Oil Market Report - Global demand growth to slow in 2016 closer to long-term trend as price support is likely to wane - IEA

IEA releases Oil Market Report for October

Global demand growth is expected to slow from its five-year high of 1.8 mb/d in 2015 to 1.2 million barrels per day (mb/d) in 2016 – closer towards its long-term trend as previous price support is likely to wane, the IEA Oil Market Report for October informed subscribers. Recent downgrades to the macroeconomic outlook are also filtering through.

World oil supply held steady near 96.6 mb/d in September, as lower non-OPEC production was offset by a slight increase in OPEC crude.

Non-OPEC accounted for just under 40% of the 1.8 mb/d annual increase in total oil output. Lower oil prices and steep spending curbs are expected to cut non-OPEC output by nearly 0.5 mb/d in 2016.

OPEC crude supply rose by 90 0000 barrels per day (90 kb/d) in September to 31.72 mb/d as record Iraqi output more than offset a dip in Saudi supply. A slowdown in forecast demand growth and slightly higher non-OPEC supply lowers the 2016 “call” on OPEC by 0.2 mb/d from last month’s Oil Market Report to 31.1 mb/d.

OECD commercial inventories extended recent gains and rose by 28.8 mb in August to stand at 2 943 mb by end-month. Since this was nearly double the 15.0 mb five-year average build for the month, inventories’ surplus to average levels widened to 204 mb.

The onset of seasonal turnarounds in the OECD and the Former Soviet Union is estimated to have curbed global refinery runs by 1.9 mb/d in September to 79.4 mb/d. Runs remained remarkably strong, particularly in Asia and the Middle East, leaving global throughputs up nearly 2 mb/d from a year ago.

The October Oil Market Report also features an in-depth look at the market's focus on Iran and Iraq as well as a feature on the fallout on oil demand forecasts from the International Monetary Fund's downward revision to its global economic growth estimate for 2015-16. A third article available to OMR subscribers looks at implications of the recent "volatility smile" for options in oil markets.

The Oil Market Report (OMR) is a monthly International Energy Agency publication which provides a view of the state of the international oil market and projections for oil supply and demand 12-18 months ahead.
http://www.iea.org/

Indonesian retail chain to enter Sri Lanka

ECONOMYNEXT – Mitra Adiperkasa (MAPI), one of Indonesia’s biggest retail store chains, is planning to enter the Sri Lankan market, a senior member of the Sri Lanka and Indonesia Business Council said.

Indonesian companies were interested in making use of the opportunities opening up in Sri Lanka, said Jatinder Biala, outgoing president of the business council and head of ISIN Lanka Pvt Ltd., a yarn manufacturer and exporter.

He said that during a visit to Indonesia recently he met the owners of Mitra Adiperkasha (MAP), which operates 1,900 stores, retailing over 150 brands and employing more than 23,000 people in 65 Indonesian cities.

“They have already taken steps to promote their products in Sri Lanka,” Biala said. “Very soon they are opening a subsidiary in Sri Lanka.”

Mitra Adiperkasa, which calls itself a lifestyle retailer in Indonesia, has businesses in retail (clothes, sports and toys), department stores, cafés and restaurants.

It also operates stores of major foreign brands such as Starbucks and Zara in Indonesia under franchise contracts.

Tax breaks for Sri Lanka listed debt may generate high risk bubble

ECONOMYNEXT Listed debentures have mushroomed over the last two years after the State made them tax free in an attempt to boost the debt market.

While it has brought results, the move may also undermine the development of an orderly market based on credit fundamentals.

It has also created a tax shelter for the rich, while the state taxes basic foods like potatoes, cereals, milk and canned fish in a bid to force less affluent workers to bow down to the desires of autarkists.

Most state interventions, which favour sections of the citizenry or one type of economic activity against another have unintended consequences. Such interventions often do not even achieve the objective they set out to do.

Tax breaks to start venture capital companies for example gave tax free luxury cars to their founders but little else.

Sri Lanka Treasuries, bond yields fall across maturities; rupee weaker

ECONOMYNEXT - Sri Lanka's Treasuries yields fell across maturities at Wednesday's auction with the 12-month yield falling 08 basis points to 7.10 percent, data from the state debt office showed, with bond yields also falling during the day.

The 3-month yield fell 05 basis points to 6.73 percent and the 6-month yield fell 03 basis points to 7.04 percent.

The Central Bank accepted 12.5 billion rupees in 3-month bills, 4.8 billion in 6-months and 6.6 billion in 12-month bills totalling 23.9 billion rupees.

There is an estimated 35 billion rupees in bills maturing this week. Over the last two weeks, large volumes of debt has been monetized, generating excess demand and currency pressure.

Bond yields also plunged 30 to 40 basis points before and after the bill auction.

There have been no bond auctions this week and active foreign selling not seen dealer say.

3-year bonds maturing on 15.11.2018 closed at 8.85/95 down from 9.10/20 yesterday.

5-year bonds closed at 01.05.2020 closed down 9.15/20 percent falling as low as 9.10 percent down from yesterday's 9.50/55 percent.

8-year bonds maturing on 01.09.2023 closed down at 9.45/55 percent falling as low as low as 9.40 percent, down from 9.85/95 yesterday.

10-year bonds maturing on 01.08.2025 9. 60/75 down from yesterday's close of 10.00/04 percent.

The 30-year bond maturing on 01.04.2045 was also quoted at 10.75/11.25 percent, dealers said.

In forex markets the rupee opened at 140.50/70 levels and dropped towards 141 and recovered to close at 140.80/90 levels, dealers said.

Sri Lankan stocks fall to 3-month closing low; budget, corporate earnings eyed

Sri Lankan shares fell to a three-month closing low on Wednesday, led by diversified companies as investors waited for clues from government budget and September-quarter corporate results, brokers said.

The main stock index ended 0.54 percent, or 38.13 points, weaker at 7,040.32, its lowest closing since July 14.

"There was selling pressure across the board today, especially on the blue-chip counters," said Dimantha Mathew, a research manager at First Capital Equities (Pvt) Ltd.

Analysts said investors were cautious ahead of Prime Minister Ranil Wickremesinghe's policy statement next month outlining his government's economic priorities.

Turnover stood at 725.9 million rupees ($5.15 million), compared with this year's daily average of 1.11 billion rupees.

Foreign investors, who have been net sellers of 2.98 billion rupees worth of equities so far this year, bought a net 106.9 million rupees worth of shares on Wednesday.

Shares of Carson Cumberbatch Plc fell 4.36 percent, while Aitken Spence Hotel Holdings Plc dropped 7 percent and Bukit Darah Plc declined 2.52 percent. 

($1 = 140.9000 Sri Lankan rupees)

(Reporting by Ranga Sirilal; Editing by Subhranshu Sahu)

Sri Lanka FMCG, manufacturing firm earnings seen up

Click here to View or Download the Full Report

ECONOMYNEXT – Sri Lankan fast moving consumer goods and manufacturing companies are expected to report higher earnings in the September quarter given low fuel and commodity prices and deflationary conditions that have improved buying power, brokers said.

The effect of the price reductions on the economy were seen large as deflation was last reported two decades back, Sampath Securities said in an earnings note to clients.

“We expect the level of consumption to be increased over the quarter with the reduced price levels. As a result we expect companies with FMCG exposure to post notable results during the period.”

The island has been experiencing deflation in the three months to September after the new government reduced prices of essentials items in the food and non-food categories earlier this year.

The brokers said sharply lower global commodity prices during the quarter should also help manufacturers by reducing costs.

Oil prices declined by 24 percent to 46 US dollars a barrel in September from the end of June while copper prices dropped 12 percent due to weak demand from larger economies.

Global cotton prices declined 12.3 percent during the quarter to 59.2 US cents a pound due to a supply glut while aluminum prices dropped five percent.

“Further, domestic fuel prices revised down earlier this year remained constant during the quarter and electricity tariffs revised down also remained unchanged,” Sampath Securities said.

“Therefore, since the commodity prices and energy prices remained favourable during the quarter, we expect certain counters in the manufacturing sector to report bolstered results.”

Sri Lanka Fitch assigns 'BB(lka)' rating to Bimputh Finance

ECONOMYNEXT - Fitch Ratings Lanka has assigned Bimputh Finance PLC (Bimputh) a National Long-Term Rating of 'BB(lka)' with a Stable Outlook.

Bimputh's rating reflects its developing franchise and limited track record as a recent entrant to the non-bank financial institution sector in Sri Lanka, a statement said.

The rating also captures its relatively high risk appetite, being mostly micro-financing and limited funding diversity although it has wide net interest margins (NIMs).

The full rating report follows:

Fitch Ratings-Colombo-13 October 2015: Fitch Ratings Lanka has assigned Sri Lanka-based Bimputh Finance PLC (Bimputh) a National Long-Term Rating of 'BB(lka)' with a Stable Outlook.

KEY RATING DRIVERS

Bimputh's rating reflects its developing franchise and limited track record as a recent entrant to the non-bank financial institution sector in Sri Lanka. The rating also captures its relatively high risk appetite, which is evident from the dominance of micro-financing in its exposures; limited funding diversity with high dependency on wholesale funding; and pressure on capitalisation through above-average loan growth. These are counterbalanced by wide net interest margins (NIMs).

About 78% of Bimputh's loan book is from the microfinance segment, which is seen by Fitch as riskier in nature due to the greater susceptibility of this segment to economic cycles. The company's gross NPL ratio for loans that are six or more months past due stood at 0.96% at end-June 2015. Fitch believes that the ratio is higher at 3.2% if a facility to Sevanagala Sugar Industries Limited (an entity within the Daya Group, which was expropriated by the government in November 2011) is included, but the ratio is in line with similarly rated peers.

The company has adequate risk controls in place, including through product structuring, regular collections of dues and close interaction with the borrowers. However, Fitch believes that the aggressive expansion of the company's loan book raises the likelihood of asset-quality deterioration, particularly if the related risks are not well managed.

The company's deposit franchise remains weaker than that of its peers and remains highly concentrated. Bimputh's loan-to-deposit ratio increased sharply on account of rapid loan growth to 289% at end-June 2015 from 184% at end-March 2014 with the company's loan book being increasingly funded by borrowings. The company's loan book expanded by 31% in April-June 2015 from the same period a year earlier and 213% in the financial year ended March 2015 (FY15),

Bimputh's Tier 1 regulatory capital ratio declined to 21.6% at end-June 2015 from 23.8% at end-March 2015 due to the expansion of the loan book. Fitch believes that continued high capital consumption could lead to further deterioration in capital ratios, if internal capital generation proves insufficient or if there is no capital injection.

The company's ROA is better than that for similarly rated peers at 9.8% (annualised) in 1QFY16 (FY15: 4.7%), driven by wider NIMs through its focus on micro-lending. However, Fitch believes higher operating costs due to branch expansion and a potential increase in credit costs could hamper profitability.

Bimputh is 94% held by its founders, the Gamage family. The company started operations in 2007, and in 2012 acquired the micro-finance portfolio of Lisvin Investments. Since then assets have increased over seven times to LKR6.3bn at end-June 2015. Bimputh accounted for just 0.96% of total assets for the licensed finance companies (LFC) sector at end-June 2015 (March 2015: 0.74%).

RATING SENSITIVITIES

The strengthening of Bimputh's franchise, while sustaining credit metrics similar to higher rated peers and moderating its risk appetite could be positive for its rating.

Higher risk appetite, indicated through aggressive loan growth that could increase capital impairment risks, either through greater unprovided NPLs and/or a continued deterioration in capitalisation, could lead to a downgrade of Bimputh's ratings.

High-net-worth individuals in Colombo develop a taste for ‘Luxury Residences’

-Ms.Gagan Singh, chairperson – Jones Lang LaSalle Sri Lanka


The year of 2015 has been very important for Sri Lanka because of the presidential and the parliamentary elections held recently. The outcome of the elections reassures that whatever perceived uncertainties the market witnessed are over. Sri Lanka’s GDP has been growing by a little above 7% for the past couple of years and the Asian Development Bank estimates the faster expansion in the construction industry is one of the reasons for the consistency. The business-friendly approach by the government is expected to continue to boost construction activity, which eventually shall take projected GDP growth to 7.3% by end-2016, up 30 bps from the expected 2015 estimation.The International Monetary Fund estimates that in 2014, GDP per capita was USD 3,558, which is an 8% growth y-o-y. This indicates that income per individual is increasing, hence the potential of consumers seeking branded items and the desire to patronise branded retail malls is high. During the remaining quarters of 2015, consumption is expected to increase with the increase in GDP. Currently, inflation is at very low levels, which bodes well for interest rates in the near-to-medium term. Higher disposable income is expected to be channelised to real estate investments. The luxury residences will be amongst the beneficiaries.

As we understand Sri Lanka has a growing number of High-Net-Worth Individuals (HNWIs), most of the developers of luxury residences that we approached claimed local buyers account for more than 60% of their sales, with Non-resident Sri Lankans accounting for the remainder.

Local buyers, who are affluent, have travelled widely and patronise luxury designer brands. For them, it is not just prestige, but also the private, smart, elegant form of living that they expect. They prefer to interact with a community of individuals who are like-minded, but like to have their private space within that ambience, restricting themselves to the recreational facilities that are provided in the complex. The luxury developments consider and fulfil these aspects; the result is the segment is doing well. Out of the total size of the luxury market of 2400 completed units, 98% of these are sold. It clearly emphasises a notable demand for the quality product. It is expected that by 2018 the luxury residential market is set to be double the size of today’s and the demand is expected to grow.

The other category of those looking at luxury residences is the Non-resident Sri Lankans, the individuals who are eager to settle in their home base. The affluent individuals are seeking prestigious lifestyles and prime locations, the young urban rich segment looking for future investments. Interestingly, the growth of foreign remittances from 2009 to 2014 increased from USD 3,330 million to USD 7,000 million according to the Central Bank statistics. This clearly indicates the country promises growth opportunities to both residents and Non-resident Sri Lankans.

The market for luxury residences in the current scenario is heading towards consistent noticeable growth. Many developers are planning to finish their projects in the medium-term horizon, and all developments are centred on the Central Business Development area – Colombo 1 with Fort, Colombo 2 Slave Island, Colombo 3 Colpetty – and Rajagiriya, an upcoming residential location.

As the luxury market in Colombo is in its early growth stage, the definition of luxury is hazy and subjective; however, JLL has categorised residences as per the price segments in the following manner:

As per the latest data of 2Q15, of the 10 residential projects completed over recent quarters, 95% of units were sold. The 16 projects that are under construction have been witnessing sales traction. Most of the projects have their own unique propositions to offer, but it is worth noting the developments by Shangri-La and Cinnamon Life. These mammoth size projects, which offer more than 400 units, are located in the CBD areas of Colombo.

A development by AVIC, a well-known developer, is entering into a JV with a Chinese firm to incorporate the global luxury standards in their project Astoria located at Colpetty. The other well-known developers are sprawled within the limits of Colombo 3, 4 and 7, and in the fast-developing commercial zones of Rajagiriya and Nugegoda. Noteworthy developers, such as John Keells Holdings, Fairway and Colombo City Centre, are relying on the advantage of anchoring clients through their trust, long-standing brand name, and working relationships in the local context.

It is imperative that the government takes urgent steps to curb red tape and come out with single-window clearances. What is required is a simplification of the approval process and a tax-friendly environment, particularly with regard to land acquisition. The emergence of the retail and office sectors will contribute to well-rounded development, including the luxury residences environment.

Developers need to ensure they are reaching the right audience and diligent care needs to be taken so that the quality supply meets the demand. Luxury apartments as a product need to be marketed well, emphasising their unique selling propositions.


The new government that recently came to power aims to attain complete transparency in all transactions. Higher transparency will lead to a higher inflow of investments. Investors are likely to be more open for market activity, helping the luxury residences segment to flourish.

www.island.lk

Oil hedging and Greek Bond issues to head matters to be probed by PSC

By Hiran H.Senewiratne

The government has appointed a Parliamentary Select Committee to inquire into the activities of the Central Bank during the last decade. It will probe mainly the oil hedging issue and the Greek Bond issue, which cost the country more than Rs 14 billion, Central Bank sources said.

Prime Minister Ranil Wickremesinghe informed parliament last week that a committee has been appointed to probe many issues relating to the Central Bank, including the hedging deal and Greek bonds, these sources said.

Central Bank Governor Arjuna Mahendra said at an event recently that good governance will be created in the Central Bank and that its internal transfers are normal routine ones. Its officers are always supportive to provide information on any matter to facilitate these probes, he said.

When responding to a question raised by parliamentarian Dinesh Gunawardena, the Prime Minister pointed out that during the previous regime statistics relating to economic development were misrepresented.

Informing the House that under the current government a large number of investors are waiting to invest in Sri Lanka, the Prime Minister stressed that at this juncture it is compulsory to prepare a special report on the Central Bank’s past dealings.

The Prime Minister said that the government is not satisfied with the performance of the CBSL and hence its activities during the last 10 years, including those of the last six months would be investigated.

Prime Minister Ranil Wickremesinghe said that the incumbent government is ready to restore the good image of the Central Bank.

The country has lost enormous amounts of money from the hedging deal and the Greek Bond issue. Further, several questionable deals will be probed, which happened during the last decade, a Central Bank officer told the Island Business Review.

The government lost US$ 60 million (Rs.7.5 billion) in the oil hedging deal.

Further ,Sri Lanka’s Central Bank invested reserve money in Greek bonds a few years ago, despite a US$ 6.6 million loss made on Greek bonds during the tenure of the previous Governor.

This payment was higher than the money which was allocated to some of the ministries from the annual budget. It is a considerable sum compared to allocations for ministries, such as, Education and Higher Education.
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Capital Alliance to raise Rs 116 m

Capital Alliance Finance will raise Rs 116 million by way of a rights issue. The company will issue 7,753,207 ordinary shares at Rs 15.00 each in the ratio of one for every five ordinary shares.

The proceeds of the rights issue will be utilized to increase the working capital of the company. The current stated capital of the entity is Rs 193, 590,566.

www.dailynews.lk

Blue Diamonds to explore new markets, local showrooms

Vishmi Wijerathne

Blue Diamond Jewellery Worldwide has taken measures for a market comeback in the next financial year after reviewing the losses the company faced during the previous management.

Blue Diamond Jewellery Worldwide Chairman and Managing Director Henry Xia Liqiang said the company has explored many directions that it can be expanded to.

Discussing the damage control policies taken by the company, Liqiang said among operating issues that was within the company they have also had to face the fallout of one of their main clients due to a misunderstanding regarding the previous management.

“We have purely relied for 98% of orders from one main customer in the Middle East. The balance 2% of orders was from Japan. Thus when the main client decided to stop nearly all of its orders we fell into a very fragile state,” he said.

However, the company has managed to assess previous drawbacks and has planned many measures of making a market comeback in the next financial year. The company which was previously an internationally oriented enterprise is now looking into expanding itself within the local market.

“Having newly come under Section 16 of the BOI regulations, we are now able to carry out

local sales. We also plan to open several showrooms in cities such as Colombo, Kandy, Galle and Negombo as we have realized through a through market analysis that the demand for gem and jewellery within the locality is increasing,” Liqiang said.

He said that they have also decided to move from solely focusing on carbon locked diamond jewellery to the gem and jewellery industry as the demand is rapidly increasing while the demand for the carbon locked diamond jewellery has been rapidly decreasing.

“The gem and jewellery market kept booming, especially for the Chinese market, the prices for gems, such as blue sapphires averagely increased around 30% to 50%, worldwide” He said.

The company also plans to strengthen their relationship with SriLankan Airlines. Liqiang said Sri Lankan Airlines have agreed to market two of their new items while signing up to market six new items in the gem and jewellery range under the ‘FIOR’ brand.

It was also mentioned that they are exploring possibilities to expand into China, Dubai, France and the United Kingdom. “We are building up initial communications with some of the world’s leading companies in the gem and jewellery industry, such as Cartier, Dior, Chaumet and Van Cleef and Arpels.” Liqiang said.

www.dailynews.lk