Sri Lanka shares end at near 3-wk high; foreign investors continue exit

Reuters: Sri Lankan shares closed at a near three-week high on Monday in dull trade as cautious investors selectively bought risk assets, while foreign investors exited amid a rise in yields of government securities.

Uncertainty over a capital gains tax and economic growth, and a higher budget deficit also hurt market sentiment, analysts said.

Foreign investors sold 137.5 million rupees ($946,644) worth of shares on Monday, extending the net foreign outflow so far this year to 1.79 billion rupees worth of shares.

The benchmark share index ended 0.51 percent, or 30.78 points higher, at 6,088.57, its highest close since March 1.

"Nothing much is happening. Overall, everything is very dull with holidays in-between, and investors are worried over the uncertainties," said Dimantha Mathew, head of research, First Capital Equities (Pvt) Ltd.

Markets will be closed on Tuesday and Friday for local holidays.

Investors preferred fixed interest-rate bearing assets over shares due to a rise in yields on treasury bills, which are hovering at more than two-year highs, and on the central bank's unexpected interest rate hike in mid-February, dealers said.

Yields on t-bills jumped by 62-90 basis points at a weekly auction on Monday to 29-month highs.

Sri Lanka will raise its value-added tax and reintroduce capital gains tax to break out of a debt trap, ahead of talks on a $1.5-billion loan it is seeking from the International Monetary Fund.

Sri Lanka's economy is expected to grow 5.3 percent in 2016, data from the state statistics office showed, but analysts say tight monetary and fiscal policies may curb growth.

The $82.2-billion economy expanded at a sluggish 2.5 percent in the December quarter, down from an upwardly revised 5.6 percent in the previous quarter.

Analysts and economists worry slower growth could reduce corporate earnings of some listed firms.

Turnover stood at 466.5 million rupees, well below this year's daily average of 787.8 million rupees.

Shares in Carson Cumberbatch Plc jumped 15.57 percent while Commercial Bank of Ceylon Plc rose 1.33 percent. Distilleries Company of Sri Lanka Plc climbed 2.57 percent. 

($1 = 145.2500 Sri Lankan rupees) 

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

Sri Lanka Singer Finance's debt gets 'BBB(lka)' Fitch rating

ECONOMYNEXT - Fitch Ratings said it has assigned Singer Finance (Lanka) PLC's proposed senior secured redeemable debentures of up to 1.5 billion rupees a final National Long-Term Rating of 'BBB(lka)'.

The final rating is the same as the expected rating assigned on 15 February 2016, a statement said.

Fitch said Singer Finance expects to use the proceeds to fund lending growth, lengthen maturities of its liabilities and reduce structural maturity mismatches.

The full rating report follows:

Fitch Ratings-Colombo-18 March 2016: Fitch Ratings has assigned Singer Finance (Lanka) PLC's (SFL; BBB(lka)/Stable) proposed senior secured redeemable debentures of up to LKR1.5bn a final National Long-Term Rating of 'BBB(lka)'.

A full list of existing ratings is at the end of this rating action commentary.

The assignment of the final rating follows the receipt of documents conforming to information already received, and the final rating is the same as the expected rating assigned on 15 February 2016.

The issue will have two tranches that have bullet principal repayments in the third and fourth years. The debentures carry a fixed-rate coupon paid semi-annually and they will be listed on Colombo Stock Exchange. SFL expects to use the proceeds to fund lending growth, lengthen maturities of its liabilities and reduce structural maturity mismatches.

KEY RATING DRIVERS

NATIONAL RATINGS AND SENIOR DEBT

The issue has been rated at the same level as SFL's National Long-Term Rating. The debenture is secured by a primary mortgage over receivables from identified lease agreements. Fitch has not provided any rating uplift for the collateralisation as the recovery prospects are assessed as average and comparable to those of unsecured notes in a developing legal system.

SFL is rated two notches below its parent, retailing company Singer (Sri Lanka) PLC (Singer; A-(lka)/Stable). This reflects Singer's majority ownership in SFL, the common Singer brand and Singer's influence on SFL's strategic direction through representation on the finance company's board. The two-notch differential also reflects SFL's limited role in the group as SFL provides financing for only a low proportion of Singer's sales.

SFL's rating also reflects its standalone credit profile, its higher capitalisation levels compared with its peers amid modest loan growth, and its improved asset-quality metrics.

RATING SENSITIVITIES

NATIONAL RATINGS AND SENIOR DEBT

Any changes to SFL's National Long-Term Rating would impact the issue's National Long-Term Rating.

SFL's rating may be upgraded if there is a significant increase in its strategic importance to Singer. A rating upgrade could also result if SFL is able to continue to maintain its capitalisation and asset-quality metrics at levels comparable to higher-rated peers while achieving a stronger franchise relative to its higher-rated peers.

A sustained deterioration in SFL's standalone credit profile, capitalisation and asset quality relative to similarly rated peers would result in a downgrade of SFL's standalone rating. A weakening in SFL's intrinsic strength, however, would not necessarily trigger a downgrade of its National Long-Term Rating, unless Singer's National Long-Term Rating or its propensity to support SFL were to weaken simultaneously.

Battered brokers bemoan Capital Gains Tax

By Charumini de Silva

Battered stockbrokers are urging the Government to consider reintroducing the Share Transaction Levy (STL) as a less damaging alternative to the Capital Gains Tax (CGT), which they warn will further hurt the Colombo Bourse.

“At this juncture where markets’ daily trading volumes are at record-low levels, bringing in a Capital Gains Tax would be counterproductive,” Colombo Stock Brokers Association President Ravi Abyesuriya told the Daily FT.

As an alternative, the CSBA Chief suggested that it would be more appropriate for the Government to reinstate the STL which had contributed Rs. 38 billion to Treasury coffers as revenue over the last decade. Last year the amount raised was Rs. 1.5 billion.

In the 2016 Budget, in a surprise move, the Government decided to remove the 0.3% STL charged to both buyers and sellers with effect from 1 January.

Originally capital market stakeholders welcomed the removal. However, following the Government’s recent announcement of the return of the CGT following its removal in 1987, the CSBA is urging a reintroduction of the STL.

While acknowledging that the present Government needed to boost revenue, Abeysuriya said that re-implementing the CGT was not the best course of action.

He said that the market had seen a “huge plunge” following the announcement of the reintroduction of the CGT. “From an investor’s point of view, the Capital Gains Tax is a declaration file and it scares away investors,” he added.

Year-to-date, the market has dipped by 12%, with over Rs. 400 billion in value wiped off while net foreign outflow has been Rs. 1.3 billion.

Highlighting the practical difficulties in implementing the CGT, Abeysuriya asserted that while the Government taxed gains it would also have to accept the capital losses as the calculation and mechanisms of it were extremely complicated and cumbersome.

“Sri Lanka does not have sophisticated systems like the US or the UK to undertake this whole calculation. With all that effort we will ultimately not get what we got through STL. The Government would have to forego what it was generating, which got credited to its account automatically on a daily basis,” he stressed.

In addition, Abeysuriya noted that the negative outlook posted by international rating agencies over Sri Lanka’s macroeconomic fundamentals had also impacted the Colombo Bourse with foreign investments exiting. 

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