Sri Lankan stocks fall, turnover slumps to 7-mth low

Dec 29 (Reuters) - Sri Lankan stocks fell in thin trade on Monday from a five-week closing high in the previous session, as many investors were away for year-end holidays, while fresh defections ahead of the Jan. 8 presidential poll hurt sentiment, stockbrokers said.

The main stock index fell 0.29 percent, or 21.44 points, to 7,287.59. It had marked its highest close since Nov. 21 in the previous session.

Turnover fell to a seven-month low of 349.7 million rupees ($2.67 million), less than a quarter of this year's daily average of 1.42 billion rupees, stock exchange data showed.

Net foreign inflows into stocks were 50.4 million rupees, extending net inflows to 21.88 billion rupees so far this year, exchange data showed.

"Demand was very weak due to the holiday season. Foreign investors are also on holidays, so we don't see large volume share trading," said a stockbroker.

"The tight election between the two main candidates is also hurting sentiment. Some foreign investors are asking which listed companies could be hit if the opposition candidate wins next month's election."

Eight legislators from the main Muslim party defected from President Mahinda Rajapaksa's ruling United People's Freedom Alliance on Sunday.

Since Rajapaksa announced snap elections last month, 23 legislators, including former health minister Mithripala Sirisena, who is challenging Rajapaksa's bid for a third term, have defected. Two opposition legislators have joined 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 has promised good governance and media freedom if he wins.,

Top fixed-line phone operator Sri Lanka Telecom fell 3.7 percent to 49.50 rupees, while Commercial Leasing and Financial Plc lost 6.38 percent to 4.40 rupees.

($1 = 131.1000 Sri Lankan rupees) 

(Reporting by Shihar Aneez; Editing by Subhranshu Sahu)

Fitch Maintains MCSL Financial Services' Rating on Watch Positive

Dec 29, 2014 (LBO) - Fitch Ratings Lanka has maintained MCSL Financial Services Limited's (MFSL) National Long-Term Rating of ‘BBB (lka)' on Rating Watch Positive (RWP) as Fitch expects the merger of MFSL, MBSL Savings Bank Limited and Merchant Bank of Sri Lanka to be concluded within the first quarter of 2015.

Press Release Reproduced

Significant progress has been made since the merger announcement in March 2014, including securing the necessary shareholder approval at the extraordinary general meeting held on 13 October 2014, setting the share swap ratios and adoption of new articles of association. In addition, the surviving entity has been renamed to Merchant Bank of Sri Lanka & Finance PLC (MBSF).

MFSL was placed on RWP after Merchant Bank of Sri Lanka announced its proposed merger with MFSL and another company, all of which are subsidiaries of Bank of Ceylon (BOC: AA+(lka)/Stable).

KEY RATING DRIVERS
The RWP reflects Fitch's expectations that MFSL, as part of the surviving entity MBSF, will be of greater importance to the BOC group than MFSL on its own. This is based on BOC continuing to be the dominant shareholder in the merged entity - Fitch expects BOC to directly own 74% of MBSF compared with its current 50.1% direct holding and 80% effective holding in MFSL.

MBSF will operate as a licensed finance company focusing on vehicle financing activities.


RATING SENSITIVITIES

The Rating Watch will be resolved on the completion of the merger and on the receipt of final details of BOC's shareholding in the merged entity, which Fitch expects to be as early as January 2015. The next step in the merger would be the issue of a certificate of amalgamation by the Registrar General of Companies, subsequent to which shares will be issued to the owners of the entities merging to form MBSF.

MFSL's rating could be upgraded by multiple notches because of the merged entity's greater importance to BOC as the only licensed finance company within the group. That said, Fitch is likely to maintain a difference of several notches between the ratings on BOC and the merged entity due to the latter's limited strategic importance to the group.

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.
www.ceylontoday.lk

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

www.ft.lk