Sri Lanka Newspapers Thursday 08/03/2012

Wednesday 7th March 2012, 1:45am
WORLD ECONOMY
TIM WALLACE

BRAZIL’S economy is now bigger than the UK’s, making it the second emerging market to enter the top-tier of world economies and heralding the beginning of the end of Western economic dominance.

Britain’s star is fading fast – the country now has the seventh biggest economy in the world, down from fourth in 2005, thanks to the long booms in China and Brazil.

The International Monetary Fund (IMF) expects France to fall behind Brazil by 2015, leaving the US and Germany as the only western economies in the top five.



The news will further fuel fears that the UK’s high tax, high regulation and high debt economic model is costing growth and jobs.

It will also rekindle the debate about what should be done to boost the UK’s competitiveness and to prevent a growing exodus of people and capital to emerging economies, where opportunities are now often much greater than in the high-unemployment West.

In US dollars, Brazil’s output in 2011 stood at $2.469 trillion (£1.57 trillion), some $49.2bn larger than the UK’s GDP of $2.42 trillion.

The emerging giant registered GDP growth of 2.7 per cent in 2011, far outstripping Britain’s 0.8 per cent. The lead is set to widen, with the IMF forecasting growth of three per cent this year against the UK’s 0.6 per cent.

However, Brazil’s 2011 growth rate is sluggish for a BRIC country – China’s economy expanded by 8.7 per cent, India’s by 6.1 per cent – and well below the 7.5 per cent seen in the country in 2010.

Yet there are hints the Brazilian economy is moving to a stronger footing. Merger and acquisition activity is up 177 per cent in the first two months of 2012 compared with the same period of 2011, and consumer spending registered healthy growth in the final quarter of 2011.

British politicians would consider growth of three per cent a nice problem to have. British GDP is still way below its pre-recession peak and estimates from the Office for Budget Responsibility (OBR) expect growth to reach the three per cent level by 2015-16.
http://www.cityam.com/latest-news/brazil-s-economy-overtakes-the-uk

history tells kingdom & kings become zero one day.

Banks increase borrowings from CB as liquidity tightens further
* Rupee strengthens

Benchmark Treasury bill rates and overnight interest rates increased further as rupee liquidity continued to tighten with commercial banks increasingly borrowing from the Central Bank to maintain positions.

The Central Bank injected Rs. 5 billion into the banking system on Tuesday (Mar. 6) as rupee liquidity continued to tighten. It had pumped in Rs. 9 billion over the previous two days which saw the interest rate for these transactions pick up to 8.8 percent from 8.75 percent last Friday.

Commercial banks are also increasing their borrowings from the Central Bank via the reverse repurchase window at 9 percent which is where the monetary authority acts as a lender of last resort to commercial banks facing liquidity issues. On Tuesday, commercial bank borrowed Rs. 8.63 billion, the highest since last Thursday where Rs. 4.9 billion was borrowed; a total of Rs. 23.73 billion has been borrowed since then.

Overnight call money market rates for interbank borrowings without security inched up on Tuesday to 9.78 percent from 9.7 percent the previous day. Market repo rates for interbank borrowings backed by securities increased to 8.78 percent from 8.68 percent the previous day. The overnight Sri Lanka Inter Bank Offered Rate increased to 9.81 percent from 9.73 percent a day earlier.

Benchmark Treasury bill rates jumped, with the yield on the three months bill moving up 30 basis points from last week to 9.81 percent at this week’s primary market auction held on Tuesday. The six months bill saw its yield move up 24 basis points to 10.18 percent and the 12-months bill moved up 15 basis points to 10.45 percent.

The auction was for maturing bills amounting to Rs. 10 billion. Bids amounted to Rs. 21.1 billion but only Rs. 9.47 billion was accepted.

Meanwhile, the rupee gained some ground against the dollar on Tuesday, closing at Rs. 121.45/55 after opening the day at Rs. 121.90/122.

Dealers said recent Central Bank regulations issued to commercial banks on the exchange rate would dampen speculation but feed volatility.
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* Venture between AMW and Dubai based Al-Futtaim seeks out other sectors
By Mario Andree

One of the largest insurance players in UAE who has a global presence in 70 countries launched its Sri Lankan venture recently with an investment of Rs. 750 million entering the General insurance arena of the country and recorded Rs. 54 million gross written premium (GWP) for the last three months since its soft launch in December, and is expected to list on the Colombo Stock Exchange after five years in operation.

Orient Insurance, a fully owned subsidy of Arab Insurance PSC was officially launched on Tuesday, and hopes to function itself in the general insurance arena where the company sees potential.

The parent company of Arab Orient Insurance, Al-Futtaim is also focusing on other areas of investment according to senior officials and the Al-Futtaim Vice Chairman Omer Al Futtaim had visited Jaffna to inspect an ideal land for a leisure sector investment.

The company obtained its insurance licence in October last year and had a soft opening on first of December, it so far has recorded a gross written premium of Rs. 54 million according to Orient Insurance CEO Deepthi Lokuarachchi.

He said that the company was expecting to capture a substantial share of the insurance market which amounted to Rs. 45 billion competing with the five major insurance giants handling more than 84 percent share currently.

"Orient insurance is well positioned to be a strong player in the Sri Lanka’s General Insurance market, and it’s A rating by both Standards and Poor and AM Best would pave the way further."

"Associated Motor Ways (AMW) is one of the renowned and leading vehicle importers in Sri Lanka and the sister company of Orient Insurance, with their 60 year experience in the local motor industry and wide spread network of outlets also would enable Orient to have a better understanding of the motor insurance needs."

It has opened 13 branches in the last three months with five operating in Colombo and hopes to launch 4 more during this year.

Omar Al Futtaim said, "We have identified Sri Lanka as a country with immense growth potential and its current progress has proved that there is more space for foreign investment."

According to him the country was blessed with a highly educated pool of people and said that the company was hoping to expand further in the country.
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*Hayleys ties up with Indian firm for BOT project in Passikudah

Plans to revive tourism in the picturesque Passikudah bay on Sri Lanka’s east coast reached a milestone on 6th March 2012, with the commissioning of a hi-tech central sewage and waste water treatment plant for the proposed National Holiday Resort, comprising of 13 star class hotels.

Hailed as the first Public-Private Partnership (PPP) in the waste water infrastructure sector in Sri Lanka, the Rs 185 million ‘Lakdiyatha Passikudah’ facility was designed and built, and will be operated for 20 years, by a joint venture involving the Veolia Water, India and Puritas Pvt Ltd.

Veolia Water India, part of Veolia Water France, is a world leader in water and wastewater services. Puritas (Pvt) Ltd, a subsidiary of Haycarb PLC represents the Purification Sector of the Hayleys Group.

The unique BOT (Build-Operate-Transfer) project comprises of a centralised treatment plant, more than eight kilometres of waste water lines and over four kilometres of treated water lines that link it with the 13 hotels spread over the 100 acres set aside for the resort. The plant utilises the new Moving Bed Bio Reactor (MBBR) technology to treat 750 M3 of sewage and kitchen waste a day, and is designed for 100 per cent recycling of treated water.

The central treatment plant was formally commissioned by Sri Lanka Tourism Development Authority (SLTDA) Chairman Dr. Nalaka Godahewa, Mr. Sunil Hettiarachchi, Director General of the Ministry of Economic Development, the Hayleys Group Chairman/CEO Mr. Mohan Pandithage, Mr Fabrice Brochet, Executive Vice President Veolia Water Systems Development and Mr. Patrick Rousseau, Managing Director of Veolia Water India, along with other dignitaries and senior officials of Veolia Water and Hayleys Group.

"This ground-breaking project reflects not only the Hayleys Group’s and our partner Veolia Water’s, competencies in large-scale environmental solutions, but also our commitment to support economic resurgence in post-conflict Sri Lanka," Hayleys Group Chairman Mohan Pandithage said. "It illustrates the potential for public-private partnerships, particularly in infrastructure development."

Speaking at the commissioning of the plant, Chief Guest Dr. Nalaka Godahewa said one of the challenges in meeting the government’s targets for growth of the tourism industry is to ensure infrastructure is in place. "I am glad that Puritas and the Hayleys Group, together with Veolia won the contract to build this facility," he said. "They have been very professional and delivered beyond expectations."

Representing Veolia Water India, Patrick Rousseau said: "This project will play a decisive role in Sri Lanka’s development by showcasing that public private partnerships are actually a way of bringing the best of the both worlds and paving the way for more such partnerships in Sri Lanka." He said the project also provides answers to environmental challenges by promoting green and innovative technologies in the field of water and wastewater treatment, to help Sri Lanka remain one of the world’s most beautiful countries.

Under the terms of the BOT agreement, the Lakdiyatha Passikudah plant will offer a concessionary rate to hotels for the first three years of its operation, in reciprocation of concessions granted by to the project by the Economic Development Ministry. Two of the 13 hotels at the resort are already in operation and the others are expected to be operational by the end of 2012, at which point the resort will offer a total of 930 rooms.

The centralized waste water treatment plant was designed and built with expertise in Sri Lanka and India, with equipment supplies from France, Sweden, Japan, India and Sri Lanka, while all civil works were built with local labour. Lakdiyatha has recruited and trained personnel from the Passikudah area to operate and maintain the plant under supervision of Puritas and Veolia Water.

A company that traces its origins to Compagnie Générale des Eaux founded in 1853, Veolia Water specialises in outsourcing services for municipal authorities, as well as industrial and service companies. It is also one of the world’s major designers of technological solutions and constructor of facilities needed in water and wastewater services. With 96,260 employees in 67 countries, Veolia Water provides water service to 100 million people and wastewater service to 71 million. The company’s 2010 revenue amounted to euro 12.1 billion.

Incorporated in 1995 as a fully-owned subsidiary of Haycarb PLC, the world’s leading producer of coconut shell based activated carbon, Puritas (Pvt) Ltd., provides consultancy and turnkey solutions for raw water and liquid, solid and gaseous effluent treatment. In addition, Puritas offers customised, innovative solutions to suit specific waste characteristics, site conditions and budgets. With its state-of-the-art analytical laboratory, Puritas differentiates its services by performing in-house analysis and running pilot-scale trials to optimize treatment processes. The company’s portfolio encompasses Pollution Control, Water Treatment, Activated Carbon Products, Energy and Specialty Chemicals.
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*Uncertainty hits capital market, but current price levels provide opportunities for the future

Investor sentiment is expected to remain weak as uncertainty grips the country’s equities market with economic growth is expected to slowdown to 7.9 percent this year, but better positions could be built in the medium to long term, John Keells Stock Brokers (JKSB) said in a comprehensive economic and capital market report titled "Timing is Everything: Sri Lanka Market Strategy".

"A steady decline in the indices over the last 12 months has resulted in the market trading at more rational valuations having priced in the macro head winds the economy faces at present. The significant correction on the indices followed a sharp rise in largely credit driven speculative trading on illiquid and second tier stocks in 2011. The ASPI declined by 8.46% in 2011 and is down a further 101.11% YTD in the first two months of trading in 2012 registering an overall decline of 29.98% from its peak in end February 2011.

"Near term valuation of Sri Lankan equities now rank more favourably with regional peers. Whilst we expect market sentiment and overall buying interest to remain weak in the short term given current concerns over the exchange rate, higher energy prices and a moderate rise in interest rates, current price levels do provide medium to long term investors with an opportunity to incrementally build fresh positions in the market," JKSB said.

With the end of the post war bull run, several fundamentally strong counters are trading at single digit and low double digit multiples on 1 yr forward earnings estimates, whilst exhibiting a healthy sustainable earnings growth outlook of 18% - 25% over the medium term. While timing is everything in generating returns in such an environment we remain bullish on the long term post war growth prospects for the Sri Lankan economy and fundamentally sound stocks positioned to benefit from this growth should provide sound returns over an 18 to 24 month period," it said.



"An ever widening trade deficit has created some uncertainty as to the extent to which the LKR will depreciate in the current year while interest rates as anticipated trended higher towards the end of CY11 on the back of strong credit growth over the last 18 months. This together with the passing of the expropriation bill has had a dampening impact on sentiment over the last quarter which has been further dampened by the sudden steep fuel price increases in February this year which will cascade into increases in cost structures across the board. The cost increases will have an inflationary impact which is somewhat cushioned by current low food prices compared to the corresponding period last year.

Corporates are also unlikely to be able to pass on the cost increases in full to consumers without an adverse impact on demand. The resulting cost increases and the depreciation of the currency will however curtail imports and reign in the trade deficit as well as reduce the extent of state borrowings to fund the country’s oil imports.

The initial increase in domestic economic activity and the re-integration of the North and East province and the infrastructure building across the country should lead the economy to expand by 8.1% in 2011 and 7.2% in 2012. However sustaining these growth rates for CY13 and beyond would require investment levels to rise in order to enhance scale and productivity in the economy. Private investment levels via local investment or foreign direct investment although expected to be significantly higher than last year still continues to lag behind our initial expectations following the end of the war.

Lower domestic debt finance expense, higher tax revenues and lower defense spend relative to GDP should see the fiscal deficit decline to 6.9% in CY11 and 6.4% in CY12. Increased food production in the North and East provinces and improved yields should cushion the country’s exposure to imported inflation on food items in the medium term although the country’s exposure to supply side shocks still remains significant with its sensitivity to global commodity prices, with world crude oil prices being the most pressing concern. Our projections for annual average inflation for the year end are at 8.8%.

The ASPI declined by 8.46% in 2011 and is down a further 10.11% YTD in the first two months of trading in 2012 registering an overall decline of 29.98% from its peak in end February 2011. The significant correction on the indices followed a sharp rise in largely credit driven speculative trading on illiquid and second tier stocks in 2011.

Corporate earnings growth remains sound with expectations of FY12E normalized earnings growth of 22.3% and FY13E of 16.2%. We anticipate businesses to continue to display healthy volume growth stemming from sustained demand and investment in new capacity.

Inflationary cost increases are expected to impact margins while finance expenses are expected to rise whilst the net margin boost from the tax reduction will be normalized in the current year. It should also be noted that the adoption of IFRS for presentation of financials from 2012 onwards would require closer scrutiny to decipher recurring company performance With the end of the post war bull run, several fundamentally strong counters are trading at single digit and low double digit multiples on 1 yr forward earnings estimates, whilst exhibiting a healthy sustainable earnings growth outlook of 18% - 25% over the medium term.

Despite the sound corporate earnings outlook, current headwinds of interest rates trending higher, higher operating costs for businesses, uncertainty over the exchange rate as well as intermittent selling pressure stemming from unwound credit positions in the market, still cloud investor sentiment. While timing is everything in generating returns in such an environment we remain bullish on the post war growth prospects for the Sri Lankan economy and fundamentally sound stocks positioned to benefit from this growth should provide attractive medium to long term returns over an 18 to 24 month period.

Political Overview…

With the removal of the constitutional bar on the president having a two term limit on the 8th September 2010, Sri Lanka started a new chapter in its political history. With the ruling United Peoples Front Alliance (UPFA) having only 144 seats the amendment had a smooth passage with 161 members voting in favour, and only 17 voting against.

Current administration firms up hold on power…

President Rajapaksa has astutely levered his post war popularity into what appears will be a long stay in the seat of power. The dominance of the Rajapakse administration is also partially due to the weakness of Sri Lanka’s second major political party the United National Party (deleted). Wracked by internal dissension the party has seen members defect once again to the ruling party while the remaining MPs have publically come out against Ranil Wickremasinghe’s party leadership.

The executive president enjoys enormous powers under the 1978 constitution. He can dissolve the parliament and declare emergency. He also appoints judges, heads of armed forces and police, election commissioners and secretaries to the government.

Consolidation of power should deliver stability…

Sri Lanka has long suffered under political uncertainty with wafer thin majorities in Parliament exacerbating the effects of the turmoil of the nearly three decade long ethnic war. This focus on political uncertainty due to the possibility of a change in regime means many investment decisions were postponed. It is hoped that this current consolidation of political power will give an environment of stability in which faster economic growth can occur. The budget delivered in November 2010 and 2011 underlined the importance the government places on catching up on the economic development that the country forfeited during its period of turmoil.

Much of the success of the war effort can be attributed to the Rajapakse administration’s foreign policy which prioritized improving relations with regional powers like India and China as well the Middle East. These relationships are also important from an economic standpoint. India and China are committing substantial amounts to investment in infrastructure in post-war Sri Lanka. China is now Sri Lanka’s largest donor of developmental assistance after Japan. India is also one of Sri Lanka’s most important trade partners and is one of the largest sources of tourists into the country. Sri Lanka’s increasing links to the Asian region should prove important in continuing export led economic growth in the coming years.

Economic Overview…

Domestic economic activity continued to expand at a healthy pace with the economy growing by 8.3% in the 3Q CY11. Improving business sentiment in the 1H of CY11 that stemmed from strong domestic demand, a low and benign interest rate environment and relative macro stability together with continued infrastructure spend reinforced a strengthening economy. However an ever widening trade deficit has created some uncertainty as to the extent to which the LKR will depreciate in the current year while interest rates as anticipated trended higher towards the end of CY11 as excess liquidity dried up given the strong credit growth in the 2H of CY10 followed by a 34.5% credit growth witnessed in CY11.

This together with the passing of the expropriation bill has had a dampening impact on sentiment over the last quarter. Sentiment has been further dampened by the sudden steep fuel price increases in February this year which included a 36.9% increase in standard auto diesel, a 49.3% increase in kerosene and an 8.8% increase in petrol has cascaded into increases in cost structures across the board.

This includes a rise in electricity costs which include a 15% increase in electricity tariff for industries and the leisure sector and a 25% to 40% increase across low to high consumers of electricity. The cost increases will have a significant inflationary impact which is somewhat cushioned at present by current low food prices compared to the corresponding period last year. Corporates are also unlikely to be able to pass on the cost increases in full to consumers without an adverse impact on demand. The resulting cost increases and the depreciation of the currency will however curtail imports and reign in the trade deficit as well as reduce the extent of state borrowings to fund the country’s oil imports.

GDP growth of 8.3% in the third quarter CY11 was in line with expectations with contributions from the agriculture sector rebounding as anticipated to grow at 6.2% for the 3Q after growing by just 1.9% in the 2Q and contracting by 5% in the 1Q.

Private sector credit growth up to December of CY11 was as high as 34.5% but is expected to taper off moderately in 2012 to around 20%. We anticipate the services sector to grow by 8.4% in CY11 and expand by 7.1% in CY12 driven by wholesale and retail trade, transport and communication and leisure activity.

Large scale infrastructure spending continues to take place simultaneously across all parts of the country relating to ports, roads, airports, power, and irrigation facilities in addition to small scale rural infrastructure projects.

Private investment levels via local investment or foreign direct investment although expected to be significantly higher than last year still continues to lag behind our initial expectations following the end of the war.

The initial increase in economic activity and the re-integration of the North East province and the infrastructure building across the country should lead the economy to expand by 8.1% in 2011 and 7.9% in 2012 according to our projections.

Fiscal Deficit…

Government revenue recorded a growth of 13.6% in the first 9mths of the CY11 with an increase in both direct and indirect taxes. Recurrent expenditure grew by just 9.6% in the same period with savings from domestic financing of debt contributing significantly to the reduction. We anticipate the fiscal deficit would decline to 6.9% for 2011 and 6.4% in 2012 stemming from lower interest expense on domestic financing, higher tax revenues and lower defense expenditure relative to GDP.

The decline in the fiscal deficit has allowed the state to relatively reduce its dependence on short term borrowings to finance the deficit thus reducing the inflationary impact of deficit financing. Total outstanding government debt stood at Rs. 5,117bn as at end Sept. CY11 with an estimated Debt / GDP ratio of 78% with foreign currency debt amounting to 44.8% of total debt. The government expects the Debt/GDP ratio to decline to 64% by end 2015.

Inflation…

The CCPI has been trending higher from an annual average of 3.1% in February 2010 to 7.19% in September 2011 before declining to 6.1% in January 2012. The sharp rise in energy prices and its cascading effect on other consumer goods will result in an increase in inflation in the current year. The effects on the CCPI will be less pronounced in the short term as a result of higher food prices in the corresponding period last year stemming from the floods in the 1QCY11.

Increased food production in the North and East provinces and improved yields should cushion the country’s exposure to imported inflation on food items in the medium term although the country’s exposure to supply side shocks still remains significant with its sensitivity to global commodity prices of which the most significant being petroleum imports. The property market has shown signs of increased activity and non-food and non-fuel inflation still remains under check reflecting unutilized capacity in the system. Furthermore evidence of demand driven inflationary effects will likely be curbed by a rise in interest rates. Our projections for annual average inflation for the year end are at 8.8%.

Interest Rates…

Interest rates, as anticipated trended higher at the tail end of last year having bottomed out in September CY11 with the 1 yr T-bill and weighted average prime lending rate rising from 7.31% and 9.26% to 10.19% and 10.4% at present respectively.

The Central Bank in February 2012 increased policy rates by 50 basis points with the repo and reverse repo now at 7.50% and 9.00% respectively having previously consistently retained policy rates since a 25bps reduction in the

repurchase rate in January of CY10. Furthermore in a bid to curtail import related credit growth as well as ensure potential demand pull inflationary effects in the 2H of 2012, the Central Bank has mandated commercial banks to moderate credit growth to ensure overall loan book expansion for 2012 does not exceed 18% whilst permitting credit growth of 23% for banks that can fund the excess 5% from funds mobilized overseas. Excess liquidity in the system which was as much as Rs. 124bn as at end 2010 now stands at approximately Rs. 15bn which we anticipate would result in a further 100 – 150 bps rise in lending rates from current levels as banks become increasingly competitive in order to mobilize deposits.

External sector…

We expect export earnings of US$ 12.69bn in CY12.

Continued import of non-food consumer goods such as consumer electronics and motor vehicles together with an increasing oil import bill and import of industrial input materials is expected to see imports grow by 20% in CY12, some what curtail by the currency depreciation and restrictions on credit growth.

The trade deficit is expected widen by 87% for CY11 as a result of export growth lagging behind a sharp collective rise in imports of consumer, intermediate and investment goods. This has been assisted by a stable exchange rate for much of 2011 and significant tariff reductions that were announced in mid-2010. Garment and textile exports which accounted for approximately 40% of total exports in 2010 has grown significantly in the current year with competing manufacturing destinations being less attractive and reliable for the niche players that Sri Lanka caters to. This has however failed to match up to the growth in imports reflective of the increase in domestic demand and business activity in the island. The resulting deficit has resulted in pressure on the currency to depreciate.

Net remittances have remained strong and grew by 25% amounting to US$ 5.14bn for CY11. Strong inflows to government securities in 2010 along with the sixth tranche of the IMF standby facility pushed gross official reserves to US$ 8.05bn at end August, equivalent to approximately 5.3 months of imports. Despite strong export growth and healthy worker remittance inflows, BOP pressure stemming from a widening trade deficit resulted in intervention by the central bank to stabilize the exchange rates. This led to reserves declining to US$5.9bn by end 2011, equivalent to approximately 3.5 months of imports.

The Central Bank with effect from 10th February 2012 decided to limit its intervention in the forex markets, by limiting the supply of foreign exchange to the extent needed to settle oil import bills and absorb excess forex liquidity entering the market, such as, from issuance of Tier 2 capital by banks and inflows into equity and bond markets. The local currency has since depreciated by 6.66% against the US$ to 119.37, whilst depreciating by 7.43% and 7.34% against the Euro and Sterling respectively. The depreciation of the currency and credit growth restriction on banks is expected to curtail non-essential imports while capital flows are expected to be healthy along with sound export growth and healthy worker remittance inflows and tourism earnings. We expect the exchange rate to stabilize at current levels.

Market Overview and Strategy…

A steady decline in the indices over the last 12 months has resulted in the market trading at more rational valuations having priced in the macro head winds the economy faces at present. The significant correction on the indices followed a sharp rise in largely credit driven speculative trading on illiquid and second tier stocks in 2011. The ASPI declined by 8.46% in 2011 and is down a further 101.11% YTD in the first two months of trading in 2012 registering an overall decline of 29.98% from its peak in end February 2011. The speculative run up of second tier stocks to irrational levels was largely funded by excessive and unsustainable levels of credit disbursed to local retail and HNI investors which included a wave of new investors in the market that were attracted by prospects of significant returns in excess of benign fixed income returns that had declined significantly since the end of the war. The number of new securities accounts opened in 2011 was nearly double that of the previous year. Speculative trading on second tier counters accounted for approximately 40% of turnover in the second half of 2011.

Foreign participation in the market declined to just 11% in 2011 from 30% in 2009 and 19% in 2010. Higher near term valuations of Sri Lankan equities compared to regional peers at the time resulted in foreign participation also continuing to consistently account for net foreign selling throughout much of 2011 stemming from a trend that started at the tail end of 2010. Several new listings which opened trading in a declining market performed poorly and contributed towards dampening investor sentiment. This collectively dragged the broader indices lower, with the more liquid Milanka index declining by 25.95% during 2011.

Turnover levels have since declined appreciably with average daily turnover levels in the 4Q CY11 down to Rs. 1.06bn from Rs. 2.7bn in the first 9months of 2011 and Rs. 2.4bn in 2010, indicative of weak buying interest as market participants chose to remain on the side lines

Near term valuation of Sri Lankan equities now rank more favourably with regional peers. Whilst we expect market sentiment and overall buying interest to remain weak in the short term given current concerns over the exchange rate, higher energy prices and a moderate rise in interest rates, current price levels do provide medium to long term investors with an opportunity to incrementally build fresh positions in the market.

Outlook …

Corporate earnings growth remains sound with expectations of FY12E normalized earnings growth of 22.3% and FY13E of 16.2%. This follows steep normalized earnings growth of 72.6% in 2010 for the JKSB Universe.

Businesses across most sectors benefitted from sharp volume driven earnings growth and improved capacity utilization levels. Banks recorded healthy credit growth assisted by excess liquidity in the system at the start of 2011, while the leisure sector continued to enjoy healthy occupancy levels and manufacturing and domestic retail businesses benefited from high disposable income levels and increased domestic demand. Further benign interest rates continued to result in lower finance expense for businesses, and lower credit default risk and improved recoveries for banks and finance companies. Moderate inflation kept operating expenses in check with tax reductions announced in the November 2010 budget improving net margins across the board.

We anticipate businesses to continue to display healthy volume growth stemming from sustained demand and investment in new capacity. Inflationary cost increases particularly with higher energy prices and possibilities of higher wage expense will impact earnings while finance expenses are expected to rise whilst the net margin boost from the tax reduction will be normalized in the current year. It should also be noted that the adoption of IFRS for presentation of financials from 2012 onwards would require closer scrutiny to decipher recurring company performance.

Despite the sound corporate earnings outlook, current headwinds of interest rates trending higher, higher operating costs for businesses, uncertainty over the exchange rate as well as intermittent selling pressure stemming from unwound credit positions in the market, still cloud investor sentiment.

Given this environment margin funded equity investments are unlikely to generate significant returns in the current year.

With the end of the post war bull run, several fundamentally strong counters are trading at single digit and low double digit multiples on 1 yr forward earnings estimates, whilst exhibiting a healthy sustainable earnings growth outlook of 18% - 25% over the medium term. While timing is everything in generating returns in such an environment we remain bullish on the long term post war growth prospects for the Sri Lankan economy and fundamentally sound stocks positioned to benefit from this growth should provide sound returns over an 18 to 24 month period."
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*700 already confirmed participation
*Leading buyers include Victoria Secret, Walmart Global Sourcing and Mark & Spencer

By Ravi Ladduwahetty

The government has targeted over 1,000 visitors for the much awaited Expo 2012 exhibition - under the theme partnering with the hub of Asia, which will be held in Colombo from March 28-31 at the BMICH, after a lapse of 15 years, after it was held in 1992, 1994 and 1997, the last occasion on which it was held.

There are over 700 trade buyers from the Americas, the European Union, the Russia, South and East Asia Middle East, Africa and the Pacific regions who have confirmed participation and some of the leading buyers which include Walmart Global Sourcing, ASDA, Arcadia, H&M, Victoria Secret. BHS, Mark and Spencer Calzedonia SPA, Lulu, Hyper Market and Carreflour, Sri Lanka Export Development Board Chairman Janaka Ratnayake told a news conference at the Cinnamon Lakeside Floating Restaurant on Tuesday night.

The countdown has begun with only 22 days more for the mega show and there will be 350 Sri Lankan exporters who will showcase a diverse array of export products ranging from Ceylon Tea to ethical garments, gems, business processing, agriculture and fisheries along with Industrial products and services.

The news conference was also held to announce the sponsorship of the event by the Platinum Sponsor- the Joint Apparel Association Forum ( JAAF) along with the strategic sponsor - the two apparel industry giants- MAS Holdings and Brandix. In addition, there will also be the sectoral partners- Ceylon Tea Services (Dilmah Teas) and Akbar Brothers from the tea sector,

Ellawela Exports and Mushan International from the gem and jewellery sector, HSBC representing the banking sector and SriLankan Airlines as the official airline partner

Trade delegates who have conformed their participation include the United States ( 35), The United Arab Emirates ( 50) Belgium ( 25), United Kingdom ( 45), Representatives from the South Asian Expert Groups and the think tanks ( 15-20) Singapore ( 35 member delegation from the gem and jewellery Association) Japan ( 40) Korea ( 30 Pakistan ( 20), India ( 120) France (10) and Russia ( 10), Ratnayake said.

Asked how effective the media campaigns were to promote the event worldwide to showcase the mega event, he said: " there was a well planned promotional campaign to announce the Colombo show with protracted campaigns in leading world capitals such as London, Dubai, Germany, Korea, Canada, Malaysia, Bombay, New Delhi with the participation of high powered delegations. Advertising was also carried out in international trade journals and business magazines such as the First Magazine (Commonwealth Business Forum magazine in Perth), Sri Lanka Investment Guide (Commonwealth Heads of Government Meeting in Perth) the Food Companion in Perth, the Wall Street Journal and the Fortune magazine of China.

A promotional campaign was also held in both the print and electronic media in collaboration with an international media agency. A well positioned web address has also been launched as a one stop information guide to the event as well.

The exhibition will be opened to the investors and foreign visitors on March 28 and 29 while it will be opened to the public on March 30 and 31 at a nominal fee. There will also be a trade and investment symposium on March 29 by numerous industry experts on the advantages of the conducive environment prevalent in Sri Lanka for business. The panelists will be: International Trade Centre Deputy Executive Director Jean Marie Paugam, Italy’s Clazedonia SPA Chairman Dr Sandro Venonsi on investment, and London Stock Exchange Group General Manager Mark Harries on investments, HSBC Holdings PLC Global Head of Business Services Ian Ogilvie and others.

MAS Holdings Chairman Mahesh Amalean and Brandix Managing Director/ CEO Ashraff Omar, himself the founder JAAF Chairman, in some brief remarks, said this would an ideal opportunity for the private sector to showcase its export capability to the world and especially after the conclusion of the ethnic war and now that this exhibition is held after 15 years. " We will be able to showcase to the world, the quality of workmanship craftsmanship and talent and we are confident that exports would grow by 50% this year , he said.

Asked how much the promotions cost, EDB Chief Janaka Ratnayake said that the total was Rs. 140 million which was equally distributed between the Export Development Board, the Treasury and the combine of JAAF, Brandix and MAS Holdings.

Asked whether the government stake should not have been more in the context of the importance of the global event and also in the light of the state which did not bat an eyelid when it spent Rs. 2 billion plus for the Deyata Kirula, he said :" The private sector came forward to support us and we did not want to burden the Treasury at this stage. We also have revenue from the sale of the stalls and other promotional materials, he said.

Responding to a question as to who the mega investors from the US who were coming from the US in the context of recent news reports which quoted Sri Lanka’s Ambassador to the United States Jaliya Wickremasuriya as having said that there were Fortune 500 multinationals – Boeing , Coca Cola and 15 others who were wanting to invest in Sri Lanka, he said that there were no US Fortune 500 multinationals but some other players.

He said that there could be some other Indian Fortune 500 players who will be coming here. But when pointed out that the two major Indian based Fortune 500 players- Tata and Indian Oil Corporation were already here, his response was a mere wry smile!!
http://island.lk/index.php?page_cat=article-details&page=article-details&code_title=46887

Orient Insurance, a wholly owned subsidiary of UAE giant Arab Orient Insurance, on Tuesday formally announced its entry to the Sri Lanka promising a new dimension to the local market.

Arab Orient Insurance is one of UAE’s largest and strongest insurance giants with a gross written premium base over US$ 350 million (Rs. 42 billion). It is part of the prestigious Al-Futtaim Group, UAE and enjoys an A rating from Standard & Poor’s and an A (Excellent) from AM Best. Al Futtaim owns Associated Motorways Ltd., (AMW) which commands a 55% market share in the new vehicles segment. It was awarded the UAE Insurer of the Year 2012 by the regional industry publication MENA Insurance Review.

Orient Insurance has been licensed by the Insurance Board of Sri Lanka (IBSL) to market general and medical insurance. The Company has kicked off operations with Rs. 750 million capital and 14 branches initially.

To officiate at the launch Al-Futtaim Group UAE Vice Chairman Omer Al Futtaim, Senior Managing Director Arab Orient Insurance UAE Omer Elamin and Orient Insurance Ltd. Chairman, Al Futtaim Motor President and AMW Chairman Len Hunt flew to Colombo in their private jet on Tuesday. Chief Guest at the launch was Senior Minister for International Monetary Cooperation Dr. Sarath Amunugama whilst IBSL Chairperson Indrani Sugathadasa was also present.

Under the general insurance portfolio, Orient will market insurance classes of motor, marine, property, liability, medical among others and all other classes. Backed by its high capital, promoters expertise, financial footing and affiliations with world’s leading re-insurers and the professional team locally the Company promised the general insurance market personalised service at an affordable cost.

“We have identified Sri Lanka as a country with immense growth potential; this is one of the many reasons that the Al-Futtaim Group has invested in Sri Lanka. At Arab Orient Insurance we believe in upholding our core values of integrity, service and social responsibility and we aim to provide the Sri Lankan market with innovative risk solutions within a professional culture,” Al Futtaim told a press conference on Tuesday.

Meanwhile Elamin said the company will offer a new dimension in insurance industry in Sri Lanka. To reinforce Arab Orient’s profile he said the Company is the insurer of Dubai Airport to the tune of $ 10 billion as well as the Dubai Port.

Orient Insurance Vice Chairman and AMW President Tilak de Zoysa said though the insurance industry is fiercely competitive Orient will set a new benchmark for the benefit of customers and will produce remarkable results. He said entry of Arab Orient reinforces the confidence of Al Futtaim in Sri Lanka and his long term commitment to country.

Orient Insurance Sri Lanka CEO Deepthi Lokuarachchi said with economy and the insurance market growing it was a timely entry as the 18th company in the general insurance market. “Orient Insurance is well-positioned, capitalised and structured to be a strong player in Sri Lanka’s general insurance segment. We have a committed set of professionals to take the general business to new heights. The company will offer both corporate and individual customers novel risk solutions; creating more innovation in the industry and bringing Orient Insurance on par with international standards.”

Lokuarachchi counts 18 years in insurance industry and previously served as Assistant Managing Director for Chartis Insurance, Colombo, Sri Lanka and General Manager Distribution and Risk Management Eagle Insurance (now Aviva NDB). He is also the Immediate Past President of Sri Lanka Insurance Institute and Past Secretary of Insurance Association of Sri Lanka.

Since it is a sister company of AMW as part of Al Futtaim Group, Orient Insurance is expected harness synergies from the growing client base of the local motor industry giant. The company said with over 60 years of experience in motor industry, AMW’s local understanding of the automobile industry and network of outlets will enable Orient Insurance to understand and have an edge in the motor insurance needs for the local market.

Hunt described entry of Arab Orient to Sri Lanka will usher world class offering in financial and insurance services industry and this in turn will benefit AMW customers.

Al-Futtaim is structured into six operational divisions: automotive, retail, new strategic growth, financial services, real estate and construction and joint ventures. Originally established in the 1930s as a trading company, today Al-Futtaim operates in more than 70 countries and employs over 30,000 people across UAE, Bahrain, Kuwait, Qatar, Oman, Saudi Arabia, Egypt, Syria, Pakistan, Sri Lanka, Singapore, Malaysia and Europe.
http://www.ft.lk/2012/03/08/al-futtaim-amw-linked-orient-insurance-debuts/