The Sunday TimesBusiness

Day, Month 1996

| PLUS

| HOME PAGE | FRONT PAGE | EDITORIAL/OPINION | NEWS / COMMENT | TIMESPORTS

Contents


Economy: Lanka's show worst in South Asia

By Asantha Sirimane

Sri Lanka would have the highest inflation and lowest growth among the larger economics in the South Asian region, an equities, research house has said.

While the domestic economy (DGP) would grow by 3.3 per cent, inflation as measured by the DGP defaulter would be 15 per cent in 1996, Crosby Securities has forecasted in their quarterly economic review of South Asia. The report coves India, Pakistan and Bangladesh, in addition to Sri Lanka.

India is expected to show the best performance with GDP growth of 7 per cent and inflation of 7.8 per cent. Pakistan (fiscal year ending June) would grow at 6.1 per cent and Bangladesh (year ending June) 4.7 per cent. Inflation the two countries would be 10.8 per cent and 5 respectively.

Sri Lanka is also expected to have the highest benchmark interest rates by year end (weighted average T.-Bill rate) at 18 per cent and India (91 day T- Bill rate) 10 per cent.

Sri Lanka would also have the highest current account feficit as a percentage of nominal DGP of 5.4 per cent.

Bangladesh would have a current account deficit of 4.2 per cent and India 1.7 per cent In the first six months of this year credit to the public sector has ben rising in Sir Lanka.

"An alarming development has been the sharp escalation of domestic credit expansion to the public sector, a reversion from its earlier contractionary phase which lasted up to December 1994," Crosby Securities said.

Credit to the public sector had been expansionary ever since, with a 40 per cent growth being registered from February to June 1996.

On the other hand fallen to 26 per cent by end June 1996. Expansion in this sector is expected to be around the same for the rest of the year.

Crosby Securities expect the Central Bank to ghten monetary policy in the coming months in the wake of signs of excess liquidity . Board money growth by mid 1996 was also high at around 22 per cent due mainly to expansion in credit to the government which has accelerated to 50 per cent from 25 per cent in December 1996.

Raising administered prices, effects of exchange depreciation and lax fiscal policies were also feeding inflation.

By end 1996, therefore T-bill rates are expected to rise to 18 per cent.

The effects of the drought had reined in export growth to only 4 per cent in the first half of 1996 compared to 24 per cent last year.

"This was mainly due to the worse than expected effect of power shortages on the garments industry which saw export of garments declining by 2.5 pre cent to US $ 835 m in the first half of 1996' , the report said.

However imports had contracted furhte resulting in an improved balance and external reserves position.

On a regional overview, Crobsy Securities warned that Indian, Pakistan and Sri Lankas were vulnerable to sudden rise in petroleum energy prices. On the longer term Indian and Pakistan were expected to become less dependent on imports with increasing domestic exploitation of petroleum. Bangladesh ( which also has offshore gas reserves) found to be the least energy intensive producer in the region.

"Sri Lanka shows a relatively high energy intensity of production, given that it has very little heavy industry and thermal power generation," the report observed.

"The country's relatively high energy intensity of production is due to the huge state subsidies on diesel, which keeps bus and rail fares at South Asia's lowest levels." The report cautioned that Sri Lanka would be most affected unless petroleum consumption. was curtailed by removing the effects of the diesel subsidy.


Six firms to lure US funds

Six Sri Lankan institutions including the Public Enterprise Reform Commission would be among top Asian delegations taking part in a fund managers conference in New York, organisers Jardine Fleming told The Sunday Times Business.

This is the only conference in the United States where Asian companies are promoted, Jardine Fleming's Chief Executive here said.

The Flemings annual conference in New York will this year feature 100 companies and institutions from Asia.

Commercial Bank of Ceylon, Development Finance Corporation of Ceylon, Lanka Ceramics, Sampath Bank and Vanik Incorporation are included this year.

The PERC would be represented by Commissioner Arittha Wickramanayake and Director General Ananda Weerasinghe.

Considering Sri Lanka's size delegation is a strong one, Ó says Mr. Wickremesinghe.

Four companies from Pakistan including the Privatisation Commission of that country and five companies from India are taking part in the conference. The Pakistan minister in charge of privatisation would represent the commission.

Unlike in India, where there is no centralised institutional framework to carry out privatisations, in Pakistan a number of large institutions including the country's telecommunications utility have been listed on the stock exchange.

The reason we are taking PERC is that privatisation would play a major role in future portfolio investments, he says.

The conference would be attended mainly by US fund managers, but a few European managers would also be present. Last year 315 fund managers were present.

United States is said to have the biggest institutional fund base including hundreds of long term investment funds which being relatively small by international standards do not have overseas offices.

By going to their doorsteps and promoting we can penetrate that market, says Mr. Wickremesinghe.

Eight Sri Lankan companies took part last year.

Following last years conference orders started to flow from US based funds to Jardine Fleming in Sri Lanka making up to 25 per cent of its revenue at one time. However following the bombings in Colombo investor interest had waned.

Jardine Fleming says that participation in such conferences brings additional benefits to the country.

We believe that the stock market is a major catalyst in promoting foreign direct investment to Sri Lanka, says Mr. Wickremesinghe.

He points out that top officials of local companies would also be able to meet their counterparts in other Asian countries, in addition to fund managers helping disseminate first hand information about Sri Lanka perhaps leading to possible future alliances.


Investor confidence visible

Market Focus by Analyst

The market witnessed an upward rally during the review period to close at ASPI 570+ levels, a net 10-15 points increase. With the increase in confidence in the economy among foreign institutional and retail investors, renewed investor confidence seems to be gaining momentum. Also the successful privatization of the Plantations has acted as a catalyst to renewed buying interest in the 'CSM'.

Turnover also recorded a three months high of Rs. 52.3 million, during this review period. A tussle for control of Richard Pieris, amongst major shareholders, has rocketed the price 30 per cent over the past week. With still more of this drama in the board positions to be enacted in the coming weeks; possibilities exist for speculators to join the band-wagon, to increase the price even more.

Dankotuwa Porcelain Limited (DPL) with the international backing of ICI a major ceramic world-wide producer and distributor for quality ceramicware has created for itself a niche position in the ceramic industry, through which 'DPL' would be able to receive a large inflow of orders which is expected to increase even further. Fundamentally the stock has potential to appreciate in the long-term (two years).

Even in this bearish scenario with total market and sectoral PE being in the 9 region potential is evident. Tea production and prices have increased during the first half of the year which augurs well for Plantation companies quoted in the 'CSM'. With a very high percentage of dividend expected from this sector, share-prices should move up in the coming weeks.


Bank of Ceylon in Asia's top 20

By Ruvini Jayasinghe

An Asiaweek study has ranked the Bank of Ceylon (BOC) among the top 20 banks in the region, based on its return on assets (ROA) and return on equity (ROE).

In Asiaweek's Financial 500, an annual rating of the region's largest banks, published in its September 13 issue, BOC's overall rating is 353.

The Bank is ranked no.15 in the region based on ROE (profit as a percentage of equity) of 31.3% and No.17 based on ROA (profit as a percentage of assets) of 2.4%.

This ranking will build up further confidence in people, which is one of the most important things for the bank General Manager, Ms. Savithri Jayasinghe said when the Sunday Times Business spoke to her on Asia week's ranking. It reflects our stability and reconfirms our leadership in banking she added.

With interest spreads becoming slimmer, and the country's deposit base spread thin with increasing competition, the bank is focussing more on its leasing and fee based activities, Ms. Jayasinghe said, adding that this was an international trend in commercial banking.

Today, corporates are not only dependent on loans for financing capital. Capital is raised through other financial instruments she said. The BOC has been a pioneer in introducing innovative products to the maket, she said.

Leasing activites which commenced 21/2 years ago, has seen a 100% improvement in approvals last year. The bank's leasing portfolio (of 806 clients) stands at Rs. 890 mn as at June 30, 1996.

The bank's target is the middle market in the provinces, a segment not generally catered to by Colombo based leasing firms. New leasing schemes for the retail, middle market clients and flexible low income groups will be launched this year, she said. Non-income tax payers will also be eligible for these leasing schemes.

Key sectors financed under leasing are; commercial transport, industry, agriculture, professional equipment, and trading. Leasing is now carried out at 22 branches of the bank's 292 branch network. A further 50 branches are expected to offer leasing facilities by the end of 1996, Ms. Jayasinghe said.

The bank will open two more overseas branches in Moscow and Nepal this year, Ms. Jayasinghe said. Locally the bank is expanding selectively she added.

With 30% of the country's total deposit base, 42% of demand deposits, 27% of advances, and 49% of the country's NRFC base, the bank seems to have got back on track after their 1993, capital restructuring amounting to Rs13 bn.

However the bank's provision for 95% of non performing loans is unusually high for a commercial bank, financial analysts say.

Their 49% stake in foreign inward remittances is a direct result of agressive marketing in countries where Sri Lankan expatriate labour is strong, Senior Deputy General Manager, International Treasury and Corporate Banking , Ms. M. Alles who was associated in the interview said. We have a presence in Lebanon. and Jordan in the Middle East and Australia, Ms. Alles said. The bank is in the process of improving remittance schemes from UK, she added.

The Bank may not be able to give relief across the board to industrialists who were affected by the power crisis and the downturn in the tourist industry, the General Manager said.

Cost of mobilisation and cost of reserves are high and we have to consider these two aspects if we are to subsidise loan repayments, she explained.

However, BOC has allowed concessions to small industrialists on a case by case basis. The bank has allowed deferring capital payments up to six months, without levying a penal rate and recovered only interest payments during the concessionary period.

Exposure to the SMI sector was Rs. 1.2 billion for the 12 months ended June 1996. In the absence of World Bank and ADB credit lines the BOC has provided its own funds amounting to Rs. 300 mn at the prevailing interest rate of 17.5% per annum.

The bank has made a profit of Rs. 958.2 mn in the first half of 1996, a growth of 58% over the same period in 1995.

Total assets which stood at Rs. 102.2 bn in the first half of 1995, was Rs. 115.1 bn as at June 30 1996, a growth of 12.6% .

Return on assets grew from 1.18% in June 1995 to 1.66% in June 1996.

The Bank's capital adequacy ratio at 12.11% is above the internationally recommened 8% (by the Swiss based Bank for International Settlement).

BOC's liquidity ratio of 26.62% is above the Central Bank requirement of 20%.


Mind Your Business

By Business Bug

Selalihiniya's match

TV rights are big business these days, specially for cricket coverage, where advertising revenue is at a peak following the phenomenal successes of our willow wielders.

First there was a big fuss about the coverage of the Singer series. Now, those who have extra terrestrial vision have clinched the deal to telecast the Kenyan games.

But, soon all such rights may be reserved for the state-run Selalihiniya. The official reason is that the Selalihiniya offers the widest possible coverage....

Poor shoe show

Plans are afoot to revamp a leading shoe manufacturer.

The company's performance this year has been dismal, even after making allowances for the disruptions due to the power cuts.

So, a major managerial-level shake-up is on the cards.


Ravi moves motion on leverage buyouts

A private member's motion has been submitted to Parliament to rescind an existing provision of the Companies Act that effectively bars leveraged buyout transactions or LBOs in Sri Lanka.

The motion moved by DUNLF M.P. Ravi Karunanayake seeks to remove Section 55 of the existing Companies Act, which is under review at present.

When an investor takes control of a company by an LBO the target company itself is made to pay the previous owner a major part of the sale price.

This is thought to be against Section 55 which prohibits companies from giving financial assistance to their shareholders or directors to purchase shares in the company itself.

However LBOs and its variants such as Management Buyouts and Leveraged Recapitalizations are widely used in more advanced markets.

Though such strategies have also been used in Sri Lanka, as in the case of Puttalam Cement, these have been embroiled in controversy.

Continue to Business page 2

Go to the Business Section Archive

Plus

Home Page Front Page OP/ED News Sports

Please send your comments and suggestions on this web site to
info@suntimes.is.lk or to
webmaster@infolabs.is.lk