Sri Lankan shares steady; seen falling after rate hike

Sri Lankan shares ended steady in thin trade on Friday, though cautious investors fear the gains would be short-lived, as the central bank's surprise move to raise key policy rates will hurt market sentiment.

After market hours on Thursday, the central bank raised its key interest rates by 50 basis points each in a surprise move aimed at curbing stubbornly high credit growth that is adding to concern about inflationary pressures.

The benchmark Colombo stock index ended up 0.03 percent, or 1.72 points, at 6,393.87. The bourse lost 0.54 percent on the week to post its first weekly fall in four.

"It was retail participation today," said Yohan Samarakkody, head of research, SC Securities (Pvt) Ltd. "We might see a staggered reaction to the rate hike after a couple of days."

Stockbrokers said the market is also waiting for an economic policy announcement from Prime Minister Ranil Wickremesinghe, scheduled next month.

Turnover stood at 446.9 million rupees ($3.06 million), less than this year's daily average of around 725.3 million rupees.

Overseas investors were net sellers of 4.65 billion rupees worth of shares so far this year, but they were net buyers of 121.5 million rupees worth of shares on Friday.

Shares in Sri Lanka Telecom Plc rose 1.93 percent, while Carson Cumberbatch Plc climbed 2.04 percent, pushing the overall index up.

Conglomerate John Keells Holdings Plc, which posted a 9 percent growth in the June quarter, gained 0.57 percent.

($1 = 145.9000 Sri Lankan rupees) 

(Reporting by Ranga Sirilal and Shihar Aneez; Editing by Sherry Jacob-Phillips)

Monetary Policy Review – July 2016 - Policy rates increased

The increasing trend in both headline and core inflation continued, reflecting the rise in demand driven inflationary pressures in the economy. Supply side disruptions arising from adverse weather conditions and the revisions introduced to the tax structure by the government also contributed to the upward movement in inflation in the past two months.

Meanwhile, in the real sector, the available indicators suggest a continuation of the growth momentum in economic activity. In particular, power generation, tourism and port related services, construction sector, investment goods imports as well as the purchasing managers’ indices (PMI) for manufacturing and services sectors have shown improvements over the past few months.

On the monetary front, market interest rates have adjusted upwards in response to the monetary tightening measures adopted in early 2016 and continued low levels of rupee liquidity in the domestic money market. Although some deceleration in the growth of broad money (M2b) supply was observed in the month of May 2016, monetary expansion remained above the desired levels. In spite of the increase in market interest rates, credit granted to the private sector by commercial banks increased at the high pace of 28.0 per cent, year-on-year, in May 2016, in comparison to 28.1 per cent in April 2016. Provisional data also indicates that the high growth of credit to the private sector has continued during the month of June as well. The continued appetite for bank credit by the private sector in spite of the upward movement in market interest rates could create excessive demand and high inflation in the economy in future.

The sustained increase in domestic credit also caused a wider trade deficit. Accordingly, the cumulative trade deficit during the first five months of 2016 registered an increase of 1.4 per cent, year-on-year. Increased earnings from tourism and other services exports, workers’ remittances, and long term financial flows to the government, eased the pressure on the balance of payments to some extent.

Taking into consideration the developments discussed above, the Monetary Board, at its meeting held on 28 July 2016, was of the view that further tightening of monetary policy is required to curb excessive demand in order to pre-empt the escalation of inflationary pressures and to support the balance of payments. Accordingly, the Monetary Board decided to increase the main policy interest rates of the Central Bank, namely, the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR), by 50 basis points each, to 7.00 per cent and 8.50 per cent, respectively, effective from the close of business on 28 July 2016.

The Board is of the view that tightening of monetary policy in a forward looking manner will ensure the maintenance of inflation at mid-single digits in the medium term, which is supportive of the growth momentum in the economy. As such, the current policy adjustment is not expected to have a significant impact on the long end of the yield curve. The Central Bank will continue to monitor macroeconomic developments closely and make appropriate adjustments to the monetary policy stance, as necessary.

Artificial boost for capital market could prove disastrous says CBSL Governor

By Hiran H.Senewiratne

"An artificial boost for the capital market will not help the country. Such moves could prove disastrous, Central Bank Governor Dr. Indrajit Coomaraswamy said.

"The Central Bank aims to create a stable environment for companies to grow and make higher profits but there will be no quick fix sugar highs. Therefore, we are looking forward to regulate the artificial movement in the capital market for the betterment of the country, Coomaraswamy said.

"When you look around in many countries you often see government regulators trying to create artificial momentums in markets. The record of such initiatives has invariably been disappointing. You find that pretty much all players are in a worse situation, the Governor said after 'ringing the bell' at the Colombo Stock Exchange to kick off trading yesterday, ahead of taking a policy decision later in the day.

Coomaraswamy said the Central Bank will try to create a stable economic environment where fundamentals are strong and companies could make profits and generate employment."The government is starting a stabilization program and has already set in motion measures to improve budget deficits, he said. Prime Minister Ranil Wickremesinghe is also expected to come out with a detailed 5-year plan.Though Sri Lanka's stock market is not going through "the best of times" now, he said if investors had confidence in these measures, "Sri Lanka would be a buying opportunity."

The Governor said the world is still trying to recover from the massive housing and commodity bubble fired by then US Fed Chief Alan Greenspan and his depression era specialist sidekick Ben Bernanke who cut interest rates to historic lows from around 2001. He kept them at one percent for too long in what some economists called the 'Mother of all liquidity bubbles'.

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JKH Group posts Rs 3.58 bn profit in first quarter

The JKH Group has posted a Group profit before tax (PBT) of Rs.3.58 billion in the first quarter of the financial year 2016/17.

This is an increase of 17 per cent over the Rs.3.05 billion recorded in the previous financial year.

JKH Chairman Susantha Ratnayake said the profit attributable to equity holders at Rs.2.37 billion is an increase of 9 per cent over the Rs.2.18 billion in the corresponding period of the previous financial year.

The revenue at Rs.22.73 billion for the period under review is an increase of 8 per cent over the Rs.21.10 billion recorded in the previous financial year. The Company PBT for the first quarter of 2016/17 at Rs.2.85 billion is a decrease of 12 per cent over the Rs.3.25 billion recorded in the orresponding period of 2015/16, largely due to a timing difference in receiving dividends. The Transportation industry group PBT of Rs.711 million in the first quarter of 2016/17 is an increase of 27 per cent over the first quarter of the previous financial year [2015/16 Q1: Rs.561 million]. Theincrease in profitability is mainly attributable to the performance of the Group’s Ports and Shipping business, where South Asia Gateway Terminals (SAGT) recorded double digit growth in throughput.

Whilst the Group’s Bunkering business recorded an improvement in margins, profitability was impacted due to a decline in volumes resulting from adverse monsoonal conditions which prevailed during the quarter. The Logistics business recorded a strong performance as a result of an increase in throughput in their warehouse facilities.

The Leisure industry group PBT of Rs.558 million in the first quarter of 2016/17 is an increase of 1 per cent over the first quarter of the previous financial year [2015/16 Q1: Rs.553 million]. The City Hotel sector recorded an overall increase in occupancies and profitability. The Sri Lanka Resorts segment achieved higher average room rates due to successful yield management.

Whilst overall arrivals to Sri Lanka demonstrated strong growth in the first quarter of the financial year, the negative publicity and travel warnings following the flooding and landslides in May impacted arrivals in the month of June.

The performance of the Maldivian Resorts segment was impacted by a slower than expected recovery of the overall market from the effects of political events in late 2015.

The Property industry group PBT of Rs.57 million in the first quarter of 2016/17 is a decrease of 72 per cent over the first quarter of the previous financial year [2015/16 Q1: Rs.203 million].

The Consumer Foods and Retail industry group PBT of Rs.1.30 billion in the first quarter of 2016/17 is an increase of 48 per cent over the first quarter of the previous financial year with both sectors contributing to the improved performance.
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Megalopolis and its impact on property prices

Sri Lanka has the proud heritage of being a developed nation in ancient times. It is believed that even before recorded history of 2500 years; there existed developed cities with proper infrastructure.

As recorded in historical chronicles, great cities such as Anuradhapura and Polonnaruwa existed with many aspects of urban development and sustained its existence over a period of 14 centuries.

The buildings were advanced in terms of maximising airflow, sustainability and comfort and still continue to inspire modern architect today.

However, urban development in the post-independence era has been less impressive, typically stretching out along the main truck routes into the capital in the form of low-rise vertical developments that are an eye-sore at best.

Moreover, lack of town planning and vision is currently leading to externalities such as rising levels of traffic congestion, a poor public transport system, a scarcity of public open spaces and air pollution.

According to a report released by an international research agency in 2011, Colombo was listed amongst one of the worst cities to live in.

However, in very recent times, the post-civil war era has witnessed the emergence of some “city beatification” and vertical developments in many parts of the capital in the midst of a rapidly growing economy and a scarcity of land which has essentially necessitated that more residential, commercial or leisure use space is better utilized and the real estate foot-print is maximised.

Whilst there are government drafted zoning plans that continue to guide land use in Colombo, the seemingly spontaneous emergence of tall buildings in all parts of the capital is essentially driven by market forces.

We shall return to this argument about market forces and its interplay with government plans later in this research article.

The immediate concern of many commentators is that despite the visible improvements that has taken place in the city, the lack of an overall strategy that will address multifarious concerns of the capital and its immediate surroundings in the Western Province, poses serious threats to the future growth of this part of the island which represents the economic growth engine of the island economy. Such a scenario threatens to reverse much of the recent progress made.

The Western Region Megalopolis Project


The Western Megalopolis is a project that embraces the plans, implementation and strategies that are diverted to develop the Western Region of the country in order to achieve Sri Lanka's national goal of becoming a high income developed country. Western Megalopolis’ grand plan envelops the entire spectrum of activities that are involved in achieving this great national objective.It is envisioned that the following three methods would be engaged in positioning the nation towards this goal:

1) Enable the national economy to capitalize on the gains of economies of agglomeration that would result in urbanization;

2) Eliminating negative aspects that results from development of urban infrastructure especially unplanned, hap-hazard urbanization;

3) Reducing per unit capital cost of infrastructure provisioning.

The Western region constitutes of three administrative districts, namely Gampaha, Colombo and Kalutara. The city of Colombo is the economic, commercial, financial, and intellectual hub of the country. The western region is centered on the city of Colombo and leads the rest of the country in every sphere of activity.

The administrative capital of Sri Jayawardanapura-Kotte is located in the outskirts of the city of Colombo. The present population of this region is around 5.8 million, with about 2 million living in the city of Colombo and its suburbs. The total population in the proposed Western Megapolis is envisaged to reach 8.7 million by 2030.

The Western region covers only six percent of the total land mass of Sri Lanka but accommodates about 29% of the total population of Sri Lanka. The western region also produces more than 40% of the total GDP of Sri Lanka.

Over the past 10 years, the population growth in the western region was marginal but the level of urbanization was very high, especially in the Gampaha District. This is mainly due to land availability and its proximity to employment and economic centers, such as the city of Colombo, Port, airport, industrial areas, BOI zones.

Presently, the population in Gampaha district is almost the population of the Colombo district and the projection is that Gampaha districts population would surpass the population of Colombo district in the near future.

As RIU has been monitoring land prices in Colombo for over a decade we can note that land prices in central Colombo have hiked at extraordinary rates since the end of the war in 2009. This landmark achievement was the most significant factor to impact the property market.

In the short-terms, we do not expect any major impact of the Megalopolis plan on property prices. We can expect to witness continued interest in apartments, houses and lands from local individuals, expats and to a lesser but growing extent, foreigners. If we consider the luxury apartment segment, current supply is set to move from 3000 units to 6000 by 2019 with projects such as Altair, Shangri-La and Colombo City being completed.

In the long term, land prices in the suburbs and beyond will receive a boost from receiving the benefits of better planning in a similar way to the impact of recent city ‘beautification’ on Colombo central land prices. However, there will be significant differences between areas that benefit from new road and rail infrastructure initiatives from those areas that do not. Therefore, the impact on different geographical locations on the western province will need to be assessed on a case-by-case basis. There will certainly be winners but there may also be some losers.

With reference to the much talked about Colombo Port City project, the green lights that were given to what will be the single biggest private sector development project in the history of the island, turned to amber with the change in political power in 2015.

However, this ambitious project is said to now be incorporated under the overall Megalopolis plan and will go ahead following some additional compliance and environmental impact studies in on order to confirm that there will be no negative impact on the coastline. It is also expected that foreign ownership will be limited to long-term lease agreements as opposed to freehold ownership which was previously agreed.

Assuming that the project will go ahead as planned, its impact on the Colombo real estate market will be a long-term consideration. Whilst it's true that the additional 575 acres of water-front land will add to the supply of real estate stock in the city, we can expect that much of the demand for port city land will arise from new areas of economic activity along with port related businesses and leisure sector developments.

The SLPA Chairman had remarked recently that the area will be” developed as a port city with roads, water, electricity, communication facilities to set up shopping areas, water sports area, mini golf course, hotels, apartments, recreation areas, marinas and with a lot more additions that will develop the area as a modern city.”

Therefore, we would expect the Port City to elevate the profile of Colombo and increase the demand for its real estate from both local as well as foreign investors.





The economy of Sri Lanka and western region has grown at a steady pace over the last few years. The projection is that this momentum would be maintained and sustained in the coming years. Sri Lanka's GDP/Per Capita is about 4000 USD and therefore is considered a middle income country.

GDP for western region is projected to reach over 230 billion USD by 2030. By 2020, the projection is that the per capita income in Sri Lanka will be around 12,000 USD on the assumption of an average annual growth rate of 7 to 8%.

The economic development in the next 15 years is crucial as the country has to move from labour intensive to skill intensive industries and to a knowledge based economy.

Where real estate is concerned, the long-term growth prospects are in the hands of those who will manage the macro-economy of the country.

In whatever eventual form and shape the Western Megalopolis Development program will be implemented, it is expected to change the economy of the country and people, life styles, employment generation, transportation, tourism, infrastructure and the entire gamut of activities in everyday life of not only in the region but in the entire country.

This development program will open doors for many foreigners to come into the country for business and work and many more expat Sri Lankans will return to Sri Lanka. This scenario will create an unprecedented growth in the real-estate market that will cover apartments, gated communities, residential houses, modern commercial spaces, leisure property and lead to the development of smart cities.

We expect the long-term impact of the Megalopolis to be extremely positive on the real estate market. However, how much it will resemble the original plans remains to be seen.
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‘Hotel Minimum Rates to go’

The minimum room rates imposed on city hotels will be abolished with the end of the next winter season said Tourism Development, Lands and Christian Religious Affairs Minister John Amaratunga from March 31, 2017.

This decision was taken by the Minister based on a recommendation of the Tourism Advisory Council which comprises of key players in the hotel and travel trade. The Council was of the view it was time to do away with the minimum rates as it has “now served its purpose.” Convenor of the Tourism Advisory Council, Felix Rodrigo said the Council had arrived at a unanimous decision to recommend to the Minister to abolish the minimum room rates as soon as possible.”

The Tourism Advisory Council was appointed by Minister John Amaratunga to advise him on issues facing the tourism industry and is chaired by business tycoon Harry Jayawardena. The Gazetted minimum rates are applicable to all star class hotels ranging from one to five stars in the Colombo city limits.

Minister Amaratunga considering the forward contracts already entered into by many hotels decided to abolish the minimum rates with the end of the next winter season.

“We need to respect the contracts already entered into for the coming season which is why it will be abolished from end March 2017,” said Minister Amaratunga.

“Almost all the hotels have been calling for the abolition of the minimum room rates and to allow market forces to decide prices. By sticking to the minimum rates we have been pricing ourselves out of the lucrative MICE market and losing out to our regional competitors.

As a result we have been uncompetitive in the MICE market,” said Minister Amaratunga. The minimum room rates were imposed during the height of the war to prevent hotels from undercutting each other and causing a price war. With the end of the war and the influx of tourists the rates have been seen as a stumbling block to making Colombo an attractive destination for tourists.

“With the abolition of the minimum rate regime hotels are free to charge what they want. They can charge 50 dollars or 500 dollars depending on the quality of the product.”
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Union Bank continues growth momentum in 1H 2016

Union Bank of Colombo and its subsidiaries UB Finance Company and National Asset Management Ltd ended the first half of 2016 with an impressive 233% growth in profit after tax reporting Rs.275 mn for the period.

Operating income of the Group grew 31% to Rs.2,120 mn for the period. Total assets of the Group reflected a strong 16% year-to-date (YTD) growth to reach Rs.88,946 mn.

The Bank’s post tax profit for the period was Rs.154 mn, a 156% increase year-on-year (YoY).

Bank’s Director and Chief Executive Officer Indrajit Wickramasinghe said the Bank’s strong half year performance affirms the steady progression of Union Bank towards its strategic positioning as a fully-fledged commercial bank.

Total operating income of the Bank grew by 23% YoY to Rs.1,655 mn. The Bank’s net fee and commission income of Rs.121 mn is an increase of 121% over the comparative period with fee income from business lending, cards and trade transactions being the primary contributors of the said impressive growth. Net gains from trading amounted to Rs.278 mn, a growth of 251% YoY. The Bank does not have any exposure to the equity market.

Reflecting significant improvement in the quality of the portfolio, Net NPL ratio improved to 2.0% from 4% in the 2Q 2015 with a corresponding reduction in impairment charges from the comparative period.

The Bank’s total operating expenses increased by 29% to Rs.1,433 mn primarily due to investment spending on New branches, ATMs, staff and technology in line with the strategic plan.

The Bank remains well capitalised with a strong core capital adequacy ratio of 23.2% and a Total capital adequacy ratio of 22.8%.

The Bank’s balance sheet expanded by 16% YTD to reach Rs.82,302 mn. Loans and advances grew by 21% to Rs.48,513 mn during the period under review, while the customer deposits reflected a growth of 22% to Rs.45,803 mn.

The impressive results reveal the success of the expansion initiatives implemented by the Bank, following the TPG investment one of the largest, global private investment firms and affirm the Union Bank’s renewed strategic focus as a fully-fledged commercial bank serving a diverse clientele including Retail, SME and Corporate segments.
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Sri Lankan shares edge up ahead of policy rates announcement

Reuters: Sri Lankan shares ended slightly firmer on Thursday, snapping three sessions of losses as investors picked up diversified and manufacturing shares, while the market awaited directions on the country's economic policy.

The benchmark Colombo stock index ended up 0.15 percent, 9.73 points, at 6,392.15.

"There was institutional buying today, and the good thing is that we saw renewed interest from foreigners as well," said Yohan Samarakkody, head of research, SC Securities (Pvt) Ltd.

Analysts said investors are awaiting directions from the policy rates; the announcement is due later in the day at 1230 GMT.

Sri Lanka's central bank is expected to keep its key interest rates steady for a fifth straight month on Thursday, a Reuters poll showed, despite signs that inflation and private sector credit growth are picking up.

Prime Minister Ranil Wickremesinghe is expected to announce the country's economic policy next month.

Turnover stood at 991.5 million rupees ($6.81 million), its highest since July 14 and well above this year's daily average of around 727.4 million rupees.

Overseas investors were net sellers of 4.78 billion rupees worth of shares so far this year, but they were net buyers of 17.4 million rupees worth of shares on Thursday.

Shares in CT Holdings Plc jumped 5.74 percent while Distilleries Company of Sri Lanka Plc rose 0.99 percent, pushing the overall index up.

($1 = 145.7000 Sri Lankan rupees) 

(Reporting by Ranga Sirilal and Shihar Aneez; Editing by Sherry Jacob-Phillips)