The Sunday TimesBusiness

25th, August 1996



Unit trust adopt new approach

CTC Eagle CTC Eagle Fund Management (CTCEFM) which received preliminary approval to set up a series of unit trusts in the country, would not seek special incentives such as tax holidays, a top official told the Sunday Times Business.

We will use our marketing expertise to promote the concept, CTC Eagle Director Chandra Jayaratne said.

CTC Eagle already has an extensive agency network used for selling insurance. Officials said this will be used as a conduit for promoting unit trusts especially in the provinces. In addition the company would also be able to use the branch network of the Bank of Ceylon.

The company will set up three specialized unit trusts and will float a fund management company in partnership with the Bank of Ceylon and the National Development Bank to manage the unit trusts.

CTC EFM is expected to hold the majority stake in the management company.

The first of the three funds will be a gilt edged securities fund investing only in Treasury Bills and other government securities.

The second will be a fixed income fund which will invest in government securities and corporate debt securities, such as debentures and commercial paper.

The third will be a capital growth fund which will invest 100 per cent in shares.

This will give potential investors a chance to choose the areas in which they would like to invest, CTCEFM General Manager Manjula de Silva said.

Having three separate funds will also enable investors to tailor make their investments with the appropriate weightings depending on their preferences.

Unlike present unit trusts where the weightings of portfolios are decided by the management, unit trust holders will now be able to purchase a mix of units.

For example a person with Rs.10,000 who wants to invest 30 per cent of his funds in government securities and 70 per cent in equity can purchase 300 units of Rs. 10 each in the Gilt Edged Securities Fund and 700 units in the Capital Growth Fund.

Mr. de Silva says that contrary to popular belief the time is now ripe to invest in shares as prices of shares are at an all time low.In any case we will have a mix of units. Those who prefer fixed income instruments can go for gilt edged securities or fixed income securities funds, he added.

Workers' Charter has faced lot of flak

Resolving labour disputes inevitably leads to increased costs and a reduction in productivity, hence strong signals are needed from the Government underscoring the obligations of workers to increase investor confidence in the country", says Aitken Spence Group Chairman H. N. Gunawardene.

"The proposed Workers' Charter which is viewed by investors as a document strengthening trade unions, is contributing to the negative sentiment", he adds.

Commenting on the "harsh business environment" created by political and economic factors under which the company operated last year, he says that away from the battle front industrial unrest continued to affect industry. A strike by the garment workers affected the Company's performance contributing to a decline of profits by as much as 65% over the previous year although turnover remained at virtually the same level.

Group turnover amounted to Rs. 2,739 million, a marginal increase over the previous year but below expectations. Operating profits declined from Rs. 322 million to Rs. 185 million. Trading profit decreased to Rs. 35.4 million against Rs. 173.7 million. Profit before tax declined by 60.7% to Rs. 95.2 million while profits after tax recorded a 64.5% decline.

Mr. Gunawardene describes as "appalling", the tourism sector which has been contributing over 50% of the Company's profits over the past several years. Mass tourist cancellations and suspension of the regular charters due to the series of terrorist acts in Colombo culminating in the Central Bank bomb explosion affected this sector.

Meanwhile, the Company's cargo handling sector showed a 10% growth, in the manufacturing sector the printing and packaging division performed well showing strong improvement in margins recording an increase of nearly 100% in net earnings. Last year also saw the closure of identified loss making operations including the gherkin business, Ace Radio Cabs operation and research and development experiments in silk production and pre-cooling of fruit for export.

"The Board firmly believes that the decision to close these projects and concentrate on improving the efficiency and productivity of our core business will deliver positive results in the future", Chairman Gunewardene says. He adds that the Board is also pursuing the possibility of disposal of the Group's non productive assets in order to improve the cash flow.Stressing that despite the poor earnings recorded by the Group, the financial position remains sound, he says that it has further improved by a capital inflow of Rs. 292 million through the placement of shares with two major US investment funds. This investment at a time when the national economy was stagnant with little improvement in stock market sentiment and Group earnings depressed, is described as significant show of confidence in the medium to long term prospects of the Company and country.

Aitken Spence is also making new investments in resorts in the Republic of Maldives which are expected to provide a rich earnings stream from this year. Incidentally, Maldives as a tourist destination has enjoyed a 15% growth in tourist arrivals year on year, a trend which is expected to continue.

Mr. Gunewardene states that a return to normal trading activity, particularly in the tourism sector, would be dependent on factors which can only be addressed by those who make policy. "The business community faces many external impediments and however strong our commitment may be, we need the right government stewardship to provide a favourable business climate, boost investor confidence, reactivate the stock market and accelerate the privatisation process in order to encourage economic growth.

"Chief Executive R. Sivaratnam, elaborating on the investments made by the Group, says that in spite of the downturn in profits the Company continued with its programme of investment in keeping with its policy of growth and expansion in the core sectors. Out of the total investments of Rs. 1068 million, Rs. 490 million was incurred on the acquisition and construction of the Club Rannalhi in the Maldives. The resort which has been completed, has guaranteed occupancy agreement with an Italian Tour Operator.

Other investments included the refurbishment of Neptune Hotel in Beruwela, the Tea Factory Hotel in Kandapola, marine contained allied services, increase in holding in Aitken Spence Travels and purchase of 100 acres of prime beach property in Trincomalee.Looking at the future, he comments that the present economic and political climate in the country is certainly not the most conducive for growth. Referring to tourism, he says the tourism being an intensely competitive business worldwide, Government assisted publicity is imperative if the rewards to the country are to be maximised. He urges the Tourist Board to commence an effective promotional campaign to win back the confidence of tour operators and counter the unfavourable publicity given in the international media. "Further, with India, Indonesia, Malaysia and other countries in the Asia Pacific rim investing heavily in the promotion of tourism internationally, there is a danger that the positioning of Sri Lanka in the minds of international tourists as an attractive destination will gradually diminish", he says.

"We have adapted ourselves to work within the existing constraints. Our resilience has been tested and not found wanting", he stresses. "We will be consolidating our position in our core activities and do not intend to diversify for the sake of diversification. We will confine our new investments to areas where our corporate strengths could be maximised."

Commenting that with the trend towards globalisation of business, companies like Aitken Spence should strengthen their position and presence locally, regionally and internationally, he says that the Company has been actively pursuing the formation of strategic alliances with foreign principals and suppliers to benefit from technological know how and gain access to foreign markets.

Dismal trade performance

Trade and the external environment have been crucially significant for Sri Lanka's economy. This is an undeniable fact. The country has been trade dependent in the past and will be even more dependent on trade and external factors for its future economic growth and development. Any deterioration in Sri Lanka's trade and balance of payments situation could be threatening to the country's economy especially owing to our current export led strategy of growth. Therefore trade and balance of payments indicators would offer good signs of which way the economy is going.

Unfortunately in the last one and a half years the country's external indicators have fared badly. This is particularly so with respect to the performance in the first six months of this year. Export growth has been inadequate, important industrial exports have decreased and external assets have declined.

In the first six months of this year exports grew by a mere 4 per cent compared to the first half of last year and a 12 per cent growth in 1995. In the first half of the year imports grew more rapidly at 9 per cent thereby creating a large trade gap of US$ 983 million, an increase of US$ 166 million from that of June 1995. This trade gap was as much as 20 per cent higher than the trade gap in last year's first six months.

This poor performance in export growth was despite increased tea production and improved tea prices. In fact tea prices improved by as much as 42 per cent in the first six months of this year compared to the prices fetched in the corresponding period last year. In rupee terms the increase was even higher (58 per cent). Therefore the reasons for the export performance being less impressive lies in a reversal of industrial export performance. Industrial exports have grown steadily and impressively in the past decade.

It is significant that industrial exports grew by only one per cent in the first half of this year compared to last year's first half. Our textiles and apparel exports, which account for a substantial proportion of our industrial exports, actually fell by 2.5 per cent. Leather and rubber exports, which displayed signs of growth in the past few years, declined by 8 per cent.

With these two significant export sectors decreasing their exports, it is no surprise that our total industrial exports grew by a meagre 1 per cent and brought down our export growth rate to 4 per cent in the first half of this year.

The prospect for our balance of payments is bleak with a poor performance on our exports, a decline in tourist arrivals by 31 per cent and a net outflow of private remittances. The prospect of the trade gap being off set by the services and capital accounts is very unlikely. In fact the situation in the external reserves of the country indicate this.

The country's external assets declined by 2.8 per cent, compared to the position at end June 1995. Although private remittances increased, there was an increased outflow and consequently the net position in private remittances showed an increase of only 1 per cent. The total external assets declined from US$ 2634 million at end June 1995 to US$ 2559 at the end of June 1996. This is a continuing deterioration as the position at the end of 1995 was a decline in external assets by about 3 per cent.

No doubt some of these dismal facts are the result of the severe power cuts experienced this year. It is hoped that the improvement in the power situation would enable private industries to catch up their production and that a better performance in exports in the second half of the year would make up for the losses in the first half. But the reasons for the poor performance cannot be fully attributed to power cuts.

What we have quoted above are hard facts relating to our trade and balance of payments. There can be no doubt about the veracity of these figures as trade and international finance statistics are accounting figures and are made available by the Central Bank. Given the huge dependence on trade, these indicators are an undeniable sign of the deteriorating economic conditions. It is better to recognise this and take remedial action rather than to think that the economy is still progressing.

T-bills take plunge

Three months T-Bill rates fell marginally last week with the short term paper issue being twice oversubscribed.

With rates expected to move up later in the year, investors preferred to go short term in the expectation of going for one year paper later, dealers said.

While the weighted average one year rate fell from 17.06 per cent to 17.01, the one year rate moved up to 17.17 from 16.97 per cent.

Three month paper attracted Rs. 4,700 m worth of bids but only Rs 2,040 m worth of bids were accepted.

Rs. 1,966 m worth of bids were received for one year bills, and Rs. 1,365 m worth of bids were accepted, dealers said.

The Central Bank had bought Rs 636 m worth of T-Bills.

New index to guide monetary policy

With mounting evidence suggesting that the relationship between money supply of a single country and inflation was not as direct as once believed, a German economist is advocating the use of a new tool to guide monetary policy.

Do not expect a one to one and simultaneous relationship between money supply and economic activity and inflation, Deutsche Bank Chief Economist Dr. Norbert Walter said in Colombo last week.

It was also less meaningful to relate inflation to money supplyin a small and open country such as Sri Lanka which was affected by changes outside the country.

If you want to get a good relationship between money supply and inflation if you should take the money supply development of the region, that is a larger part of the world, with the inflation of that larger part of the world, he explained.

He says it makes little sense to consider only the German money supply. There was a closer relationship to inflation when the money supply of both France and Germany was taken together.

Dr. Walter says the relationship between money supply and inflation is a long term relationship.

If you increase the money supply today, most probably the impact on the economy would be felt in an year's time, he says. Its impact on inflation he says, would be felt only in two years time.

This may explain why money supply and inflation has been going in opposite directions in Sri Lanka.

So the relationships relatively loose, he says.

There was also the problem of defining exactly what money supply was. To draw a relationship with inflation it was always better to choose a money supply that did not include any interest bearing assets.

The narrow definition of money is normally much better for measuring its impact on the economy, in general it is better to take M0 or M1 than a higher M such as M2, he said.

In addition new means of payment was also posing problems or those attempting to define money supply.

If there is so-called monetary innovation, and coins and bank notes gove way to cheques, then credit cards and then to digital money, then money would be nothing but an entry in a computer, he observed.

Deutsche Bank Research for example used a tool called the Monetary Condition Index (MCI) which took into consideration other factors such as the exchange rate.

Sri Lanka is an open country, Dr. Walter said. So the exchange rate plays and important role and it has to be explicitly considered.For example the effects of changes interest rates and the exchange rate sometimes tended to cancel each other and the net result on inflation would be neutral.

While he believes that money supply does play an important part in inflation in the long run though in the short term he says cost push factors play a major role.When tight monetary policies are persuade domestic demand and output growth should be expected to be dampened. However he believes it is essential to persue prudent monetary policies, despite short term negative effects.

If somebody suggests that he can dampen monetary expansion and at the same time avoid a reduction of growth and demand he would be a fool or a liar, Dr. Walter said.The negative fall out on growth and demand may continue for one year or more.I would suggest that we pay the price, he said.High inflation he pointed out would hurt the poor and ultimately even the credibility of the rich would also be lost and it would result in a capital flight as in Mexico.

If you are serious about inflation, in the long term or even medium term it will not harm growth, he concluded.

He said in the Asian context growth rates of 5 per cent or more was necessary for economies to maintain momentum.

Dr. Walter's prediction last Tuesday in Colombo that the Bundesbank would most probably cut the German repo rate also came true, when the rate was cut by 30 basis points last Thursday.


By Business Bug

Budget secret

A few weeks ago, there was a flutter in business circles, with stories of an impending hike in fuel prices.

But now, someone has advised that too many hikes too soon maybe too much to stomach for an already restless electorate.

So, a rise in fuel prices is now likely in the next Budget than in the near future...

Sri Lankais safe

Tourism is down in the dumps, but what can anybody do to stop the decline?

Among the proposals is one for Colombo to lobby western countries into saying that "Sri Lanka is safe".

The suggestion has been received favourably, so it may soon be time for Kadi to pack his bags once again...

Heart notin S(e)oul

The blue-eyed BOI raised a storm by not putting his heart and Seoul into his job.

There were many waiting for his downfall after the incident, but that is not to be, and the 'BOI' a good cricketer himself, will bat on..

Broker's advice

And, the following are a reputed broker's advice to overseas clients about our economy. By end 1996, the Dollar will climb to 58 rupees, Treasury Bills will yeild 22 per cent and the stock market-surprise, surprise - will rest at the 600 level...

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