CBSL holds promotions in four financial capitals Govt. to raise US$ 1.5 B after polls Interest charged to be higher

By Paneetha Ameresekere

Ceylon Finance Today: The Central Bank of Sri Lanka (CBSL) which plans to raise a Sovereign Bond of US$ 1.5 billion on behalf of the Government of Sri Lanka (GoSL) after next month's polls, has held road shows and meetings in this connection in London, Hong Kong, Singapore and New York recently, according to market sources.


The tenure of the Bond will be five years, an official who didn't want to be named told Ceylon FT. "CBSL doesn't want the tenure to be longer than that for fear that the market would ask for higher rates in the backdrop of a buoyant US economy, where the Federal Reserve System is expected to raise rates, after a lapse of over eight years, by the middle of next year," the official said.

The last time GoSL raised money in international markets was in April, where it borrowed US$ 500 million of a five year tenure at a 5.125 per cent interest rate. "This time the interest charged will be higher, but at the same time demand is slack, which will put a cap on an 'untoward' spike in rates," an official said Earlier, on 6 January, 2014, the Sovereign raised US$ one billion, also of a five year tenure, but at a higher interest rate of 6%.

The problem facing Sri Lanka's external sector, which results in GoSL having to borrow from international commercial markets, is that it runs a continuous trade deficit. 

According to latest statistics, the trade deficit in the first 10 months of the year increased by 4.3% year on year (YoY) to US$ 6.79 billion. Sri Lanka last established a trade surplus 37 years ago in 1977.

Currently, CBSL is protecting the local currency from further depreciating pressure at Rs 131.99 to the US dollar in interbank "spot next" and "spot next next" trading, while on Friday (26 December), CBSL allowed the administered "spot" price to depreciate by 15 Sri Lanka cents to Rs 131.15 to the dollar on that day.

He further said that while major international currencies worldwide are depreciating against the dollar due to the recovery of the US economy, here it was being protected and not allowed to depreciate.

The official didn't discount what happened in November 2011 and February 2012 once more being repeated, where CBSL/GoSL let go of the rupee due to pressure on CBSL's external reserves; then too after continuously protecting it at the Rs 110 level against the dollar in "spot" trading for months.

It was devalued by 3% in Budget 2012 presented in November 2011 to Rs 113.40 but the pressure persisted due to import demand, after which CBSL virtually let go of defending the local currency three months later in February 2012, which resulted in the exchange rate (ER) closing 2012 at the Rs 127 level.

Nevertheless, with private sector credit growth being low, it grew by 5.1% in October on a YoY basis according to latest statistics, compared to a recent record high of 34.5% on a YoY basis, established three years ago in December 2011. Sources said that the recent demand for dollars was due to credit once more picking up, a condition favoured by CBSL.

Meanwhile, top officials of the Central Bank defended the Bank's ER policy on the basis that CBSL has reserves of more than US$ eight billion. But when it was pointed out that this was borrowed money, they said that the debt to GDP ratio in the USA was 114%, while even in the UK this ratio was high.

They said that outflows in the government securities market (GSM) was not a concern, because they had received over a billion dollars of net inflows. Since August, net outflows from the GSM have totaled Rs 48 billion (US$ 365 million). Meanwhile, GoSL's foreign debt servicing commitments in the 12 months to October 2015 have been estimated at US$ 6.9 billion.

Central Bank officials declined to comment on the proposed Sovereign Bond sale at the present time.
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CB Governor: Good times ahead for Sri Lanka in 2015 Roll out those barrels! With oil at US$ 60 per barrel

By Ravi Ladduwahetty

Ceylon Finance Today: Central Bank Governor Ajit Nivard Cabraal predicted good times ahead for Sri Lanka in 2015, if global fuel prices stay at the current US$ 60 per barrel.
In an exclusive interview with Ceylon Finance Today, Cabraal said that the country's total fuel imports, estimated at US$ 4.8 billion for 2014, would fall by as much as US$ 2-2.8 billion, if crude oil prices remain around US dollars 60 per barrel in 2015.

As an oil importing country, Sri Lanka also will be benefitted by ease of current account deficit, low inflation and high economic growth, while reducing pressure on fiscal accounts, he observed.

Further, import prices of intermediate goods such as fertilizer, synthetic rubber and polythene will decline in line with the decline in oil prices, he said.

Commenting on the further immediate benefits of the reduction on global fuel prices, Governor Cabraal said that, the decline in oil prices will reduce the import bill substantially, strengthening the current account balance of the Balance of Payments.

Stressing that Sri Lanka's expenditure on fuel imports accounts for around one fourth of its import expenditure, he also said that the reduction in fuel prices will impact inflation favourably, both directly and indirectly.

"As per the composition of the consumption basket which is used to calculate the Colombo Consumer Price Index (CCPI), petrol, diesel and kerosene account for more than 5 per cent of the total weight. Therefore, fuel price reduction will directly reduce the expenditure value in CCPI reducing inflation," he said.

"Further, reduction in fuel prices will help to reduce transportation cost and electricity prices which are also major items in the CCPI basket. In addition, reduction in fuel prices, transport cost and electricity cost reduces the production cost of goods and services having indirect impact on reducing inflation," he remarked.

He added: "The reduction of fuel prices will have a favorable impact on economic growth of Sri Lanka especially through the supply channels. Fuel is used as a main source of energy for the productive sectors such as the agricultural sector, the formal manufacturing sector and transport sector. Therefore, reduction in cost of energy will reduce the cost of production of firms, increasing their profitability and encouraging them to enhance production which leads to high economic growth"

The declining trend of international oil prices will reduce the pressure on fiscal accounts through reductions in energy subsidies, as it will improve the financial performances of Ceylon Petroleum Corporation (CPC) and Ceylon Electricity Board (CEB). CPC has been able to record profits since 2013 while gradually reducing the dependence on the banking sector resources due to cost reflective price revisions.

The declining oil prices will reduce the cost of production of petroleum products substantially, even though it takes some time to make a positive impact due to time lag in importation and production cycles. While passing the maximum benefits to all stakeholders by reducing domestic fuel prices, improving cash flow will further reduce CPC's liabilities to the banking sector.

The price reduction of petroleum products will also improve the CEB's financial position. 

The reduction of Diesel and Furnace oil prices will help reduce the cost of thermal oil power generation, though the thermal power generation is currently low due to commissioning of Phase 2 of the Norochcholai coal power plant.

"Accordingly, as an oil importing country, the oil price reduction observed in the international market will be favorable to Sri Lanka and it will strengthen the external sector, monetary sector, real sector and the fiscal sector through lower current account deficit, lower inflation, high economic growth and reduction in cost of production respectively, he added.

Crude oil prices had been around US dollars 110 per barrel during the period from 2010 to June 2014. But then declined rapidly to below US dollars 60 per barrel by December 2014 recording the lowest level after July 2009.

The reduction of the global price reduction is mainly attributed to weak demand in many oil consuming countries due to sluggish economic growth, and increased oil production by the USA.
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1.5 millionth tourist arrives

Sri Lanka yesterday welcomed the arrival of 1,500,000th tourist for 2014 at the Bandaranaike International Airport.

The name of the milestone visitor was Torence Jimmy, who along with Qupika Hedwig arrived via UL 558 Sri Lankan Airlines flight from Germany. Sri Lanka Tourism Promotion Bureau officials including Managing Director Rumy Jauffer and representatives from the travel and tourism industry extended a warm welcome.


 

– Pix by Deepa Adhikari

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Rs 48B net outflows from Govt. securities market

By Paneetha Ameresekere

Ceylon Finance Today: Friday saw a net foreign outflow (NFO) of Rs 706 million from the Government Securities Market (GSM) in the week ended Wednesday (24 December), taking NFOs in the last four months to date to Rs 48 billion (US$ 364 million), thereby causing further depreciating pressure on the rupee, market sources told Ceylon FT.

"Strengthening of the US dollar against other major international currencies, a buoyant US economy which grew by five per cent in the 3rd quarter, complemented by foreign funds exiting from the GSM (Treasury (T) bonds and T bill) to US based assets are causing downward pressure on the rupee," they said.

Meanwhile, the exchange rate (ER) on thin trades closed Friday (Boxing Day) at
Rs 131.99 to the dollar, both at 'spot next' and 'spot next next' trading under Central Bank of Sri Lanka's (CBSL's) moral suasion umbrella, while trading in the government securities market was also thin due to the holiday season, the sources said.

In a bid to shore up interest rates, in a dual role of trying to satisfy those living off interest income and to mitigate pressure on the ER, CBSL, on Friday, simultaneous with drawing in excess liquidity from its standing deposit facility (SDF) at the low, five per cent interest rate, also held an overnight repo auction and a short term repo auction, by which it drew in further excess liquidity at the higher interest rates of 5.91% and 5.98% respectively.

CBSL, in its monetary policy statement of 23 September said that banks parking their excess liquidity in CBSL's SDF for more than three calendar days a month would be paid the low, five per cent interest rate, rather than the standard, SDF rate of 6.5%. CBSL further said that they will be suspending their repo auctions, only to reintroduce them hardly 10 days later, in the first week of October, in order to push up interest rates.

Meanwhile, CBSL lent Rs 2.4 billion to the Government of Sri Lanka (GoSL), by buying T bills of an equivalent value at Friday's trading, thereby helping to create demand side inflationary pressure on the economy.

As a result, CBSL increased its T bill holdings by nearly 1,700% to Rs 2.4 billion at Friday's trading.

Statistics further revealed that a sum of US$ 143 million (Rs 18.8 billion) was drawn out from CBSL's foreign reserves for the purposes of defending the rupee or GoSL's foreign debt servicing or due to a mix of both.

CBSL, in order to prevent depreciating pressure on the rupee, sells dollars to the market on selective trades at Rs 131.55/65 to the dollar in two way quotes in interbank spot trading, currently.

As a result, market's excess liquidity of an equivalent rupee amount (Rs 18.8 billion) was swallowed up by CBSL in return.

Meanwhile, on the previous market day Wednesday (24 December) too the ER on thin trades closed at Rs 131.99 to the dollar at 'spot next' and 'spot next next' trading under CBSL's moral suasion umbrella, while trading in the GSM was also thin due to the holiday season, sources said.

Nevertheless, the longer tenure T bonds, that is, those maturing on 2021, 2022 and 2024, saw their yields decline by 10 basis points since Friday (19 December) due to local demand, they said. Meanwhile, market's excess liquidity increased by 69% to Rs 18 billion, due to banks parking their excess with CBSL, in order to capitalize on an additional day of interest earned, due to Christmas Day, 25 December being a holiday, they said.

Previously, some of their excess was kept in their own vaults, which however didn't earn interest for them. CBSL pays banks interest at the rate of 6.5% on an overnight basis in the event they park their excess with them for a maximum of three calendar days a month, while the interest paid on other days is a mere five per cent.
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Auto Company mulls legal action against ex People’s Merchant Leasing Company Chairman

For alleged default of Rs. 2.25 mn on purchase of two vehicles

BY SURESH PERERA

A leading automobile parts company is contemplating legal action against the former Chairman of a government-controlled company in the financial service industry for alleged default of Rs. 2.25 million due as final payments on the purchase of two vehicles.

Three cheques to the value of Rs. 3 million given by him to meet the due payments had bounced as the HSBC account had been closed at the time of their issuance.

The company, Japan Lanka Auto Parts (Pvt) Limited of Mirihana, Nugegoda, has already sent a letter of demand through its lawyer, Namasena Gamage, seeking payment of the money "lawfully due within two weeks".

At the time Ajith Panditaratne served as the Chairman of People’s Merchant Leasing Company PLC, he had entered into a legal contract with the company in November, 2010 to purchase two Toyota Axio motor cars for Rs. 9.2 million. He had undertaken to settle the total due amount within one year.

Although it was a raw deal, the company agreed to a time extension for settlement based on representations made by the buyer (Chairman) considering, inter alia, that he is personally very close to the top most authorities in the country and that he served as the head of a state-owned financial institution, which had secured an A+ Rating, the letter of demand stated.

It was discovered that the cheques had been drawn from the account of the Chairman’s personal assistant, and there are doubts whether such a person could maintain an account in this bank. There are also doubts whether this account was actually maintained by the Chairman himself under the name of his assistant, it further noted.

"We sent the letter of demand in October 2014, but he has still not responded to it", a senior official of Japan Lanka Auto Parts, said. "He is also avoiding answering our telephone calls".

"We are now in the process of initiating legal action against him", he noted. "We entered into a legal agreement with him based on trust, but we have been led up the garden path".

Apart from instituting legal proceedings against him to recover outstanding dues with costs, criminal action will also be filed on the dishonored cheques, the official explained.

Asked why he had defaulted on the payments, Panditaratne said he "ran into some problems which resulted in the delay". The two cars were purchased for his personal use and not for People’s Merchant Leasing Company, where he served as Chairman at the time.

He said that he had kept in touch with the company and briefed them on the developments with an assurance he will honor his commitment shortly.


"That’s bunkum. He continues to duck and our repeated phone calls are also not answered", the official interjected. "When we use a different number, he answers, but immediately hangs up saying he is busy".

"I can give a categorical assurance that I will pay back the money in the second week of January 2015", Panditaratne said. "I will call the company immediately and assure them that it will be done".

Contacted again five days after Panditaratne gave this assurance, the company official described it as "typical bluff". This is just eye wash. He didn’t call, and is not expected do so in the future either.

"We have decided to seek legal redress as this hide-and-seek game cannot be allowed to continue", he said. "We have suffered a substantial financial loss as a result".

The former Chairman, it is understood, is closely connected to the powers-that-be, which warranted his appointment to head the state-owned financial institution at the time.
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Sri Lankan stocks rise to 5-wk closing high in thin trade

Dec 26 (Reuters) - Sri Lankan stocks closed at its highest in five weeks Friday in thin trading, led by large caps such as Ceylon Tobacco Company Plc even as investors stayed away amid holiday season and political uncertainty before the Jan. 8 presidential polls.

The main stock index rose 0.63 percent, or 45.78 points, to close at 7,309.03, its highest close since Nov. 21.

The day's turnover fell to a near two-week low of 438.1 million rupees ($3.32 million), less than a third of this year's daily average of 1.43 billion rupees, stock exchange data showed.

Shares in Ceylon Tobacco Company Plc rose 3.7 percent in low trade while Sri Lanka Telecom Plc rose 2.8 percent also in low trade.

"Market turnover is up on block deal of Dialog Axiata and Lanka IOC; if you take out that the turnover is very low as many investors and stockbrokers are still on Christmas holiday," said Reshan Wediwardene, research analyst at First Capital Equities (pvt) Ltd.

Analysts said low volume trading was seen in illiquid stock.

Shares in Lanka IOC Plc rose 1.55 percent while Dialog Axiata Plc ended 0.74 percent weaker.

President Mahinda Rajapaksa's United People's Freedom Alliance lost its two-thirds majority in Parliament for the first time in more than four years after two ruling party legislators, including a cabinet minister, defected to join the opposition on Monday.

Fifteen legislators, including former health minister Mithripala Sirisena, who is challenging Rajapaksa's bid for the third term, have defected after the president announced snap elections last month. Two opposition legislators have left to join the ruling party.

Political analysts see a tight race between Rajapaksa and Sirisena, whose New Democratic Front has promised to eliminate rampant corruption and reduce prices of essential goods and fuel by cutting taxes.

Rajapaksa said on Tuesday he would ensure good governance and media freedom if he bags a third term.

Net foreign inflows into stocks were 192.9 million rupees, extending net inflows to 21.83 billion rupees so far this year, exchange data showed. 

($1 = 131.99 Sri Lankan rupees) 

(Reporting by Ranga Sirilal and Shihar Aneez; Editing by Biju Dwarakanath)

East West Properties buys 36 million shares of Weligama Hotel Properties

East West Properties PLC is to purchase 36 million ordinary shares of Weligama Hotel Properties Limited at Rs. 09 per share.

The total value of this major transaction is Rs. 324 million.
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