8th April 2001
Sports| Mirror Magazine
Dr. Dushni Weerakoon, an economist at the Institute of Policy Studies (IPS), told a media briefing last week that the economy was in "serious trouble" this year for several reasons including weaker fundamentals and an adverse external environment.
The IPS researcher was presenting an overview of the Sri Lankan economy at the UN office in Colombo while analyzing the year 2000 economic and social survey of Asia and the Pacific released by ESCAP. The survey presented a favourable outlook for Sri Lanka, even though not justified by the prevailing macro economic conditions.
It forecast an optimistic growth rate of 6 percent in 2001 for Sri Lanka, which is higher than the Sri Lankan government's expectation of 4.5 percent.
The survey noted that industry and service sectors of the local economy last year grew mainly due to the buoyancy of world trade, but growth in the agriculture sector decelerated.
Dr Weerakoon said one of the reasons why economic growth would be lower was the high probability of the actual budget deficit going over 10 percent in 2001.
The government's bud-getary expectation of containing the deficit at 8.5 percent would not be realised due to obvious shortfalls in projected revenue, arising mainly from a drop in privatisation proceeds, she said. As a result it is most probable that government borrowing will increase in 2001, further crowding out investment. Dr. Weerakoon forecast actual inflation in 2001 to reach 12 percent, a significant increase from government expectations of 9.5 percent. This will reduce the competitiveness of Sri Lanka's exports, putting pressure on the exchange rate.
"The government would have to maintain very high interest rates to defend the currency," she added.
The ESCAP report said Sri Lankan export values of merchandise have increased steeply by 20.4 percent while import values have also increased by 18 percent due to high oil prices and rapid rupee devaluation.
The report has also drawn attention to the high amount of public debt outstanding in Sri Lanka, which stands at Rs 1,051 billion (95 percent of GDP).
Debt servicing has taken up 50 percent of the government's revenue, the bulk related to domestic debt at prevailing high interest rates, since the majority of foreign debt is on concessionary terms.
A slowdown in the US and Japanese economies was viewed as a major challenge
to regional economies. The two countries together consume a majority of
the region's exports and if the downturn is sustained, it could cripple
the export performance of the region, the report said. The survey strongly
suggested that regional governments take up this issue with local companies
The Colombo bourse is expected to see lower interest and dismal turnover levels this week due to the upcoming Sinhala and Tamil New Year.
Last week the benchmark indexes were at historical lows of below 425 & 650. Earlier in the week, Commercial Bank announced its bonus share issue of 1-for-5, but this didn't have any impact on the stock. Large transactions took place on Monday with 2,600 shares of Colombo Dockyards Ltd trading at 10.50 rupees, 30,000 shares of Lanka Ventures Ltd at 6.25 rupees, 5,000 shares of Sampath Bank 39 rupees and10,000 shares of Trans Asia Hotels, where a tussle is on for controlling stakes, at 22.50 rupees.
Asiri Hospitals announcing a ex dividend for its bonus issue of 3-for-2 saw interest picking up in the share. Ceylon Shipping Lines, which has a 19 percent stake in Asiri, is expected in increase its stake which should drive up the share price. Among stocks traded were 20,000 shares of Agalawatte Plantations Ltd at six rupees, 42,000 Asiri Hospitals stock at 58 rupees, 30,000 Distilleries Company of Sri Lanka shares at 3.75 rupees, 17,000 shares of Lanka Milk Foods Ltd at six rupees, 40,000 Pelwatte Sugar industries Ltd at 4.75 rupees, 11,000 shares of Royal Ceramics Ltd at 14,25 rupees and17,000 shares of Tangerine Beach Hotels Ltd at 20 rupees.
Thursday saw a slight improvement in the indexes when 150,000 shares
of DFCC Bank were sold by a foreign investor to local investors. Trading
was temporally halted in Seylan Bank after approval was given by the Colombo
Stock Exchange for the bank to issue of 3,000,000 unsecured, subordinated,
redeemable five year debentures each at 100 rupees with an option to issue
up to a further 3,000,000 debentures in the event of oversubscribing -
The issue comprises of 3 million unsecured, subordinated, redeemable five-year debentures, at a par value of Rs 100/-each. The issue also carries an option to issue further 3 million debentures, in the event the issue is oversubscribed.
Seylan Bank has also applied for a listing on the second board for the debenture and the Colombo Stock Exchange has granted provisional approval, the officials noted.
The issue offers a choice of interest rates to the investor; 15% p.a interest on par value payable monthly, 16% p.a payable annually or a floating interest rate of 1% point above the simple average one-year T bill rate.
Seylan Bank's previous debenture issues in 1998 and 1999 were oversubscribed on the day of the issue itself, said the bank's AGM (corporate planning), Saliya Kumara who noted that Seylan was having similar expectations this time despite market conditions being unfavourable. " Investors are starved of good opportunities," he added.
The bank has posted favourable results for the year 2000 with net profit
before tax increasing by 43% to Rs 245.6 million from Rs 181.5 million
in 1999. The bank's non-performing loan ratio has also declined from 17.4%
in 1999 to 13.6% in 2000.
March and April along with December are reportedly the best months for consumer durable companies with the highest sales being reached during these months. But is it the same this year as an economic slowdown and less money in the hands of people put luxuries or the normal clothes-buying spree beyond the reach of the middle and lower middle class or groups?
Not many would agree, especially consumer durable companies or FMCGs (Fast moving Consumer Goods) as they are referred to in the advertising industry. According to most companies and advertising firms, consumer durables are doing even better than last year and March, in some cases, had recorded much higher growth that last year during the same period.
Companies are upbeat as sales grow and turnovers rise. But a survey by The Sunday Times Business found that at the bottom end of the market street sales for instance things are not all that rosy. Sales by pavement hawkers have slumped by more than 50 percent while low-end consumers say there is more window-shopping and less buying this year.
E.H. Sarath, who has been a pavement hawker for 35 years, said that this year was the worst-ever season for him due to the unfavourable economic situation with business dropping by 60 percent.
Clothes stores like the House of Fashion, which attracts the rich, the famous and the low budget consumer, may have to some extent eaten into the sales by pavement hawkers, offering products that are equally competitive but with added on features like a more pleasant buying environment.
Some of the comments in this special report by journalists Hiran Senewiratne and Akhry Ameer reflect a mixed bag of consumer trends this year during the Avuruddhu season. But market research analysts are of the belief that consumer buying has fallen sharply and companies are coming up with various gimmicks, incentives and gifts to spur buying or retain sales growth.
"I can't think of any reason why companies should offer all kinds of special discounts and gift schemes unless business is down and they need to keep market share or ensure it does not fall to alarmingly low levels," said a director from a market research firm.
'There is no doubt that consumer spending has fallen and that this would be reflected in the balance sheet of companies," he added.
Advertising companies are positive and maintain that demand for products, especially consumer durables like televisions, refrigerators and radios, are growing and there is no slump. But they also say that consumers have become price conscious and are particular about product quality, which reflects the more careful and cautious use of financial resources by families.
The economy as a whole is showing lower growth this year while inflation
is set to rise sharply as the lagged effect of last year's string of price
increases of essential goods is felt in 2001 Business Editor
"The Avurudhu season advertising is not as active as it used to be. We are a relatively new agency so I cannot say that comparatively it has been high or low. But as an observer of the industry the presence of advertisers are below usual. This is also because the retail people like Veytex who accounted for fairly large volumes are not around. The electronics advertisers are also notably absent. It is also sometimes premature to comment because there are also the last minutes advertisements that come in. However, the Avurudhu is normally quite hyped up, but it is not so this year. Our clients like Odel and Barefoot are continuing to advertise their Avurudhu related products.
If you take the newspapers, during this time getting space is difficult, but we find that there is enough space this year. Taking the financial services, FMCG's (Fast Moving Consumer and others like housing products, we generally recommend them to stay quiet till about the 20th of April to avoid the clutter.
The March, April months are also the closing of the financial year for all companies. They tend to buy office automation products before they close the accounts and so we see the office automation products being advertised and that also didn't happen this year."
Ms. Lilamani Dias Benson,
CEO at LDB Lintas:
"Firstly it is too early to comment. I must say that certainly there wasn't any downturn last year. In fact the ad industry keeps its head up and grows each year. It demonstrates the optimism of the business community. Last year was one of the best for us. As for this year, we are not anticipating any downturn.
However, we anticipate some changes in the way clients behave. They now select agencies carefully, they select their seasons of expenditure more carefully. Some clients when they see that their competitors are not advertising they capitalize on the opportunity and go on a spree. I could say that the clients are now more quality conscious, they use their budgets judiciously. They also are looking for more creative ways of advertising.
At Lintas we don't have too many Avurudhu clients. The ones we have are not cutting budgets slavishly and some are on a spending spree. I would say that they are staying even compared to the previous year."
Ms. Neela Marrikar,
Managing Director at Grants:
We don't see any major changes in shopping trends. Of course some categories are doing quite well while others are not.
New categories are developing all the time. The financial services sector for instance is coming up with new products and we see huge promotions in the media. That sector is doing quite well.
We have not had any cuts on advertising budgets from our clients due to any situation in the country.
What I think would be happening in the current environment is that consumers
would be more cautious spending. They could be spending more wisely and
looking for values and quality all the time in a product. They will make
careful choices in selecting a product.
Most of the hawkers said that people do not have money even to buy essential goods for the New Year due to rising costs. Customers don't have money to buy goods like clothes for the New Year like in previous years as most of the household cash goes for mostly essential items.
Mohamed Fazly, a street trader of ornamental flowers at Pettah said business had hit rock bottom this time "In the past few years I earned an average 2,500 rupees per day during this period but this time we are badly hit due to the crisis in the country."
He said the devaluation of the rupee in the recent past has also compelled traders to increase prices of many of their items, resulting in low sales.7
Pavement hawker M. Meeran said his sales of kitchen silverware has dropped sharply with many of his regular customers not coming to the Pettah unlike in previous years.
His income has dropped by more than 50 percent from previous years when he made a sizable sum each day. " What I get today is insufficient to maintain my family."
Pavement hawker J.W. Malwatha, who sells denims at the Pettah bus stand, said earnings have slumped from good previous years when he could sell garments worth 10,000 to 15,000 rupees per day and keep a tidy profit. "Those days are gone," he lamented.
Malwatha said in the "good, old days" he had three assistants to help him during seasonal sales like the New Year period but this year he can't afford a single assistant let alone earn to keep the home fires burning.
E.H. Sarath has been a pavement hawker for 35 years and this year, he says, is the worst-ever season due to the unfavourable economic situation with business dropping by 60 percent.
New Year shoppers may be thronging the streets but for many of them, it is just seeing or window shopping, not snapping up the goodies on offer on pavements or fancy stores.
Many said their first priority was essential goods, with little spending money for other items.
M.S.Rohana, a shopper from Kottawa feels that prices of garments and other fancy goods at the pavement are not as expensive as one would expect but all his money is spent on essential items for New Year, leaving little disposable cash for fancy goods.
Shopper N. Siriyawathi of Maharagama also agreed that prices of pavement goods haven't skyrocketed but that she too couldn't afford to shop for luxuries unlike in previous years.
Manjula Saman and Ajith Gamage, two young men from Kandy, said that a striking feature this year was that though prices of goods from the pavement have not escalated as anticipated, the quality of the products were below standard.
"We also noticed more people window shopping this year than buying as
the cost of living is unbearable and eating into the household budget,"
Business is brisk and our sales last month is an improvement from March 2000. We don't seen any slowdown in sales though the economic environment seems a bit unsteady. April is also a good month and we are opening the doors till midnight in the next few days to give flexible shopping hours to customers.
We have trimmed our overheads as costs are growing all the time and
dropped profits slightly but we are making up for this from volume sales.
Saman Warnasooriya, Marketing Manager at Hayleys Electronics Ltd, said that their sales have increased by 15 to 20% during the month of March and April (first week), which are their peak months.
He said there is a remarkable sales increase for consumer durables in their showrooms compared to previous years for televisions and refrigerators. The consumer durable market has become very competitive as it is saturated, Mr. Warnasooriya added.
He said that many companies were accustomed to have bargains sales during
the New Year season which are very popular among middle class consumers
as items are cheaper than at other normal outlets.
Tea trade cuts timeThe Colombo Tea Traders Association on Friday officially endorsed a proposal by the Colombo Brokers Association to reduce the lead-time between cataloguing and auctioning of tea at the Colombo Auctions, tea broker John Keells said in a report.
Hitherto, the time duration between cataloguing teas for auctions and sale required a period of three weeks. The newly proposed system reduces the lead-time to two weeks. The benefits to the producer is enormous in terms of converting their produce to cash quickly thereby, improving cash flows, and quicker sales will reduce the period of borrowing on stocks and help reduce cost of funds.
It is also commendable to note the commitment by brokers and buyers who will now have to work on a much tighter schedule to ensure a smooth operation of the entire system, Keells said.
This system of cataloguing is expected to be effective from the auction
of May 2 and a trial period of three months is proposed for evaluation.
In spite of the lowering of Central Bank's open market operations rate on 3rd April by 50 basis points the inter-bank call money market rates remained virtually unchanged. During the week the liquidity shortfall climbed by approximately 4~5Bn, to close at Rs. 40Bn levels. Most of the call money transactions were within the boundaries of 22% to 22.50%. Hence, the weekly average call money rate improved marginally by 09 basis points to close at 22.07%.
The term money rates remained virtually unchanged and the one-month money was quoted at 21.00% to 21.75%.
With the much-expected reduction in the Central Bank's open market rates, the market repo rate settled 50 basis points lower than the previous week. The overnight market repo rates closed at 21.25%-21.50%.
Given the prevailing liquidity shortfall in the money market, the interest structure will be guided by the Central Bank's reverse repo rate.
Open market operations
With the reduction on 3rd April, the Central Bank's open market repo and reverse repo rates closed at 18.5% and 21.5% respectively. As the liquidity shortfall expanded further, the Central Bank's reverse repo window had to released further liquidity to the market. During the week the market borrowed Rs. 194Bn averaging approximately Rs. 39Bn a day.
T bill auction
Rs. 2,536mn worth of treasury bills were offered in the weekly auction. Since September last year for the first time the Central Bank reserved Rs. 800Mn worth of bills, which helped ease pressure on the treasury bill yields. Though the auction was well subscribed, the bids were for higher yields. In spite of the reduction in the Central Bank's' open market operation's rate, the market players placed high bids in order to counter the rising uncertainty in the economy. The investors were very concerned of the rise in the liquidity shortfall and the month ahead, where seasonal drawbacks will take place, aggravating the liquidity shortfall. Therefore, the yield of all categories moved up.
Treasury bond auction
91 Days 182 Days 364 Days
Last Week 19.26 19.51 20.21
This Week 19.41 19.57 20.47
Change 0.15 0.06 0.26
In the auction held during the week Rs. 1000Mn worth of treasury bonds were offered to the market. The auction was fully subscribed. As the investor expected higher yields the 2-year bond yield improved by 43 basis points over the previous auction. In the secondary market the 2-year bonds were offered at 20.1%, while the buyer was at 20.4%.
Amount offered Rs.Mn 1000
Amount Accepted Rs.Mn 100
Weighted Average 20.42%
Dollar spot movement
The persistent buying interest for dollars kept the rupee under pressure through out the week. The rupee started trading at Rs.86.75 and reached Rs. 87.80 level by the end of the week. We continue to believe that the demand was stemmed by financing of import bills.
The rupee depreciation for the year saw a further hike during the week
to close at 6.04% as compared with 5.41% at the end of the previous week.
Three months forward was quoted at Rs. 91.05 to Rs. 91.35, while six months
forward was quoted at Rs.93.95 to Rs.94.45.
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