ltd from trading in the capital market and declaring company dividends, following the company’s controversial deals in bond trading last year, informed sources said.

Earlier the CB had said that it would take action against Perpetual Treasuries but unspecified this at a recent media conference. The company continues to be listed as a primary market dealer in the most recent call for bids by the CB which is auctioning treasury bonds worth Rs. 57 billion on Tuesday, December 27. Meanwhile the US dollar hit Rs. 152 per 1$ earlier this week and then fell to Rs. 149-150 by Friday owning to the demand for dollars rising. “There is a demand because foreigners are selling off their securities to invest in US securities with interest rates going up there,” one dealer said.

www.sundaytimes.lk

Drop in tourist arrivals in Q1 2017

By Sunimalee Dias

The airport closure is set to steer a drop in visitors to the island in first quarter 2017 just as Sri Lanka Tourism is gearing for a promotional drive and is drawing up new rules of how public private partnerships could work in future.

“Already we have recorded a drop in booking,” City Hoteliers Association President M. Shanthikumar told the Business Times adding that a drop was expected by about 8-10 per cent during the three months when the country’s busiest international airport, the Bandaranaike International Airport would be closed.

The airport will close from 8.30 am to 4.00 pm for flight take off and landings as the 30-year old runway is being resurfaced.

However, he noted that the industry is looking positive and with cooperative airport authorities, “we will manage.”

Growth is expected next year as arrivals are distributed among the hotels in the formal and informal sectors, Mr. Shanthikumar explained.

The long awaited promotional campaign is expected to kick off next year following the Tourism Minister John Amaratunga’s assurance to the industry in this regard.

This is being backed by Prime Minister Ranil Wickremesinghe’s detailed campaign programme for 2025 for an aggressive promotion for the industry’s growth. “We believe that the industry will grow and tourism should pick up. The inventories are growing therefore the promotions are important to sustain the business,” Mr. Shanthikumar explained.

In the meantime the private sector is currently working out a strategy to ensure that private sector involvement in state sector institutions would not get them into trouble by leaving out responsibilities that could warrant any obligation other than as advisors.

Lately, a number of tourism industry personalities had been pulled up for sanctioning state funds to be allocated for purposes other than tourism promotion, which even they were unaware of.

In this respect, the industry believes the Chairmen and Directors General of the respective state institutions should be held responsible for such funding allocations.

A guideline on how private sector board members would function in the absence of such responsibility is currently being worked out.

Meanwhile promotions for feeder markets are expected to continue while bringing in travellers from the Far East and Australia along with the Indian and Chinese markets.

“There is a lot more room to promote China,” Mr. Shanthikumar said since Sri Lanka is yet to receive a large bundle of the traffic that checks into hotels globally as more are expected to travel next year.

Segmentwise the industry expects to gain more from the Meetings Incentive Conference and Exhibitions (MICE) events in addition to more travellers targeted via charter operations that had resumed since the last couple of years and cruise and sports tourism.

Sri Lanka Association of Inbound Tour Operators (SLAITO) Secretary Nalin Jayasundere explained that charters from Scandinavia, Russia, the UK and Italian markets were attracted thereby reviving a dormant segment of the industry.

He explained that tour operators have “more confidence in Sri Lanka” to promote the destination.

However, there are expectations for more support from the Sri Lanka Tourism Development Authority (SLTDA) by carrying out joint promotions that would help look at the country more positively.

Meanwhile, there are expectations of improvement in working out entrance fees to tourist sites by informing travel agents well ahead of making the bookings without haphazard charges being implemented.

www.sundaytimes.lk

CB should hike interest rates faster than desired to limit capital outflows, Moody’s says

Sri Lanka’s (B1 negative) elevated debt burden, large fiscal deficits and high external borrowing costs continue to expose the country to potential shocks, Moody’s Investors Service says in a new report.

While the programme with the International Monetary Fund (IMF) has helped establish an ambitious roadmap to fiscal consolidation and structural reform, implementation will be challenging. The negative growth impact of tight fiscal and monetary policy and subdued external demand, combined with uncertain effectiveness of tax-broadening measures, could limit the efficacy of the government’s reform efforts aimed at consolidation of public finances and shoring up the country’s balance of payments, it said.

“Given its weak fiscal position and demands for growth-enhancing public expenditure on infrastructure and development programmes, plans to increase government revenues will play an important role in bolstering debt sustainability and the overall sovereign credit profile. Revenue mobilisation efforts will likewise be key to creating fiscal space for increased spending and deficit reduction, while tempering external vulnerabilities. The government’s 2017 budget proposal is broadly consistent with its fiscal consolidation roadmap with the IMF, and illustrates its commitment to fiscal consolidation and to the IMF programme. The budget relies on significant increases in tax revenues to drive a material narrowing of the deficit, through a mix of implemented and planned measures,” the report added.

It could be difficult for the government to pursue fiscal consolidation at the pace it envisages. The significant fiscal tightening currently envisaged, combined with likely relatively tight monetary policy, may dampen GDP growth to a greater extent than currently projected by the government. Moreover, if the government does not manage to implement tax policy and administrative reforms in full, it could cut back on expenditure to meet its fiscal targets. That would also weigh on GDP growth, which in turn would lower revenue collection.

“Given Sri Lanka’s weak fiscal position and need for growth-enhancing public expenditure on infrastructure and development programmes, plans to increase government revenues will play an important role in bolstering debt sustainability and the overall sovereign credit profile. Revenue mobilization efforts will likewise be key to creating fiscal space for increased spending and deficit reduction, while tempering external vulnerabilities,” it said.

The report said that the government projects tax revenues to rise to 13.5 per cent of GDP in 2017 from 11.6 per cent in 2016. That marks a 27 per cent year-over-year rise, compared to only a 5.6 per cent in in 2016. The expected increase is reflected in all major tax components, through a combination of tax rate hikes and exemption exclusions.

The most significant contribution to the overall increase in tax revenues is projected to come from excise, with related revenues to increase by nearly 30 per cent, representing about 32 per cent of total tax revenues. New excise duties will be introduced and some revised while the government expects the efficiency of excise collection to increase through e-invoicing.

The second largest increase stems from higher income tax receipts, accounting for 25 per cent of the total tax revenue rise. Income tax is projected to rise by 42 per cent representing about 18 per cent of total tax revenues.

Receipts from value-added tax (VAT) are projected to rise by nearly 21 per cent to represent about 21 per cent of total tax revenues, consistent with a full year of VAT at the 15 per cent rate following the re-instatement of the rate hike in November 2016, the report said.

“We project GDP growth to be lower, rising to 5.2 per cent in 2018 from 5 per cent in 2017, similar to the IMF projections – 4.8 per cent and 4.9 per cent in 2017 and 2018, respectively. Our real GDP growth forecast takes into account the likely impact of fiscal consolidation and tighter monetary policy over the next few years. A concerted government effort on regaining competitiveness and resumption of foreign direct investment and development of key projects, including the Colombo Port City and Hambantota port, would enhance Sri Lanka’s export potential and eventually contribute to higher exports. However, in a global environment of prolonged slow trade, the returns on such policy may be limited,” the report said.

“On the monetary policy front, we believe the Central Bank of Sri Lanka’s objectives of price stability and moderate credit growth will likely result in relatively high interest rates and generally tighter financing conditions. This will add to the factors weighing on private domestic investment in the near term. In addition, Sri Lanka’s relatively low level of foreign exchange reserves further complicates monetary policy, as the central bank may need to hike rates faster than desired in order to limit capital outflows or attract portfolio inflows in an environment where US interest rates are rising and global investors are generally retreating from emerging markets,” it said.

While the government has demonstrated its commitment to fiscal and structural change, substantial implementation challenges remain, which could slow or derail the reform process. Moving forward, fractious politics and a substantive policy agenda which also includes reform of the constitution and further progress on reconciliation could limit progress on revenue and SOE reforms, resulting in weaker growth, slower fiscal consolidation and losses from SOEs crystallizing on the sovereign’s balance sheet. If this happened, foreign investors’ confidence may be undermined. This could combine with the expected normalisation of interest rates in the US to result in lower capital inflows in, or capital outflows out, of Sri Lanka. Pressure on the fragile balance of payments would increase. In this scenario, the Central Bank of Sri Lanka’s policy of less frequent foreign exchange rate intervention could also be tested, it said.

“Looking forward, medium-term risks remain as foreign debt repayment obligations are large, especially those due between 2019 and 2022. Meanwhile, the Central Bank of Sri Lanka currently borrows a large portion of its reserves through temporary forex swap arrangements with domestic commercial banks, which are subject to rollover risk. As of 30 October 2016, the central bank had a total short foreign currency forward position of $2.81 billion, with combined residual maturity of one month to one year. The IMF has advised Sri Lanka to unwind these swap positions. At this stage, it is not clear how this will be achieved in an environment of fragile capital inflows that may drain rather than inflate foreign exchange reserves,” it added.

www.sundaytimes.lk

Temporary BIA Jan-Apr closure set to drop passenger traffic by 12%

The re-construction of the Bandaranaike International Airport’s runway, at an estimated cost of Rs.7.2 billion, is likely to result in a drop in arrivals and departures by about 12.8 per cent with the cancellation of about 10 flights per day and rescheduling of others.

SriLankan Airlines has cancelled six flights per day and others about four per day during the period the BIA would be closed from January 6 – April 6 between 8.30 am and 4.00 pm, Transport and Aviation Minister Nimal Siripala De Silva said at a media briefing held at the BIA at Katunayake.

The minister noted that the cost of the construction of the 30-year old runway at the BIA will be borne by the Airport and Aviation Services Ltd. (AASL).

The national carrier would stop over at Mattala for its four weekly flights to Beijing and Shanghai for approximately three hours during which time passengers would be allowed to go off board and be provided a meal before leaving for its final destination, the airline’s CEO Suren Ratwatte told the Business Times.

He noted that SriLankan Airlines would have to incur an addition loss in revenue of US$60 million as a result of this closure.

The BIA will witness a drop in arrivals and departures by about 12.8 per cent due to the airport closure, AASL Executive Director Johanne Jayaratne told the Business Times.

He noted that foreign airlines will stay at their point of origin when operating to Colombo on the rescheduled timings due to the closure for the 3-month period.

Due to the closure, there would be 14 flights taking off and landing at the BIA during the peak hour of 7.00 am – 8.00 am with the most number of flights operating after opening recorded between 7.00 pm and 8.00 pm amounting to eight, he explained.

The arrival time of passengers would be determined by the respective airlines but it is expected that arrival at the airport was likely to be at least four hours ahead of departure.

The rush hour would also witness 65 check-in counters in operation compared to the existing 55; the 17 immigration counters would have its manpower increased with about four more added to the departures.

Minister De Silva noted that due to a lack of required immigration staff the government has asked authorities to even bring back retired employees to be engaged during the 3-month period. Customs department would also increase its staff at the BIA.

In addition to ease the congestion at the airport, the airline staff have been allocated a separate passageway to get to their flights early overcoming the congestion.

The government has requested the public to reduce the number of persons accompanying passengers to the airport in a bid to ease the congestion except for those in need of special assistance like the aged and the differently abled.

A concerted traffic plan would be in operation to ease traffic to the airport by teaming up with the Minuwangoda, Katunayaka and airport police in a bid to encourage the use of alternative routes.

The Minister noted that Mattala had not been favoured by any of the international airlines and this airport would continue to be used for emergency operations as at present.

Mattala costs the BIA an expenditure of Rs.3.6 billion in loan repayment and Rs.74 million for staff salary payments.

The government is looking at a 3-year, long-term plan to build on the infrastructure development surrounding the Mattala airport, the minister said.

“The government has no state funds to commit for the development of Mattala. We might have to go for a venture for Mattala similar to the Hambantota port,” the Minister said.

Under the Expression of Interest for Mattala about seven were evaluated and five shortlisted with selections scheduled to take place next month.

Mattala airport has received at least two proposals, not from Chinese parties, to take over entire operations of the facility while others were for the conduct of Maintenance Repair and Overhaul (MRO) and as a training facility among others. - (SD)


Immigration under camera scrutiny

Security cameras have been placed at immigration counters by the airport authorities amidst opposition from staff.

Airport and Aviation Service Ltd. Executive Director Johanne Jayaratne said that the security cameras at the immigration counters fixed were now operational since about a couple of months ago.

Immigration officers had opposed fixing the security cameras where their counters were located.
www.sundaytimes.lk

Saturday 24 December 2016

Exchange Rate and Economic Impact of Depreciation

Introduction
The exchange rate is a widely discussed topic at present. There is much debate on whether the exchange rate should appreciate or depreciate due to its impact on economic activity. Although there are pros and cons of depreciation of the exchange rate, the popular sentiment is against the depreciation of the exchange rate. Opponents of depreciation highlight that any depreciation of the Sri Lankan rupee will increase the value of the country’s stock of foreign debt in terms of Sri Lankan rupees while increasing the domestic price of imported goods and services. However, in order to assess the economic impact of an exchange rate depreciation, it is necessary to have a clear understanding of the exchange rate, its determinants and movements. Therefore, the objective of this article is to explain what the exchange rate is, why it is important, how the exchange rate is determined and the economic impact of a depreciation. 

The Exchange Rate 


The rate at which a currency of one country exchanges for a currency of another country is called the “exchange rate”. The exchange rate can either be expressed in terms of number of units of domestic currency per unit of foreign currency (direct quotation) as in the case of most currencies such as the Sri Lankan rupee, or the number of units of foreign currency per unit of domestic currency (indirect quotation) as in the case of some major trading currencies such as the pound sterling and the Australian dollar. When the value of the domestic currency increases in terms of another currency, it is referred to as a nominal appreciation of the domestic currency. In contrast, a decrease in the value of the domestic currency in terms of a foreign currency is known as a nominal depreciation. 


The exchange rate plays a pivotal role in any economy. The exchange rate is important for trade and investment. The exchange rate affects the price of imports when expressed in domestic currency and the price of exports when converted into foreign currency. Therefore, the exchange rate can have an impact on a country’s inflation and serves as an indicator of external competitiveness and hence of likely developments in the Balance of Payments (BOP). The exchange rate also occupies a central position in monetary policy where it may serve as a target, an instrument or an indicator-depending on the monetary policy framework adopted. Therefore, central banks or monetary authorities are given the responsibility in deciding appropriate foreign exchange policies for their countries along with the monetary and financial policy frameworks. 


Supply of and demand for foreign exchange 


Usually, the supply of and demand for foreign exchange in the domestic foreign exchange market determine the external value of the domestic currency, or in other words, a country’s exchange rate. Demand for foreign exchange arises from payments required for imports of goods and services and for capital payments such as debt service payments, whereas supply of foreign exchange is determined by earnings from export of goods and services and remittances as well as from receipts related to the financial account such as foreign investment and foreign loan inflow. As such, the demand for and supply of a currency in the foreign exchange market rest on real forces determining a country’s imports, exports, workers’ remittances, foreign investments and other financial flows. 


Exchange rate regimes 


Countries in the world operate under different exchange rate regimes. An exchange rate regime is the process by which a country manages its currency in respect to foreign currencies. There are two major types of exchange rate regimes at the extreme ends; namely the floating exchange rate regime, where the market freely determines the movements of the exchange rate, and the fixed exchange rate regime, which ties the value of one currency to another currency. Although countries generally maintain its exchange rate at a stable level in relation to currencies such as the US dollar or the euro under a fixed exchange rate policy, since the exchange rate of currencies such as the US dollar and the euro are determined in the market freely, even under a fixed exchange rate policy the exchange rate of these countries would be determined according to movements of major currencies in global markets. There is also a spectrum of intermediate exchange rate regimes that lie in between these two extremes, and are referred to as BBC rules-Baskets, Bands and Crawls. These include pegged float, crawling bands, crawling pegs and pegged with horizontal bands. 


Basically, the free floating or flexible exchange rate regime is said to be efficient and highly transparent as the exchange rate is free to fluctuate in response to the supply of and demand for foreign exchange in the market and clears the imbalances in the foreign exchange market without any control of the central bank or the monetary authority. As there is no obligation or necessity for intervention, the central bank is not required to maintain a large pool of international reserves. In contrast, in the fixed or managed floating (where the market forces are allowed to determine the exchange rate within a band) exchange rate regimes, the central bank is required to stand ready to intervene in the foreign exchange market and, thus to maintain an adequate amount of reserves to use at such instances. 


Exchange rate regimes in Sri Lanka 


Sri Lanka’s exchange rate policy has gradually evolved from a fixed exchange rate regime in 1948 to an independently floating regime by 2001. Sri Lanka, which followed a managed floating exchange rate regime with crawling bands since 1977, shifted to an independently floating exchange rate regime in January 2001 due to the strong need of maintaining a large stock of international reserves. With this move, the Central Bank of Sri Lanka stopped buying or selling of foreign exchange at preannounced rates, but reserved the right to intervene in the market to buy and sell foreign exchange at or near market prices, as and when it deemed necessary, depending on the movements of the exchange rate. Volatility in the exchange rate is caused primarily by unstable trade and financial flows such as foreign investments as well as by expectations. As central banks also have control over the money supply and interest rates, they sometimes intervene even in freely floating foreign exchange markets by filling in shortfalls in supply and demand, which could otherwise create excessive fluctuations in the exchange rates. Central banks do so using their own stocks of foreign exchange reserves or by influencing interest rates through money market operations. The aim of intervention in a managed floating exchange rate regime is to prevent excessive volatility in the short-term and to build up the country’s international reserve position in the medium-term. 


Determination of the external value of the Sri Lankan rupee 


As Sri Lanka currently follows a flexible exchange rate regime, the exchange rate of the country is determined by the supply and demand for foreign exchange in the economy. The supply of foreign exchange depends on the inflows to the economy such as export proceeds, workers’ remittances, tourist earnings, direct investment flows and foreign loans while the demand for the same depends on outflows such as import payments and loan repayments. In Sri Lanka, foreign exchange earnings have persistently remained at a lower level than the demand for the same. Accordingly, a current account deficit has been a salient feature of the Sri Lankan economy. 


The deficit in the current account of the balance of payments of the country would have to be met through foreign exchange inflows to the financial account. If the deficit of the current account cannot be met through financial flows, then the exchange rate is to be depreciated as the exchange rate is expected to be an automatic adjuster under the flexible exchange rate regime. If the exchange rate is maintained at a stable rate, then a depletion of reserves would have to take place. 


In addition to domestic factors, global factors such as the global demand for exports, interest rates in international financial markets and currency movements also affect the external value of the domestic currency. In particular, the recovery in the US economy and the hike in interest rates by the Federal Reserve Bank have strengthened the US dollar against other major currencies in the international market. After three weeks of Donald Trump’s victory, the US dollar was 40 per cent higher against a basket of currencies of other major countries, from its lows in 2011. The reciprocal impact of this appreciation should be a depreciation of other currencies against the US dollar. 


Therefore, maintaining a stable exchange rate against the US dollar cannot be considered as a sustainable approach since this would lead to an overvaluation of the Sri Lankan rupee which would in turn reduce the competitiveness of our exports. At the same time, Sri Lanka does not have the capacity to intervene on a continuous basis through the supply of foreign currency due to the fact that the country has only a limited amount of international reserves which have largely been raised through debt creating sources. Using reserves accumulated through borrowed funds to defend the exchange rate is even more costly for the economy. 


Is exchange rate depreciation always bad? 


Allowing the exchange rate to depreciate is not necessarily a bad approach in economic management. However, popular belief is that a depreciation of the Sri Lankan rupee against other foreign currencies would only increase the outstanding stock of foreign debt, debt service payments and prices of imported goods and services. Nonetheless, a depreciation of the exchange rate can also have a positive impact on the economy. 


Depreciation of the exchange rate has a positive impact on the country’s trade deficit as it makes imports more expensive for domestic consumers and exports cheaper for foreigners. Such a policy would encourage domestic consumers to consume domestically produced alternative goods. More importantly, depreciation of the exchange rate would improve export competitiveness of the country as the depreciated exchange rate would lower the cost of goods exported from that country to the rest of the world. The combined effect of an exchange rate depreciation on imports and exports would boost domestic demand for alternative domestically produced goods and foreign demand for our exports, thus favourably contributing to enhancing exports, employment and economic growth in the country. 


An exchange rate depreciation can also impact government operations in the areas of revenue, expenditure, government borrowings in foreign currency, debt service payments and outstanding government debt. Depreciation would enhance revenues from import related taxes, especially if the country imports more of essential goods. Further, depreciation of the exchange rate would result in a higher amount of local currency for a given amount of foreign currency borrowings of the government. 


Despite such positive effects, depreciation of the exchange rate could also have some negative effects, especially in terms of increase in foreign currency debt service payments of the government and increase in expenditure on the imports including capital goods which are crucial for the long term growth of the country. In addition, depreciation of the external value of the domestic currency would lead to an increase in the domestic currency value of the outstanding stock of external debt of the country. However, even if the domestic currency value of the outstanding stock of external debt increases, the country will only have to service a certain portion of that debt stock in a year. 


Further, if loans are obtained in foreign currency, these loans and their interest component can be settled only if incomes are received in foreign currency or if additional loans are obtained in foreign currency. Even though the value of the rupee in terms of the foreign currency changes by any amount, the foreign currency equivalent of loans and the interest to be repaid would not change. Therefore, comments that the external debt burden of the government has increased significantly due to the depreciation of the rupee are misinterpretation of facts. The comments that if such a depreciation of the rupee did not arise, the government could have saved billions and this money could have been used for other mega development projects are not correct. If the exchange rate is overvalued/appreciated especially for a country like Sri Lanka, which continues to record a budget deficit and imposes significant tariffs on foreign trade, the budget deficit would further expand and this would necessitate to borrow more from domestic and external sources to finance the budget deficit. As such, though the net effect is difficult to be evaluated accurately, it is important to understand that depreciation of the rupee has not only negative implications, but also positive implications on the Sri Lankan economy. The positive effects of the depreciation of the exchange rate would contribute in reducing the impact of negative effects of the depreciation, but sometimes, the negative effects can be exceeded by the positive effects. 


As such, the most important message is that the negative effect of allowing the exchange rate to depreciate is not that significant compared to negative consequences of maintaining an overvalued exchange rate and shocks to the economy if the Central Bank suddenly moves out of the foreign exchange market after maintaining the external value of the rupee stable for an extended period. 


Sri Lanka has had numerous such experiences with the most recent events been in 2011/2012 and 2015. Total supply of foreign exchange to the market by the Central Bank amounted to US dollars 3,184 million during 2011, and US dollars 977 million during the first two months of 2012, until greater flexibility was allowed in the determination of the exchange rate in February 2012. In spite of this considerable loss of reserves, the Sri Lankan rupee depreciated from Rs. 113.90 at end 2011 to Rs. 132.55 against the US dollar by 26 April 2012, a depreciation of 14.07 per cent. Similarly, in 2015, the Central Bank supplied US dollars 1.9 billion in net terms during the year before deciding to allow more flexibility in the determination of the exchange rate on 3 September 2015, which was followed by a depreciation of 4.8 per cent against the US dollar by end September. 


In this context, the most prudent policy stance would be to allow the exchange rate to be determined flexibly, according to supply and demand conditions for foreign exchange in the market. Accordingly, this would ease the pressure on the exchange rate. However, as the Central Bank has intervened in the domestic foreign exchange market to prevent a sharp volatility of the Sri Lankan rupee, any decision to move away from this policy would lead to a sharp depreciation immediately before stabilising thereafter. Further, allowing the exchange rate to be determined according to market forces would not necessarily lead to a continuous depreciation of the rupee. The exchange rate could also appreciate if the country receives a substantial amount of foreign currency inflows. This could help the country to build up international reserves in the medium to long term. The most sustainable inflows in this regard would be earnings from exports of goods and services as well as long term foreign inflows such as foreign direct investments. Some countries in the Asian region, which lagged behind Sri Lanka a decade ago, are now growing at a faster rate benefiting from higher export earnings and/or inflows of export oriented foreign direct investments. Accordingly, maintaining a competitive exchange rate aimed at promoting Sri Lankan exports in the international market and attracting foreign direct investment to Sri Lanka, will remain vital in promoting the country as a globally competitive export-led economy.

Source: CBSL