Sri Lanka Newspapers Monday 16/04/2012

April 15, 2012
COLOMBO: Sri Lanka’s once-buoyant, now-ailing stock market needs integrity and greater participation by foreigners to grow well, the new director-general of the country’s exchange regulator said.

Hareendra Dissabandara said the Securities and Exchange Commission (SEC) has to take strong steps to help improve the performance of the Colombo Stock Exchange.

“We need to introduce a number of changes to increase foreign investors,” Dissabandara, promoted from heading the SEC’s education and training division, told Reuters this week in his first interview since becoming director-general on April 2.

“We have to make possible arrangements to enter into MSCI Emerging Markets Index,” he said, adding one of his aims is to double the stake of foreign investors in Colombo’s market to 30 per cent.

Dissabandara said he knows that much needs to be done before Sri Lanka could fulfil requirements to be part of the MSCI index. Among the needed steps is updating the exchange’s payments system, establishing clearing corporations and increasing liquidity. At present, the capitalisation is about 2 trillion rupees ($15.69 billion).

In the next few months, Dissabandara said, the SEC expects to come up with a minimum three-year strategic plan for tackling problems that have hurt investor confidence.

“As the regulator, we have to manage systemic risks, protect investors, especially small and retail investors, and maintain a fair and transparent secondary market trading system,” he said.

In 2009 and 2010, after Sri Lanka’s long civil war ended, the Colombo bourse was a star performer. It rose 125 per cent in 2009 and another 96 per cent the next year.

But last year, when there were both economic and market problems, Colombo’s benchmark All Share Price Index fell 8.5 per cent. And so far in 2012 -a year when Asian markets have rallied — it has slumped 11 per cent in spite of eased restrictions on broker credit and margin trading.

Dissabandara faces “a very challenging task”, according to Sriyan Gurusinghe, president of the Colombo Stock Brokers Association, “but since he has been in the market for a reasonable period, I think he should able to resurrect it.”

Previous attempts by officials to change exchange rules and practices have met stiff resistance from some market players and brokers.

Dissabandara’s predecessor, Malik Cader, was transferred to the Finance Ministry in November after spearheading steep restrictions on credit, which brokers said hurt their volumes, and leading market manipulation probes that touched politically connected investors. One month later, SEC chairwoman Indrani Sugathadasa quit, saying she did so “to uphold her principles.”
http://gulftoday.ae/portal/a1708d83-103d-49db-97aa-eb0842b2f83c.aspx?

Reverse gear: Govt. more reliant on domestic banks contrary to CB warning


The government’s reliance on domestic banks had increased in 2011, reversing a more favourable trend witnessed in 2010 where the government seemed to be moving away from acquiring financing from banks to bridge the budget deficit. Meanwhile, Central Bank ownership of government securities increased to Rs. 169.8 billion at end 2011 from Rs.2.1 billion at end 2010.

Early in 2010, Central Bank Governor Ajith Nivard Cabraal asked the government (and public institutions) to tap into non-domestic banking sources for their financing needs as it could threaten private sector growth, and the low inflation and interest rate regime at that time. He warned against recklessness on the government’s part, asking it to be more disciplined in its fiscal operations.

Earlier this month, Cabraal again said he hoped the government would move away from domestic banks and look at other options to finance the budget deficit.

The government has done well to contain the budget deficit a shade under 7 percent of GDP last year with considerable rationalisation seen in the expenditure front, despite a fall in revenue.

"The government’s commitment to fiscal consolidation was evident in the reduction of the overall fiscal deficit in 2011 to 6.9 per cent of GDP from 8 per cent of GDP in 2010, marginally higher than the original target of 6.8 per cent of GDP. Despite the shortfall in revenue collection, rationalisation of expenditure enabled the overall fiscal deficit to be maintained close to the original estimate. There was a corresponding decline in the current account deficit to 1.1 per cent of GDP in 2011 from 2.1 per cent of GDP in 2010 due to the reduction in recurrent expenditure. However, it was higher than the budgetary estimate of 0.8 per cent of GDP due to the lower than expected performance in revenue. The primary deficit also declined to 1.4 per cent of GDP in 2011 from 1.7 per cent of GDP in 2010, marginally above the budgetary estimate of 1.3 per cent of GDP, reflecting the ongoing fiscal consolidation process," the Central Bank said in its 2011 Annual Report.

"The fiscal deficit in 2011 was mainly financed through domestic sources. Accordingly, domestic financing accounted for 51.4 per cent of total financing, while foreign sources contributed the balance 48.6 per cent. However, the contribution from foreign sources to financing the deficit was higher than the original estimate, while domestic financing was less than envisaged in the budget for 2011. Consequently, net foreign financing (NFF) amounted to Rs. 219 billion compared to the original estimate of Rs. 143.8 billion, while net domestic financing (NDF) amounted to Rs. 231.2 billion compared to the original estimate of Rs. 290 billion.

"Considering the composition of domestic financing, the trend of moving from banking sources to non bank sources witnessed in 2010 was reversed in 2011. Consequently, net borrowings from the banking sector in 2011 amounted to Rs. 192 billion (83 per cent of NDF) exceeding the original estimate of Rs.42 billion and a net repayment of Rs.1.9 billion in 2010. Accordingly, borrowings from the non bank sector amounted to Rs. 39.4 billion, significantly lower than the Rs.248 billion expected in the original budget. Of the total bank financing, borrowings from the Central Bank accounted for 97 per cent, amounting to Rs. 185.8 billion compared to a net repayment of Rs. 32.1 billion in 2010.

"The shift from non bank to bank sources in financing the budget deficit in 2011 was due to relatively lower interest rates prevailing in the government securities market up to the third quarter of the year, which motivated the non bank sector to seek alternative sources of investments giving a higher return. However, from the beginning of the fourth quarter of 2011, primary market yield rates started to move up mainly due to the tight rupee liquidity conditions in the domestic money market. These market developments led to an increase in purchases of government securities by the Central Bank from the primary market. This together with the open market operations carried out by the Central Bank, ownership of government securities by the Central Bank increased to Rs. 169.8 billion at end 2011 from Rs.2.1 billion at end 2010.

"Government relied more on marketable debt instruments to finance the budget deficit. Accordingly, net borrowing by way of instruments amounted to Rs.227.5 billion. This comprised net borrowings by way of Treasury bonds amounting to Rs.168.4 billion, Treasury bills amounting to Rs. 79.6 billion and Sri Lanka Development Bonds (SLDBs) amounting to Rs. 5.3 billion, while there was a net repayment of Rupee loans amounting to Rs. 25.7 billion. Net borrowing by way of other sources amounted to Rs. 3.7 billion. This mainly consisted of provisional advances from the Central Bank (Rs.17 billion) and import bills (Rs. 2.3 billion).

"Foreign sources contributed more than originally expected in the budget to bridge the resource gap. Total gross borrowings from foreign sources amounted to Rs. 322.8 billion, while total net foreign financing (NFF) was Rs. 219 billion during the year. Total gross borrowings consisted of Rs. 61.5 billion (19.1 per cent) of concessional borrowings compared to Rs. 58.4 billion (17.8 per cent) in the previous year, while the balance was obtained from non concessional sources.

"Further, project loans from bilateral and multilateral development partners amounted to Rs. 174.5 billion (54.1 per cent of total gross foreign financing) compared to Rs. 163.9 billion (50 per cent of total gross foreign financing) received in the previous year. The Asian Development Bank (ADB), Japan and China were the major sources of project financing. However, the share of NFF in total financing declined to 48.6 per cent in 2011 from 54.7 per cent in 2010. Other than project financing, NFF included the proceeds from the International Sovereign Bond issue of Rs. 109.5 billion (US dollars 1 billion) and net borrowings from Treasury bills and Treasury bonds issued to foreign investors and the Diaspora of Rs. 12.4 billion and Rs. 12.6 billion, respectively. Foreign investments in government securities in 2011 were considerably less than the Rs. 48.9 billion received in 2010, as the threshold for foreign investments in government securities was reached," the Central Bank said.
http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=49602

In order to cater to the growing need for new establishments in the tourism sector, the Sri Lanka Tourism Development Authority says it would soon implement a fully automated licensing system. All registered establishments in the tourism sector will be able to renew their licenses and obtain necessary documentation in a few hours while new registrations can be lodged online for processing, the authority announced recently.

‘’Our focus at present is to make sure that our services are provided in an efficient and effective manner. We want our customers to spend minimum time in getting our approvals and licensing. This system will ensure that all applications can be handled on time as well as effectively and efficiently,’’ said Dr. Nalaka Godahewa, Chairman, Sri Lanka Tourism.

The new system which will be operational from May 01, will store data of each application along with inspection reports, photographs and other documents.

"We have streamlined the entire process and introduced one day services,’’ said Dileep Mudadeniya Head of standards, quality assurance and investments.

Licensing and renewal is a key income generator for the organisation and it has continued to grow since 2009. At present the Sri Lanka Tourism Development Authority (SLTDA) has over 6,800 registered establishments in the island covering over 22 categories of tourist service providers. It includes tourist hotels, guest houses, travel agents, restaurants, home stays, bungalow, boat operators, tour guides, chauffeur guides, jeep operators etc.
http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=49601

By The Pathfinder Foundation

Sri Lanka now a middle-income country has to operate within a new paradigm, particularly in raising finances for the country’s development program. In this context the Pathfinder Foundation wishes to draw the attention of policy makers and the leadership to study the feasibility of raising low cost, long-term financing through a new innovative mechanism, technically known as introducing an innovative, low cost and long-term ‘Asset Backed Securitization of Future Flow of Receivables’ such as remittances. Securitization is a form of secured borrowing involving the transfer of assets to a Special Purpose Vehicle (SPV) that finances the assets with securities backed by the value of the assets.

The findings of a research on this subject published by the World Bank include that: i) this mechanism provides a way of raising funds particularly for middle-income countries, especially during times of low liquidity and heightened perception of sovereign risk ii) such transactions can be structured to mitigate sovereign risk so that a developing country borrower can access longer-term financing at lower interest rates than unsecured bonds iv) Governments may find this asset class attractive because, when planned and executed ahead of time, it can provide a way of assessing markets during times of liquidity crisis.

(Views and comments on this subject are welcome at www.pathfinderfoundation.org)
http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=49600

National savings declined to 22.1 percent of GDP in 2011 from 25.4 percent a year earlier, the Central Bank said.

"Accordingly, the resource gap (the difference between national savings and investment as a ratio of GDP) increased substantially to 7.8 percent in 2011 from 2.2 percent the previous year," the Central Bank said in its 2011 Annual Report.

Total consumption increased by 22.4 percent to Rs. 5,536 billion in 2011, a combined effect of average price levels increasing by 8.3 percent and the growth of total consumption by 13 percent.

Private consumption expenditure had increased sharply, up 25.1 percent in 2011 from a growth rate of 17.2 percent the previous year. Total private consumption amounted to 69.8 percent of GDP from 65.2 percent the previous year.

Government consumption expenditure rose 10.9 percent, a sharp growth compared with a growth rate of 2.5 percent in 2010. However, as a percentage of GDP, government consumption declined to 14.8 percent from 15.6 percent the previous year, "reflecting the impact of the sharp increase in private sector consumption.

The total investment expenditure increased by 26.7 percent to around Rs. 1,959 billion. It recorded an increase as a percentage of GDP from 27.6 percent in 2010 to 29.9 percent in 2011.

Private investments accounted for 79 percent of total investment, expanding 29 percent during the year, reaching 23.7 percent of GDP from 21.4 percent of GDP the previous year.

Foreign direct investment (FDI) grew 107 percent to US$ 1,066 million.

"The largest FDI inflow was to the hotels and tourism sector, followed by the infrastructure sector which attracted investments mainly to telephone, telecommunication network and fuel, gas and petroleum sectors. Foreign investment to manufacturing sector were mainly attracted by the textile, wearing apparel and leather products, chemical, petroleum, rubber and plastic products, and fabricated metal, machinery and transport sub-sectors. The cumulative realised investment of the BOI by end 2011 was Rs. 1,033 billion," the Central Bank said.

Government investment was estimated at Rs. 409 billion, an increase of 18.7 from 2010 and mainly focused on development of infrastructure in the areas of road and highways, railway lines and transport, telecommunications, ports and airports, hydro power, irrigation and water supply projects.

Domestic savings contracted by 6.8 percent from the previous year to reach Rs. 1,007 billion.

"The deceleration in domestic savings could be attributed to the expansion in consumption and deterioration of the net external demand with increased growth in imports, despite the significant growth in export earnings," the Central Bank said.

Government dis-savings (the difference between revenue and recurrent expenditure) declined to 1.1 percent of GDP in 2011 from 2.1 percent the previous year.

"National savings, the sum of domestic savings, net foreign private transfers and net factor income from abroad (NFIA), were estimated at Rs. 1,448 billion in 2011, recording an improvement of 1.7 per cent over the previous year," the Central Bank said.

"NFIA remained negative as usual, but deteriorated further by 3.3 per cent in 2011. Although both the foreign receipts and payments increased during 2011, the latter recorded a relatively higher growth resulting in the deterioration in NFIA. Net private transfers, which consist mainly of workers’ remittances, grew at a significant rate of 24 per cent in 2011.

"Improvement in net private transfers helped record a positive growth in national savings despite the decline of domestic savings during the year. However, the increase in foreign private transfers was not sufficient to offset the impact of the significant expansion of consumption in 2011.

"Hence, national savings as a percentage of GDP declined to 22.1 per cent in 2011 from 25.4 per cent in 2010. Accordingly, the resource gap, i.e., the difference between national savings and investment as a ratio of GDP, increased substantially to 7.8 per cent from 2.2 per cent with the drop in the domestic savings ratio and the increase in the investment ratio," the Central Bank said.
http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=49599

BEIJING (AP) — China’s central bank announced Saturday a slight easing of its controversial currency controls. It says it will allow the country’s yuan to rise and fall by a slightly wider margin against the dollar in daily trading.

The change could allow a faster rise for the yuan, which Washington and other trading partners complain is undervalued. But any increase will likely be too small to satisfy many critics and Beijing already has warned that future gains will be limited.

The central bank said it will allow the yuan to fluctuate by up to 1 percent in value against the dollar each day beginning Monday, up from 0.5 percent previously.

The bank took the unusual step of issuing a statement in English as well as in Chinese, clearly intending it for foreign audiences.

The United States and other governments say an undervalued yuan gives China’s exporters an unfair price advantage, swelling its trade surplus and hurting foreign competitors at a time when other governments are struggling to lower unemployment.

Chinese Premier Wen Jiabao, the country’s top economic official, said in March the currency might already have reached an "equilibrium exchange rate," suggesting more gains would be limited.

Wen said the yuan already has gained 30 percent in value in real terms since 2005.

That increase has failed to satisfy critics. Some American lawmakers are calling for punitive tariffs on Chinese goods if Beijing fails to act faster.

Wen also said the yuan has moved both up and down in Hong Kong trading of nondeliverable forward contracts since September. Such contracts are used by traders to bet on movement of currencies that are not freely traded. They are settled in dollars or other hard currencies.

That suggests that the yuan also might fall in value over short periods following the latest easing of controls.

Communist leaders have promised repeatedly to help struggling Chinese exporters that have been battered by a plunge in global demand, which suggests that the central bank expects its latest move to result in only a modest increase in the yuan’s value.

The central bank suggested it would restrain a rapid rise by the yuan, pledging to maintain "reasonable and balanced levels."

China’s multibillion-dollar trade surplus has narrowed in recent months and swung to a deficit in February. Some analysts suggest that will reduce market pressure for the yuan to rise.

Chinese leaders have said they planned eventually to allow the yuan to trade freely on global markets but they say rapid changes could disrupt the country’s economy.
http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=49611

Deputy Chairman Alex Lovell has increased his stake in Union Bank Plc following the purchase of 1.5% shareholding for Rs. 117.5 million.

Lovell, who functions as a Non Executive Director at Union Bank, on 5 April had picked up 5.34 million shares at Rs. 22 each, which was about Rs. 5 above the market.

That week Union Bank share closed at Rs. 16.50 whilst last week it closed 40 cents above.

By end last year, Lovell, held around 4.9% stake of 17.06 million shares and with last week’s purchase, he holds the highest number of shares among Directors in addition to being the fifth largest shareholder behind Vista Knowlege (18.5%), Sampath Bank (7.5%), Associated Electrical Corp (7.5%) and Select Gain (6.7%).
http://www.ft.lk/2012/04/16/alex-buys-1-5-more-union-bank-stake-for-rs-117-5-m/

The recent policy rate hike from the Central Bank is expected to bring fresh challenges to the financial sector firms, according to CT Smith Stockbrokers.

It said the finance sector companies are likely to go through a tighter economic period as the general consumer debt servicing capacity is expected to deteriorate in the short to medium term.

“As a result we expect a slight deterioration in the finance sector NPAs during FY2012,” CT Smith said.

“We however do not expect Licensed Commercial Bank (LCB) Net Interest Margins (NIMs) to come under severe pressure, as the Asset-Liability Mismatch (ALM) of LCBs is highly regulated compared to Registered Finance Companies (RFCs) and Specialised Leasing Companies (SLCs),” the stock broking firm said in an analysis.

It also expects the LCB sector Current And Saving Account (CASA) ratio to slightly deteriorate during FY2012E due to the rising interest rate scenario. NIMs of RFCs and SLC are also expected to come under pressure during 2012, as general business practice is to borrow short term to fund their relatively fixed long term investments.

“Nonetheless, we expect the recent policy measures to improve stability in the banking sector, though at the cost of growth,” CT Smith said.

While the Central Bank directed the LCBs to limit credit expansion to 18% in 2012E (as opposed to 34.5% in FY2011), this is consequently likely to limit financial sector fund growth resulting in a slowdown in sector core income growth. However, if LCBs manage to obtain foreign Tier II funding, the said growth in credit is allowed to reach a maximum of 23%, which is also expected to increase foreign fund flows to the economy.

“We maintain our top line growth forecasts for our banking sector stocks as we have already taken effected revisions to our LCB top line growth targets to factor the aforementioned criteria,” CT Smith said.

With regard to the impact on the non Financial Sector companies, it said highly geared companies are likely to have a negative impact owing to increased finance costs, whilst several more are also expected to be negatively impacted owing to CBSL’s policy move.

They include businesses which depend on (low cost) debt capital to promote sales, i.e. land and property, motor vehicles and consumer durables; and Companies engaged in (credit driven) import related businesses.

CT Smith also said that the increase in policy rates should impact the stock market negatively. Reasons listed include – Reduce interest in equities while encouraging a switch from equities to fixed income instruments; Reduce corporate profit expectations (especially for highly geared companies); Relatively expensive stock valuations (owing to higher cost of capital) compared to regional stock markets and Higher costs on margin facilities.

Overall CT Smith said that the recent policy measures together with the policy rate revision done in April 2012 are expected to bring in stability to the economy, economic growth will however likely be sacrificed in the near term.

In its Monetary Policy Review for April, the Central Bank of Sri Lanka (CBSL) increased its repurchase rate and reverse repurchase rate by 25bps and 75bps to 7.75% and 9.75% respectively (w.e.f. end 5 April 2012) in order to further decelerate credit growth and anchor inflation expectations. See tomorrow’s FT for the full analysis of CT Smith Stockbrokers.
http://www.ft.lk/2012/04/16/fresh-challenges-for-financial-sector-firms-from-policy-rate-hike/

Apr 15, Colombo: The Sri Lankan delegation attending the International Monetary Fund (IMF) Spring Meeting 2012 will leave for Washington this week.

The Spring Meetings of the IMF and World Bank will be held in Washington, DC from April 20 -22.

The Minister of International Monetary Cooperation Dr. Sarath Amunugama will lead the delegation.

The other members of the delegation include the Governor of the Central Bank Ajith Nivard Cabraal, the Director General of the External Resources Davison of the Ministry of Finance Mapa Collure and several other senior officials.

The meetings of the IMF's International Monetary and Financial Committee and the joint World Bank-IMF Development Committee, which discuss progress on the work of the IMF and World Bank will take the center stage at the 2012 Spring Meetings.

In addition the The IMF-WB Spring Meetings will feature many events focused on the global economy, international development, and the world's financial markets.
http://www.colombopage.com/archive_12/Apr15_1334503473CH.php