Sri Lanka Newspapers - 15/01/2012

Moving Towards Liquidity Crunch

Wednesday’s Treasury (T) Bill auction which initially had only Rs. 2,000 million worth of maturing T Bills of 91 day tenure available for reissue, however saw Central Bank of Sri Lanka (CBSL) allowing the market to oversubscribe to almost four times that amount, a sum of Rs. 7,879 million, at that auction.
But the danger in CBSL allowing the market to subscribe to such a large volume of such a short tenure is that its maturity coincides with the Avurudhu period, a period in which liquidity demand from the market is virtually at its peak.
And when such a large amount of maturing T Bills are up for re-issue during that peak season, it causes a liquidity crunch, tending for rates to rise. CBSL of course can reinject liquidity to the market by procuring T Bills and releasing rupee liquidity in lieu, thereby dampening pressure for a rate rise, but such an action may lead to inflationary pressure on the economy, a situation which may be brought under control by jacking up rates to attract excess liquidity away from the market, leading to a situation where one is back to square one.
A higher interest rate regime deters investments as it makes borrowings more expensive, thereby negating an avenue for job creation.
As it’s, the net value of CBSL’s T Bill holdings as at Tuesday had increased to Rs. 166,392.278 million compared to a figure of a mere Rs. 1,048 million a year ago.
Meanwhile weighted average yields (WAYs) of 91, 182 and 364 day maturities at last week’s T Bill primary auction remained unchanged for the second week running, which caught the market by surprise, as, it was only the previous day that the market saw rupee premiums in US dollar ($) forward bookings rising.
“If you look at the fundamentals there is something wrong,” a market source told this newspaper.

http://www.thesundayleader.lk/2012/01/15/moving-towards-liquidity-crunch/

Breaks Norm

Central Bank of Sri Lanka (CBSL) at Wednesday’s Treasury (T) Bill auction offered Rs. 12,000 million worth of maturing T bills to the market for reissue, over and above the usual Rs. 10,000 million weekly quantum.
This was due to a surplus of maturing Treasuries entering the market (for re-issue) last week.
The split too was peculiar, with the amount of three months (91 day) Treasuries offered being Rs. 2,000 million and six months (182 day) and one year (364 day), Rs. 5,000 million each respectively.
The reason why, relatively speaking a lesser amount of three months Treasuries were offered to the market being that its maturity coincides with Avurudhu, a season where there is liquidity demand by the market. So the lesser maturities (in value terms) up for reissue during that period, the less pressure it causes on liquidity also during that period, thereby making it easier for CBSL to police rates.
Usually, when a parcel of Rs. 10,000 million worth of maturing T Bills is offered to the market, the splits are generally:-91 and 182 days (Rs. 3,000 million each) and 364 days (Rs. 4,000 million).

http://www.thesundayleader.lk/2012/01/15/breaks-norm/

F&W Optimistic About Tea
■Ignores Iran Crisis

Average tea auction prices last month declined by Rs. 34.12 year on year (YoY) to Rs. 354.63 a kilo, Forbes and Walker (F&W) in a report said.
It attributed this to the political unrest in the Middle East (ME), Sri Lanka’s single biggest tea importer regionwise.
The decline would have had been sharper if not for the November 3% rupee devaluation, F&W said. However listing a host of other positives for the New Year for tea, the report seemingly overlooked an apparent negative, the possibility of escalating tensions in the ME on account of Iran’s nuclear programme, a country which the report said is Sri Lanka’s second biggest tea importer and its impact on this produce (see elsewhere on this article).
Howbeit, among the positives listed for tea for the new year by F&W in this report were: Generally low production in the first quarter of the year which would drive up prices, greater interest by some of Sri Lanka’s key export destinations showing some element of political stability following last year’s political unrest which disrupted the smooth flow of tea, the growth in tea consumption in India and China as a combination of its increasing population and rising per capita income levels which would result in exports declining from those countries due to internal consumption increasing, increase in popularity of black tea in China particularly among the younger age groups, improved market activity from most importing countries which is likely to emerge as the current price levels are significantly lower than the corresponding levels in 2010 and 2011 and another plus being that inventory levels in most importing countries being unlikely to be higher than the corresponding level of the previous year, particularly the tea importing nations from the ME regions.
“The above factors would enable to project a cautiously optimistic market scenario this year with the expectation that the Colombo Auction averages should move up from the low levels to which it declined to during the last quarter (Q) of last year, whilst it may be over-optimistic to predict the dizzy heights that we reached during the first Q of last year at this point of time,” F&W further said.
It also said that the year’s first sale which concluded last week which had 7.2 million kilos on offer met with “good general demand.”
Ex-Estate offerings totalled 1.1 million kg. “There was good demand and prices in most instances were firm to dearer,” F&W said. The encouraging feature was the strong demand for BOPs which appreciated between Rs. 20-30 a kg., and “more select best invoices,” it said. Consequently the price parity between the BOP/BOPFs have narrowed considerably and in the case of the better Westerns, the BOPs are now selling substantially above the BOPFs, the report said. Nuwara Eliya BOPs gained sharply whilst the BOPFs lost out on value. The overall price structure for Uva/Udapusellawas showed no significant change except for the poorer invoices which were difficult to sell. CTC teas appreciated by Rs. 15-20 a kg., while the liquoring leafy teas “were irregular following quality.”
Shippers to the CIS participated on a wide cross section of the teas. There was fair demand from Japan and the Continent as well, while some selective buying was also evident possibly on account of Pakistan, F&W said.
Off Grades and Dust too were dearer by Rs. 5-10 in most instances.
Low Growns comprised 3.5 million kg. in the leafy/tippy catalogues. In the tippy catalogue, a range of better FBOP/FF1s sold at fully firm to “irregularly” dearer rates. Others were lower, particularly following quality. Well made tippy invoices too were irregularly dearer, others were generally easier. In the leafy catalogue, better OP/OPAs declined. Teas at the bottom end however met with better demand and were fully firm to dearer. PEKs were easier. BOP1s were fully firm to dearer whilst OPIs were easier. There was fair demand from CIS, Dubai, Saudi Arabia, Turkey, Iraq and Kuwait.

Exports
Total tea export revenue in the first 11 months of last year increased by Rs. 8.5 billion to Rs. 149.5 billion YoY.
In the review period export volumes too increased, by 6.6 million kg. to 292.4 million kg. CIS continues to be the largest importer of Sri Lankan tea followed by Iran and Syria. Although UAE is placed 4th, total imports showed a significant decrease YoY. Other noteworthy importers are Iraq, Turkey and Japan.
Meanwhile tea exports in November of 26.9 million kg. showed a marginal 0.5 million kg. YoY gain. Total revenue of Rs. 13.9 billion during that month showed a Rs. 0.5 billion YoY gain. Tea in bags have shown a YoY growth whilst tea in bulk and tea in packets have shown a decline.

http://www.thesundayleader.lk/2012/01/15/fw-optimistic-about-tea/

Another “Singapore”?

Last week’s business pages of this publication carried “gloom and doom” quotations from two businessmen.
One was from Richard Jansz a rubber broker and the other from well known businessman Ajita de Zoysa. Both of their negative outlooks coincidentally revolved round the Euro Zone debt crisis and rising tensions in the Middle East (ME) brought about by Iran’s nuclear programme with possible military action by the West and Israel to stifle the same and the seeming impact of such on oil prices.
Euro debt crisis is bad for Sri Lanka’s exports (incidentally EU is Sri Lanka’s second biggest export market) while an attack on Iran will make oil prices go sky high, widening Sri Lanka’s trade deficit even further, which last year is estimated to have had touched a near US$ ($) 10 billion figure, with oil being responsible for half of that amount and causing a serious balance of payments crisis in the economy.
As it’s, even without a conflagration in the ME because of Iran, Sri Lanka’s oil bill in the first 10 months of last year grew by 48.5% year on year (YoY) to $ 3.68 billion. According to Central Bank of Sri Lanka (CBSL), oil prices on Wednesday were hovering around US$ ($) 113 a barrel, up by nearly $ one in a mere two days.
The Iranians threaten that if the West/Israel resorts to military action against them, oil prices will go up to $ 200. Oil last hit dizzy heights nearly three years ago, at the height of the commodity boom, when it almost touched $ 150 a barrel. That caused grave problems to the economy, with oil prices at the pump shooting up, commodity prices increasing, coupled with inflationary pressure on the economy, pressure on the exchange rate and electricity costs, which is mainly fuelled by expensive diesel, also increasing, That was also the time the terrorist war was in full swing, which was another blow to the economy. Thankfully, now that war is a thing of the past and Sri Lanka doesn’t have to worry about that evil. But despite the war end, the island has not lessened pressure on military spend, part of that problem being the costs that have to be incurred in maintaining a large defence and police force, not forgetting the Civil Defence Force, even in peacetime! But why aren’t’ they being demobilized? Can a poor country such as Sri Lanka afford to apportion its largest chunk of budgetary expenditure during peacetime to defence year in year out as has been the case even after the war has been won, for three years since, ie in 2010, 2011 and 2012? Are there not other more pressing commitments? Isn’t there something wrong somewhere?
It may be moot, at this juncture, to recapitulate excerpts of the business editorial published on these pages in The Sunday Leader issue of 31.5.09., 13 days after the terrorist war was over under the heading “Demobilisation.”
It said, “Whilst, no doubt, a large number of troops will be needed to man newly established or re-established camps in the North and East to ensure that there is no repeat of terrorism from those areas, there may still remain a surplus of soldiers who are no longer needed by the army, now that the 26 year long war with the L.T.T.E. is over.
What then is the Government going to do with those excess numbers of military personnel who have been trained to handle weapons, who have been trained to kill, but whose services are no longer required now that the war is over is the million dollar question.
Therefore the onus before the Government is to find alternative avenues of employment to those demobilized troops.
For this to happen, they may need to be trained in various vocational skills in order to be made employable elsewhere, similar to what the Government is doing to those captured or surrendered terrorist cadres who are now in the process of being rehabilitated, before being released to society.
Of course the excess number of troops are not terrorists, that is the subtle difference. But the sheer numbers involved in the case of demobilized troops may be phenomenal, possibly numbering in the thousands, if not in the tens of thousands, gigantic, when compared with the head counts of those Tigers who are being rehabilitated, and whose numbers may add up to only a few hundred, if not a couple of thousands at the most.
The Government may also be hard pressed to find the necessary resources to train them in various vocations so that they would be equipped with the necessary skills to make them suitable for employment in non military jobs.
A man who has been trained to kill, if not gainfully employed in other trades in the event of being demobilized, may be a threat to society itself, this is the reality.
One way that the Government may make these demobilized troops useful is to employ them in construction and reconstruction works, a very real requirement for a country whose assets have been destroyed and development and progress stultified as a result of the 26 year old conflict.
However, a cash strapped Government with little resources will be hard pressed to do this alone. It will need to muster the support of the donor community and N.G.O.s to see this through.
These are one of several issues which the Government faces in peacetime, for which international goodwill and international support are essential for lasting peace and sustainable development of this island nation…”
The phrase, “international goodwill and international support” prescribed in the last para of that editorial perhaps sums it all as a possible solution to this vexing question which drains out valuable resources for the upkeep of such a large force now seemingly redundant with the war end 2½ years ago.
“International goodwill and international support” revolve round not only around India, China, Iran and Myanmar, the canvas is broader than that and needs no elaboration.
Reverting to terrorism, leave aside the fear, the killings and the destruction caused by it, it also bled the economy white, but now that is all history, and as a result a plus point from a socio-economic perspective for the country, which Sri Lanka should take advantage of.
There are those who said that if not for the July 1983 disturbances that led to Sri Lanka’s 26 year old destructive protracted terrorist war, Sri Lanka would have had been another Singapore by now. Now that war has been over more than 2½ years ago, can we still say that we are on the path of being another Singapore from a development perspective? Blame it on the economic crisis in the EU region and in USA (the island’s second biggest export market) as well, but why not for a start turn the searchlight inwards and see whether Sri Lanka and its leaders too share part of the blame for the economic morass currently besetting the country and not necessarily only to external issues, as some of the articles published on these pages in this publication point out?
Now that the war is over, it may be good for President Mahinda Rajapaksa and his Government to go back to the drawing boards and examine the success of the economic policies adopted in 1977 (which progress was however interrupted by the 1983 riots and terrorism that sprang thereafter, possibly due to certain political, both internal and external (India) ramifications and not necessarily due to economic policies) and try to learn lessons from the same, so that the country could go forward to the next level of development. Space doesn’t permit further elaboration.

http://www.thesundayleader.lk/2012/01/15/another-singapore/

Bye To FDI

It’s foreign direct investments (FDI) and not investments in Government securities that the country wants, a market source told this reporter.
FDI, among other things is free money, free foreign exchange, he said. Whereas subscription in Government securities (Treasury Bills and Treasury Bonds) is an expense as there is an interest component added to them, which the Government has to pay such investors along with the capital at maturity, he said.
FDI not only ease pressure on the rupee, it also strengthens the country’s balance of payments position, so critical as the island is believed to have had run a trade deficit of US$ ($) eight billion last year. FDI also boosts its foreign exchange reserves.
FDI are also needed to create employment opportunities in the island where the ranks of the educated unemployed has swelled to 20% (see also the business editorial of this newspaper’s 1.1.12 issue), though unemployment on an overall basis has declined to under 5%.
Youth unemployment may have had been the primary cause of three insurgencies the country has faced thus far, ie two in the south-in 1971 (of which in particular unemployed graduates and undergraduates played no smaller role) and 1987 and the other in the northeast in 1983.
“And the recently passed Expropriations Act which targeted a foreign hotel brand such as Hilton (see also last week’s business editorial of this newspaper’s) has had a negative impact on FDI,” the source said. Foreigners are talking about it and they have taken it as a negative message, he said.
“Laws are needed to protect FDI,..we are sitting on top of a volcano,” the source further said.
Meanwhile Government/Central Bank of Sri Lanka (CBSL) in a seemingly desperate move to attract more foreign exchange ($s) to the market, last month deepened the permissible investments of foreigners in government securities from 10% to 12.5% of such outstanding amounts. However this move has thus far not achieved the desired results, where the T bond market in fact having had witnessed a foreign outflow of Rs. 672 million (US$ 5.9 million*) in the week ended January 4 on a week on week basis and the T Bill market a foreign inflow of a mere Rs. 343 million ($ 3 million*) witnessing only a mere $ 2.9 million in net foreign inflows in the review period, of foreign investments in the Government securities market.
A source commenting on then Deputy CBSL Governor K.G.D.D. Dheerasinghe’s statement that there is demand for government securities like hot cakes in the international market (see this publication’s issue of 11.12.11.), said that one may be able to fool the electorate, but not financial markets (see also the business pages of this edition’s last week’s issue).
*1$=Rs. 113.90

http://www.thesundayleader.lk/2012/01/15/bye-to-fdi/

Customer First

Alliance Finance, a pioneering Sri Lankan finance company, has increased its profit after tax by a phenomenal 406% during the six months ended September 2011 year on year (YoY).
Alliance Finance AGM Deposits Ms. Champa Nakandala said that the Company has witnessed a significant growth last year (2011) on all fronts with its deposit base reaching Rs.6 billion which reflects a 24% growth compared to 8.7% in the previous year. The diversified client base has grown to over 10,000 customers during this period.
She said that the Company will continue to expand this year by converting more collection centres to branches. Currently Alliance Finance operates in every province in the country with 61 service points comprising branches, collection and gold loan centres and window offices. In keeping with its expansion strategy requirements, the Company is expected to grow its deposit base further this year. The continuous and prompt payment of due interest to deposit holders over the years has built confidence amongst its clients, she said. “Our first priority is interest payment and even the staff salaries are paid after that” as per the guidelines set by three successive generations of the Board. Asked how it was possible to sustain a high renewal ratio during the financial crisis in the industry, she said, although the Company was compelled to pay lower interest rates to depositors during that period, Alliance Finance was able to maintain a 90% renewal ratio with hardly any premature withdrawals.
As a testament to the Company’s excellent performance in its core hire purchase and leasing business, non-performing loans (NPL) ratios which stood at 4.24% in March 2011 had reduced to 3.86% in September 2011. In recognition of its superior industry performance, the Company recently won a Prestigious Silver Award in the Specialized Banking & Financial Services Sector category at the National Business Excellence Awards 2011 organized by the National Chamber of Commerce of Sri Lanka.
Alliance Finance has also been featured in the 61st position within the top 100 Most Valuable Sri Lanka Brands compiled by an independent survey carried out by LMD and Brand Finance.

http://www.thesundayleader.lk/2012/01/15/customer-first/

Gold Sponsor


Capt. Deleted. Amarasuriya

CINEC is no stranger to EDEX, Captain Deleted. Amarasuriya, internal auditor to CINEC, the country’s largest maritime education institute, told reporters on Tuesday.
CINEC is a Gold sponsor of EDEX, an annual education fair which among other things assist students to match make with tertiary education institutes other than the island’s state run university system. It’s organized by the Royal College Old Boys’ Union (RCOBU).
“CINEC is the island’s largest maritime higher education institute, headquartered in Colombo with branches in Jaffna and Trincomalee,” Amarasuriya further said. It has a 6½ acre sprawling campus in Malabe and an annual student population of 14,000 following over 150 education programmes. This institute, recognized for maritime training and such like, also has plans to open some more branches in the south
It’s also affiliated to universities in the UK, USA and Australia, offering their courses here, including ICT from Wolverhampton University, UK. CINEC established in 1990 won the quality award in 1994, 2004 and 2009, as well as the Asia-Pacific Quality Award in Education in 2010, said Amarasuriya.
CINEC, from offering courses to ships’ captains and marine engineers, additionally offers courses in various skilled development programmes such as welding, aluminium fabrication, diving and underwater welding.
He further said that CINEC Chairman Captain Ajith Peiris is actively involved in RCOBU.
EDEX 2012 Chairman Kamal Abeysinghe said that with the monies accrued by holding EDEX over the years (this year is its ninth edition), RCOBU was able to build a technical training institute costing Rs. 37 million and sponsoring indigent students who enter Royal College under the Grade 5 scholarship programme generally from rural areas, right up to their university education, among a host of other things.

http://www.thesundayleader.lk/2012/01/15/gold-sponsor/

Doesn’t Buy “Lie”

There was no change in the foreign exchange (forex) market despite pronouncements by key government officials that they are expecting foreign investments worth several billion US dollars ($s) to the economy which were reported in the local media on Friday.
“While state owned Bank of Ceylon on behalf of the Government and state owned Central Bank of Sri Lanka (CBSL) was offering $s to the market at Rs. 113/90 a unit, the market in two way quotes (buy-sell) were offering them at Rs. 113/88/93 per $, a market source told this reporter.
With the market being short for the umpteenth time (since the second half of last year) on Friday, CBSL once more opened its overnight (o/n) reverse repo window, offering to the market in excess of its requirements, a sum of Rs. 15,000 million; of which only Rs. 8,644 million was taken up by the market, at a slightly higher weighted average yield (WAY) of 8.20%, eight basis points (bps) more than the previous day’s (Thursday’s) price.
CBSL since December 30 of last year (that year’s last working day), has been conducting its open market operations (OMO) in a seeming nonchalant manner, at times, in their daily o/n reverse repo auctions, making offerings less than the needs of the market’s liquidity requirements, thereby forcing it to borrow from CBSL’s more expensive reverse repo window at an o/n rate of 8.50%.
Yields in secondary market Treasury (T) Bond trading too remained unchanged on Friday, the source said.
Meanhile the money market on the first day of last week Monday (January 9) lost the zest it saw on the previous working day (January 6) when yields came down on the back of $ premiums in forward bookings also falling on that day.
A source said that the gains made by the market last Friday (January 6) were one off. It was caused by a private insurance company, probably due to regulatory requirements, subscribing to such T Bonds, which caused the yield of the 2014 maturity in particular to fall by as much as 30 bps on that day, he said (see also the business pages of this publication’s last week edition).
But on Monday call money rates* rose by an average of 15bps to 8.68% over that of the previous Friday’s close.** Meanwhile, Monday’s secondary market trading saw T Bonds of 2014 maturity which contracted by as much as 30 bps the previous working day January 6, holding on to these levels, ie at a price of 9.30-40% on Monday’s trading.
The other popular trading instrument, the 2015 maturity commanded a price of 9.50% on Monday.
A peculiar practice resorted to by CBSL these days is to compel the market to make part of their borrowings from CBSL’s more expensive overnight o/n reverse repo window (where the rate commanded is 8.50%), rather than from the reverse repo auction, where the rates fetched in the latter are much less than that in the former.
This has happened at least eight times in the recent past thus far, on December 30, 2011, the last trading day of last year and again on January 2, 3, 6,9,10, 11 and 12 of this year. The market, since about September of last year has been short of liquidity with CBSL meeting this requirement by holding daily reverse repo auctions from that time onwards.
The liquidity crunch in the market is attributed to the protection of the rupee, where CBSL does not allow the local currency to depreciate below a certain amount by offering $s to the market at a prescribed price (the current price being Rs. 113.90 to the $ in inter-bank trading), but in the process draining out rupee liquidity from the market. The other reason attributed for the liquidity crunch being high credit growth. When CBSL protects the rupee, it expends the $s held by it in the form of foreign exchange reserves to the market. Similarly if it allows the rupee to depreciate it makes imports more expensive to the consumer, particularly oil, needed to produce electricity among others, as Sri Lanka thus far does not produce oil. Reverse repo auctions and reverse repo window are mechanisms by which CBSL injects liquidity to the market.
*Call money rates are inter-bank borrowing rates of a particular day, in this instance that of Monday’s.
**By Thursday it had gone upto 9.06%.

http://www.thesundayleader.lk/2012/01/15/market-doesnt-buy-lie/