Sri Lankan rupee rises on exporter dollar sales; stocks extend falls

Reuters: ** The Sri Lankan rupee strengthened 0.5 percent on Friday, as inward remittances and exporters dollar sales surpassed mild importer demand for the greenback, while stocks declined for a fourth straight session and posted their lowest close in more than one week.

** The rupee ended at 169.40/70 per dollar, compared with the previous close of 171.20/40. 

** The rupee fell to an all-time low of 171.60 per dollar on Wednesday, surpassing the previous low of 171.00 hit on Tuesday due to foreign selling in government securities and exporter greenback sales, market sources said. 

** The central bank surprised financial markets on Oct. 2 by leaving its key policy rates unchanged, despite heavy pressure on the rupee and foreign outflows from government securities. 

** The central bank said on Oct. 2 it purchased 4 million dollars from the market in the previous day, but it has sold a net 184 million dollars in the market so far this year to defend the currency.

** The rupee has weakened 0.3 percent so far this month after a 4.7 percent drop in September against the dollar. It has declined 10.5 percent so far this year.

** The Colombo stock index fell 0.4 percent to 5,815.03, its lowest close since Oct. 3. It fell 3.6 percent last month and is down 8.7 percent so far this year.

** Data from the central bank showed foreign investors sold government securities worth a net 1.8 billion rupees ($10.58 million) in the week ended Oct. 3. Sri Lanka has seen a net outflow of 74.3 billion rupees in securities so far this year.

** Stock market turnover was 408.9 million rupees ($2.41 million) on Friday, more than half of this year’s daily average of 765 million rupees.

** Foreign investors were net sellers of 311.5 million rupees worth of shares on Friday, extending the year to date net foreign outflow to 6.6 billion rupees worth of equities. 

($1 = 169.5000 Sri Lankan rupees) 

(Reporting by Ranga Sirilal; Editing by Sunil Nair)

Sri Lanka's Ashok Leyland unit net down 72-pct as truck sales fall

ECONOMYNEXT - Profits at listed Lanka Ashok Leyland Plc, which distributes India's Ashok Leyland trucks in Sri Lanka fell 72 percent from a year earlier to 24.4 million rupees in the September 2018 quarter on falling vehicle sales, interim results showed.

The company reported earnings of 24.4 rupees a share in the quarter. For the six months to September 2019, the company reported earnings per share of 21.35 rupees as earnings fell 65 percent from a year earlier to 77.3 million rupees.

The stock last traded at 818.10 rupees a share.

Revenues fell 42 percent from a year earlier to 2.3 billion rupees and cost of sales fell 44 percent to 2.0 billion rupees and gross profit fell 19 percent to 247.7 million rupees, in the quarter, interim accounts filed with the stock exchange showed.

The company says it has a 60 percent market share in Sri Lanka's commercial vehicle market for busses and trucks. It also imports spare parts and diesel generators.

In the September 2019 quarter, vehicle sales fell 42 percent from a year ago to 2.3 billion rupees while diesel generator sales declined 42 percent to 3.8 million rupees.

Spare parts sales had increased 13 percent to 34.5 million rupees while income from vehicle hires surged 169 percent to 20.2 million rupees.

Administration expenses grew 4 percent to 121 million rupees and selling and distribution costs fell 79 percent to 7.2 million rupees.

Net finance cost in the September quarter was 64 million rupees grew sharply from an income 1.5 million rupees a year earlier.

The company's short term borrowings had fallen 54 percent to 1.3 billion rupees as it inventory.

The firm had earned earlier that a Euro 4 standard (super diesel) for engines of imported vehicle that started in July 2018 would hurt operating costs of truck owners.

Sri Lanka makes second forced bond sale, yields up

ECONOMYNEXT - Sri Lanka has made the second coercive bond sale with gilt dealers being forced to 5-year bonds based on a cut-off decided by the authorities during a 40 billion rupee bond sale.

Sri Lanka has sold 20 billion rupees of bond maturing on 15 July 2023 at an average yield of 11.69 percent of which about 4.0 billion rupees were estimated to have been forced on buyers at the weighted average yield.

The bond was quoted in the secondary market at yields around 11.85/95 percent generating losses for holders. The cut-off is estimated to have been around 12.00 percent, market sources said.

A 15 October 2021 bond forced on buyers at 10.03 percent at the last auction is now trading around 11.50/75 percent with holders now in losses.

Sri Lanka's interest rates have been rising amid a liquidity shortage generated by a maturing central bank swap and interventions made after the exchange rate came under pressure from excess liquidity and low rates.

Critics say the coercive bond sales are a point of vulnerability both to the financial system and the economy in general, especially when the exchange rate is under pressure.

An offer of 20-billion rupees of 14-year 3-month bond maturing on 15 January 2033 was fully take up at a weighted average yield of 11.90 percent. It was quoted around 11.70/95 percent.

The longer term yield curve is flat in the belief that interest rate spike is temporary with some insurance firms in particular willing to buy the bonds.

Rates could come down after credibility returns to the exchange rate peg, market analysts say. 

Sri Lanka 3-month Treasuries yield rises 72bp at auction

ECONOMYNEXT - Sri Lanka' 3-month Treasury bill yields rose 72 basis points to 9.28 percent at Wednesday's auction after a sharp 49 basis point rise at the last auction, data from the state debt office showed.

The 12-month yield rose 68 basis points to 10.19 percent, after rising 46 basis points to 9.51 percent at the last sale.

Six month bills were not offered.

The debt office, which is a unit of the central bank, offered and accepted 4.0 billion rupees of 3-month bills after getting bids of 6.5 billion rupees.

It offered and accepted 07 billion rupees of 01-year bills after getting bids of 10.8 billion rupees.

Sri Lanka’s power utility retains 'AAA(lka)' rating, no tariff hike seen

ECONOMYNEXT - Fitch Ratings said it has confirmed the Sri Lankan state power utility’s long-term rating at 'AAA(lka)' with a stable outlook on the strength of government support with no tariff hike expected despite heavy losses, ahead of elections.

A statement said Ceylon Electricity Board's (CEB’s) rating is equalised with that of the Sri Lankan sovereign (B+/Stable), reflecting strong linkages with the parent, in line with Fitch's Parent and Subsidiary Rating Linkage criteria.

Fitch views CEB's standalone credit profile as much weaker than its support-driven rating and believes providing a notch-specific standalone credit view of CEB is meaningless due to poor margin visibility and the need for continued state support to sustain operations.

“We do not expect the government to increase electricity tariffs in the foreseeable future to levels that adequately cover CEB's generation, distribution and transmission costs,” Fitch Ratings said.

“The government faces elections in the next 24 months, and amid rising living costs due to higher fuel costs and local-currency depreciation, we do not expect the government to raise electricity tariffs or implement a cost-reflective pricing formula.”

The full statement follows:

Fitch Ratings-Colombo-09 October 2018: Fitch Ratings has affirmed Sri Lanka-based Ceylon Electricity Board's (CEB) National Long-Term Rating at 'AAA(lka)' with a Stable Outlook.
CEB's rating is equalised with that of the Sri Lankan sovereign (B+/Stable), reflecting strong linkages with the parent, in line with Fitch's Parent and Subsidiary Rating Linkage criteria. The equalisation takes into consideration CEB's strategic importance to Sri Lanka in ensuring power security and supply of affordable electricity to the public as the monopoly electricity transmitter and distributor in the country. CEB also accounts for around 70% of the power generation in the country.

KEY RATING DRIVERS

Strong Linkages with State: Fitch assesses the linkages between CEB and the state as strong, reflecting high ownership and management control, explicit guarantees and financial support through equity infusions and debt funding. The government also implicitly guarantees CEB's project loans (about 80% of outstanding debt), which are extended by bilateral and multilateral agencies and routed through the government for development of power infrastructure. CEB provides electricity at subsidised rates, fulfilling an essential service for the government. CEB has almost full network connectivity and accounted for more than 70% of Sri Lanka's generation capacity at end-2017.

We do not expect CEB's linkages with its parent to weaken in the medium term as the government's need to provide electricity at subsidised rates can be carried out only by a state entity such as CEB, as private companies would not be willing to incur losses. Fitch views CEB's standalone credit profile as much weaker than its support-driven rating and believes providing a notch-specific standalone credit view of CEB is meaningless due to poor margin visibility and the need for continued state support to sustain operations.

Tariff Increases Unlikely: We do not expect the government to increase electricity tariffs in the foreseeable future to levels that adequately cover CEB's generation, distribution and transmission costs. The government sets tariffs based on its socio-economic objectives and has not revised tariffs for almost three years despite rising generation costs. CEB's average cost of supplying a unit of electricity to customers in 2017 was around 20% higher than the average tariff. The government faces elections in the next 24 months, and amid rising living costs due to higher fuel costs and local-currency depreciation, we do not expect the government to raise electricity tariffs or implement a cost-reflective pricing formula.

Rising Generation Costs: We expect generation costs to remain high in the next couple of years amid rising oil prices and volatile contribution from low-cost hydropower. We expect the share of hydropower in the generation mix to remain below historical levels due to declining load factors and very little new capacity additions. We expect CEB to turn to high- cost oil-based sources to meet the shortfall.

In addition, CEB and independent power producers have been compelled to purchase fuel at market prices since mid-2018, after the government introduced a pricing formula, compared with subsidised prices offered previously. We do not expect the LNG projects proposed under CEB's generation expansion plan for 2018-2037 to contribute significantly to the generation mix in the next 2-3 years.

Weak Balance Sheet: CEB's balance sheet continues to weaken due to persistent losses and significant investments. It is unable to recover operating costs under the current tariff structure, and has to borrow to sustain its day-to-day operations. Further CEB, as government's main investment arm in the power sector, is likely to have large capex to improve country's power generation and transmission and distribution network. As such we do not expect CEB's balance sheet to recover in the medium term unless the government reduces its debt by converting some of it to equity.

DERIVATION SUMMARY

Fitch has rated CEB at the same level as the sovereign due to the strong linkages with its parent. The rating is not derived from its standalone credit profile and thus is not comparable with industry peers.

KEY ASSUMPTIONS

Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Electricity consumption in Sri Lanka to increase by 5% per annum over 2018-2021
- No material electricity tariff increases in the next two years
- Generation mix to broadly remain at 30% coal, 30% fuel, 30% hydropower and 10% other.
- Capex of LKR120 billion in 2018 and to moderate to LKR60 billion per annum from 2019, mainly for generation, transmission and distribution

RATING SENSITIVITIES

Developments that May, Individually or Collectively, Lead to Positive Rating Action

- There is no scope for an upgrade as CEB is at the highest rating on the Sri Lankan national ratings scale

Developments that May, Individually or Collectively, Lead to Negative Rating Action
- A significant weakening of the strong linkages between the sovereign and CEB.

LIQUIDITY

Tight but Manageable Liquidity Position: As at end-2017 CEB had LKR54.0 billion of unrestricted cash and unutilised credit facilities to meet LKR20.1 billion of debt falling due in the next 12 months. We do not expect free cash flow to turn positive in 2018 amid continued operating losses and capex of around LKR120 billion. However we believe the government will step in and provide liquidity support if required, as it has in the past.

Sri Lanka tourist arrivals up 2.8-pct in September

ECONOMYNEXT - Tourist arrivals to Sri Lanka during September 2018 grew 2.8 percent to 149,087 from a year ago, led by Indian visitors, the tourism office said.

China was the second largest source market, followed by the United Kingdom.

Up to end-September 2018, tourist arrivals had grown 11.6 percent to 1.73 million from the same period a year ago.

A statement said India, China, United Kingdom, Australia and Germany were Sri Lanka’s top five international tourist generating markets in September this year.

“India was the largest source of tourist traffic to Sri Lanka with 22% of the total traffic received in September 2018. China accounted for 13% of the total traffic, while United Kingdom, Australia and Germany accounted for 9%, 6% and 6%.”

Sri Lanka's Richard Pieris Finance gets BBB+(lka) credit rating: Fitch

ECONOMYNEXT - Fitch Ratings said it has assigned Sri Lanka's Richard Pieris Finance Ltd. a BBB+(lka) long-term credit rating with a stable outlook on weak underwriting standards and risk controls, and limited synergies with listed parent Richard Pieris and Company Plc.

Richard Peiris and Company (RICH) has businesses in retail with its Arpico supermarket chain, plantations, tyre manufacture, furniture, and rubber and plastic. The share was trading 10 cents lower at 10 rupees on Thursday.

"RICH's ability to support Richard Pieris Finance is reflected in its rating, which is underpinned by its standalone strength. However, its relatively large size means that any required support could be considerable relative to the ability of the parent to provide it," Fitch said in a statement Thursday.

The finance company has a 'heightened' risk appetite, the ratings agency said.

"This is evident in its weak underwriting standards and risk controls.

"As a result, Richard Pieris Finance's gross non-performing loans ratio was at 9.5 percent end-March 2018, well above the industry average of 5.8 percent," Fitch said.

Fitch Ratings' statement in full:

Fitch Ratings Lanka Limited has assigned Richard Pieris Finance Limited (RPF) a National Long-Term Rating of 'BBB+(lka)'. The Outlook is Stable.

-Key rating drivers: National rating-

The rating on RPF is driven by institutional support from its parent, Richard Pieris & Company PLC (RICH, A(lka)/Stable). This reflects Fitch's belief that RICH has high propensity to support RPF, if needed. Our assessment takes into account the parent's 98% effective control of RPF and their common brand name.

RICH's ability to support RPF is reflected in its rating, which is underpinned by its standalone strength. However, the relatively large size of RPF means that any required support could be considerable relative to the ability of the parent to provide it. RPF's total assets and equity accounted for 24% and 15.6% of RICH's group assets and equity respectively, at end-March 2018.

RPF is rated two notches below its parent because of its limited contribution to the group's core businesses. Despite its relative size, RPF's synergies with its parent are limited as the subsidiary's role in facilitating group's core business is low. Furthermore, RPF's integration with the group is low as the subsidiary exercises considerable management and operational independence.

RPF's standalone rating is weaker than its support-driven rating mainly due to its heightened risk appetite, which is evident in its weak underwriting standards and risk controls. As a result, RPF's reported gross NPL ratio was at 9.5% at end-March 2018, well above the industry average of 5.8%. RPF's loan-loss coverage ratio decreased sharply by end-March 2018.

RPF is likely to need additional capital in the medium term in order to meet the enhanced total capital ratio requirement of 12.5% by 1 July 2021 and its loan growth expectations. RPF's capital levels are currently satisfactory, with both Tier I and total capital ratios at 16.8% at end-March 2018, which is above the regulatory minimum of 5% and 10% respectively.

RPF is likely to rely on wholesale funding in the medium term to support its future expansion, although the company started soliciting deposits in the financial year ended 31 March 2018 (FY18).

-Rating sensitivities: National rating-

Weakening links with the parent, including declining parental control or importance to the group, or a downgrade of RICH's National Long-Term Rating, could trigger a rating downgrade on RPF.

Fitch believes a rating upgrade will depend on an upgrade of RICH or a significant increase in RPF's role and/or strategic importance to its parent.