The Sunday TimesBusiness

9th February 1997




SLECIC payments reach record level

Asiff Hussein

The Sri Lanka Export Credit Insurance Corporation (SLECIC) has paid Rs. 26.5 mn in claims in 1996, which is the highest ever paid by the corporation.

Since its inception, the SLECIC has paid a total of Rs. 123.6 mn, Chairman M. Ramalingam said.

Other than actual payouts, the Corporation had made provisions for claims totalling Rs. 32 mn for the year.

The previous high in recent times was in 1992, when SLECIC paid Rs. 21.5 mn as claims.

SLECIC provides cover to exporters for losses from delays or non-payment by foreign buyers.

"Non-commercial risks arising from war, civil war, insurrection in the buyer's country, import bans, export control regulations, diversion of voyage or any other cause beyond the control of the buyer, as well as non-payment arising from risks such as natural disasters that are not covered by general insurers, are covered by us", he said.

He said that the insurance policy extended to small-scale exporters provides cover upto 95 percent and entails a brief waiting period of two months for payment of claims.

Mr. Ramalingam said that the Corporation's Entrepot trade policy initiated about a year ago would enable Sri Lankan exporters to ship goods from one country to a third country with or without touching Sri Lankan ports, as in Singapore. "This is an area of tremendous potential as Sri Lanka requires massive export earnings at present", he observed.

Mr. Ramalingam said that new products covered during 1996 include ornamental fish, artificial plants, scrap metal iron, bio-black tea, meat products, gingelly oil, conchshells and herbal products such as polpala.

He said new markets covered last year included Argentina, Colombia, Egypt, Latvia, Ukraine and the Republic of Belarus.

The Sri Lanka Export Credit Insurance Corporation was established in 1978 and operates under the Ministry of Internal and External Trade, Commerce and Food. The Corporation's main objective is to increase Sri Lanka's exports by providing internationally competitive insurance policies and guarantee services.


By Business Bug

Bad timing

Charges levied in the tourist industry are to be regulated through a Tourist Service Code, government announced this week.

But those in the trade are not happy.

The industry is battling for survival and this is not the best time to put things in order, they say. So, representations to the powers that be, are on the cards...

Shell shock

Boss herself announced last week that the deal with Shell is to be re-negotiated because Shell had "gone beyond their limits."

The news is not sweet music to other prospective buyers of privatised ventures.

What with a Public Enterprises Reform Bill also being enforced, some of them are taking a long, hard look at their options.....

More the merrier

When it comes to beer, more the merrier, it seems.

Only last week, a Mauritius-based brewery launched operations and now, more want to come, we hear.

Among them is a leading Aussie brewery that is looking for a local partner.

So, will beer replace tea as our national beverage, someone in the trade asked the other day!

Market Focus

Share market could lose stability

By Analyst

Retail and foreign investors foreseeing a down-turn in the economy in the short term (3 months) due to elections, power-cuts, war etc., were seen to be disposing shares at a faster rate than in the previous week. Contraction in the volume of shares traded was also a significant development. The CSM ASPI fell 10 points during the period to level off at ASPI 620 levels.

The introduction of 1-1 1/2 hours power-cuts in towns/cities outside Colombo is expected to encompass Colombo as well in the coming weeks. This is not expected to have an impact on the share prices, but investor confidence would most probably be affected which would have an effect on the share prices. The proposed increase in electricity charges and other utilities during the year by 20-40% would create an inflationary spiral, which would constrain mainly retail investors trading in the CSM.

Sectoral analysis:

Tourism sector: Opportunities for investors exist as the share-prices of the companies quoted in this sector are at very low price-levels are also trading at a discount to book value with a limited down side in price-levels.

Potential for investors with long term focus (2-5 years).

Finance sector: With modest economic growth expected for 1997, the finance sector is expected to show earnings growth in the region of 5% up from a decline of 18% for 1996.

For most financial institutions with exposure to the equity market investments show provisions for unrealised losses in their portfolio, which in all probability would affect the profitability of the firms.

A two tier market based on the market capitalization of companies is expected to be introduced in March 1998. The 1997 IPO market pricing will determine the success of the two tier system.

Though the CSM is attractive at these price levels, it will be advisable to wait and see the direction which the market takes before taking any decision on investing for a short-term (3 months).

Recommended stock: MBSL/Richard Pieris/DFCC/Ceylon Grain Elevators.

Export rejects flood market

Export consignments rejected by foreign buyers are being sold to local consumers while authorities are inactive a consumer protection society has said. "The National Consumer Watch of Sri Lanka said (NCW) in one instance it had forwarded samples of cashew which have been stuck together with adhesive together with a written complaint to the Municipal Health Authorities, with a request for a report. But sorry to say, almost ten months have passed with no prospect of any report", National Consumer Watch Presient Moddy C. Fonseka said in a statement.

They had later learnt that a large consignment of cashew rejected by a foreign buyer had been released to the local market.

NCW says at one time there were reputed to be more than 4,000 consumer societies in the country.

"But today almost all are defunct", the NCW said.

The NCW says most of these societies may have been politically inspired to serve a limited purpose. Another reason could be that, consumers had deserted the societies once they found that no relief could be found.

The NCW says most of the provisions of the Consumer Protection Act are observed more in the breach.

A common violation was the lack of price marks on goods.

The problem was compounded because there was no single agency charged with consumer protection.

"So many departments share the responsibility that in the end no single one is accountable", the NCW said.

Rise and Fall of Shares

The upturn of the stock market in the first few weeks of January created an optimism in the economy. Unfortunately this optimism has subsided after a decline in prices in the last week of January. During January the All Share Price Index rose by 30 points till January 28th. This 5 per cent increase was certainly beyond the expectation of analysts. In fact a growth of about 10 per cent for the entire year would have been considered quite good. Whether the slide in the last few days would continue is yet to be seen. There are reasons to believe that the market would firm up later in the year owing to an overall recovery of the economy and better corporate results.

Stock markets do reflect economic performance and the mood and climate of business confidence. Yet there are reasons why the behaviour of the stock market should not be taken too seriously or as a sole indicator of business development and economic performance. This is particularly so in the case of the Colombo Stock Market. The Colombo Stock Market is narrow and covers only a small proportion of business enterprises. It is true that large companies are represented and that they often reflect developments in unquoted companies as well. Still it is a small sample of economic enterprises in the country,

There is also another good reason why the behaviour of the stock market should not be considered a sufficient indicator of economic performance. The Colombo Stock Market is foreign driven with as much as two thirds of the transactions being by foreigners. The attitude and approaches of foreign investors to portfolio investments are governed by a number of factors. These include international flows of capital, interest rates in the big capital markets and speculative movements towards investments in particular regions. Therefore the performance of the stock market can be a reflection of these factors rather than the country's own economic performance.

The converse of this phenomenon is that if the Colombo Stock Market is to become a robust and strong market, then there must be much more foreign investments in it. Unfortunately the Colombo Stock Market is too small for large investors. The volumes of buying which foreign investors are interested in are not available in Colombo. Therefore Colombo remains in the category of small league stock markets with little publicity and international attention. The Colombo Stock Market is not only small in terms of the investment possibilities but also suffers from a lack of liquidity. Foreign portfolio investors dabble in markets in which they can have an easy exit.

The low liquidity and the high proportion of foreign transactions imply that unless there are foreign investors willing to buy other foreign investors may have little chance to sell their stock.

The low market capitalisation is something that has to be rectified before the Colombo Stock Market could attract more investors. The privatisation process provides an opportunity as large enterprises could come on the market. Only then is there the prospect of the Colombo Stock Market being an attraction to foreigners.

Notwithstanding these factors there is little doubt that the market is affected by corporate results. Company growth and improved results will spur investors to buy and consequently raise prices as they consider the stock more valuable. This is where the relationship between economic performance and the performance of the stock market is linked. It is certainly a good indicator of corporate performance.

While the importance and significance of the stock market for the mobilisation of capital for both new investors and existing old ones are undeniable, we must not rest too much on the stock market performance to indicate the country's economic performance. Lord John Maynard Keynes, who made a very large fortune on stock markets and bequeathed millions of pounds to King's College, Cambridge, likened the stock market to a casino and was of the view that a country which rests on the fortunes of a casino could hardly be expected to develop a robust and healthy economy. In his own words:

"When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill done."

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