17th August 1997


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Euro:Asia to benefit

Asian countries like Sri Lanka should benefit from the introduction of the Euro (currency) scheduled for 1999, a visiting German Economist said in Colombo last week.

Deutsche Bank's chief economist and head of their research unit, Dr. Norbert Walter was speaking on a subject close to his heart.

Trading with Europe after the single currency will obviously be easier. The Euro will eliminate exchange rate risks of trading with several European currencies. There will also be a reduction in transaction costs.

Banks will lose revenue on transaction costs and staff redundancy is possible. But this is not so bad as a steel worker losing his job, Dr. Walter said. Banks and financial markets have better prospects for innovating new products and restaffing, he added.

Most importantly, governments, financial markets and individual businesses could all benefit from the Euro, Walter said.

Many Asian countries like Sri Lanka link their currency to the US dollar. Some European currencies with a high exchange rate against the US Dollar will experience a downward revision when the single currency is introduced. This could be beneficial to all dollar-linked currencies, Dr. Walter said.

The situation however is short term and a correction will take place within a year or two, he added. The European Monetary Union and the introduction of the Euro is the single most revolutionary change in financial markets in the latter half of this century. The success of the single currency is two-dimensional.

Stringent macro economic criteria and an independent European Central Bank (ECB) will regulate the new European currency that is tipped to challenge the US dollar, Dr. Walter said.

Convergence criteria are based on monetary policy and fiscal discipline. For example, countries with inflation rates of above 2.7% will be refused entry to the EMU. Similarly long term interest rates have to be less than 12% per annum. Fiscal policy requires a country's budget deficit to be less than 3% of its GDP and accumulative government debt to be not more than 60% of GDP.

Countries failing to maintain these criteria will be penalised by the ECB. A non recoverable penalty which will be a percentage of the country's GDP will have to be paid to the European Account if the country's performance is not corrected within a two year grace period from the year of deviation, Dr. Walter said.

Meanwhile the watchdogs of the Euro, the ECB will be set up in Frankfurt with the Presidents of six national Central Banks and six members of their directorate elected for a period of eight years. Members of the ECB cannot be re-elected.

Short term interest rates will be fixed by the ECB and will apply to all Euro currency countries. Dr. Walter predicts that short term rates will be in the region of 31/2% per annum moving towards 3% per annum. Long term interest rates are not so easy to predict and may well be determined by financial markets, he added. EMU member countries have similar inflation and interest rates, which will not make the convergence difficult, Dr. Walter said.

The ECB will not bail out any EMU member who has a budget deficit, Dr. Walter said. The EMU's foreign reserves should also improve with the introduction of the single currency, he added. When the Euro is launched in 1999 the two big players in the EMU Germany and France, together with Holland, Austria, Belgium, Luxembourg, Ireland, and Finland will be pioneering member countries creating the new currency. Portugal and Spain will probably join the EU but Italy, Sweden, Denmark and the UK are yet sitting on the fence. Greece falls way behind the stringent convergence criteria required to be a EMU member.

Technically the project is on time with the European Monetary Institute, the forerunner to the ECB being on target and schedule, Dr. Walter said. Adjusting fiscal policies and gaining political acceptance are the two biggest hurdles to clear before 1999, he added.

The other most important aspect of the Euro is fixing the conversion rate, Dr. Walter said. It has been suggested that an average of one or two years actual exchange rates should be used, so that stronger European currencies would not lose out in the conversion.

When most European countries eventually join the EMU, probably by 2003, the EU bond market will match the US bond market in size, Dr. Walter pointed out.

Optimism looms over hotel sector firms

Market Focus

Renewed buying interest in the low priced stock in the CSM stabilized the indices in the ASPI 850 levels. Turnover levels remained moderate, with foreign participation being minimal with net outflow being recorded for the week.

Institutional activity was mainly concentrated on the blue-chip banking sector. NDB Institutional private placement by the government also being very successful (as they were over twice oversubscribed) would bring more foreign funds to the CSM, as more funds would be made aware of the potential in the CSM.

Over the week the most significant development was the implementation of the fully automated screen based trading system, which enables the CSE to handle 20,000 transactions per trading day. This would enable an online-real time process of transaction.

Analysis of the Hotel sector:

Companies quoted in this sector are in for a period of rapid growth with tourist arrivals exceeding the expected estimates. This is mainly due to the increase in regional travel as well as cyclism in the tourism industry, where for a certain time period locations become very popular, as in this case being South Asia due to the world media attention being focused on sports/cultural/economical etc...

As already hotels are recording occupancy rates ranging from 60% to 90% it is expected that if more investments are not channelled into the sector, under capacity utilization of the increased influx of tourists with 1998/99 season would arise.

As already the capacity available as per hotel rooms is only in the region of 600,000 this would have to increase to cater to the expected target for year 2000 of 1 million tourists, Already the target set for 1997 has been exceeded, which means the target set for year 2000 is highly achievable. Therefore more star class hotels would have to be built to accommodate the influx.

Corporate front

Ceylinco securities: 1st quarter ended 30th June recorded an increase of 97% in turnover and a 198% increase in profits compared to the same quarter in 1996. This was mainly attributed to the increase in activity in the financial sector due to the turnaround in the economy.

Bata: Has recorded a turnover in the first half of 1997 Rs. 666.6m an increase from the previous Rs. 590.9m same quarter 1996. Pre-tax profit increased to Rs.31.9m from Rs 1.5 million a year earlier. The overall increase is mainly due to better product & Market strategies.

Recommended: Speculative: Magpek/Veytex /Kelani/ Ceylinco securities /Hunas.

Buoyant NDB leaps again

Following the unprecedented success of its international debenture issue, the National Development Bank, (NDB) will float a further 900,000 shares on the Colombo Stock Exchange next week.

The public issue priced at Rs. 250 will open on August 19th, NDB's Chief Executive Officer Ranjit Fernando said at a media briefing last week.

NDB's 27.5 million debenture stock which was to be converted in 1999, 2000 and 2001, was sold ahead of schedule at a discount. The issue of 18.33 million convertible debentures, of which 16.5 million was floated internationally, was snapped up by fund managers some of whom made their maiden investment in Sri Lanka.

The issue which was over subscribed twice over, with 56 funds applying, has raked in Rs. 4.5 billion at Rs. 260 per share. Lead managers Jardine Fleming HNB Securities Pvt. Ltd. and Leehman Brothers Ltd. launched a road show for the International float and graded the prospective investors, most of them A grade pension funds. Allotments were made on the strength of the investment houses and 35% of the issue was sold in Hong Kong, Singapore, 33% in the UK and 29% in the US.

The international sale which followed a book building process, levelled at Rs. 260 per share on closed offers. While the market value of a share is the benchmark, this type of sale is usually carried out at a discount to the market price, Mr. Fernando explained.

The conversion has also reduced NDB's issued capital from 45 million to 35.83 million shares, ( 17.5 million shares in equity and 18.33 converted debenture stock) and thus increased its Earnings Per Share (EPS) considerably.

NDB's Profit After Tax of Rs. 670 million in their last financial year, makes them the highest profit making public quoted company, Mr. Fernando said. They are also among the three highest market capitalised companies with a market capital of Rs. 10 billion.

The conversion leaves another approximately one million shares which will be created into a trust and issued to employees on a performance linked basis.

While NDB is extremely positive about the local issue, the substantial foreign ownership of the company will not change its lending policies, Mr. Fernando said.

It has been pointed out that NDB could move from a development bank to a purely profit oriented commercial bank, with the dilution of the shares, Mr. Fernando said. Development and profit are not contradictory and the NDB is essentially looking at profitability in the log term, he added.

The government still owns a 121/2 % of the NDB stock which they will hold for a further 18 months at least. Even after government holding is divested, the NDB will continue to be governed by the NDB Act No. 2 of 1979 which binds the bank to developmental lending.

An NDB policy document limits lending exposure in any sector to less than 15%, Mr. Fernando said.

Handover boost for ad market in China

China could be the largest advertising market by the year 2000, Ogilvy and Mather 's president for Asia Pacific, Miles Young said in Colombo last week.

At present it is just behind the United States and Germany in terms of value, he added.

Ogilvy and Mather's (O & M) Asian business is estimated to grow by a colossal 50% this year, with three new offices in mainland China and a large slice of the new and growing business, Mr. Young said.

Mr. Young was visiting O &M's local partner, Phoenix Advertising last week. A good number of O &M's Hong Kong-based clients have shifted operations to mainland China, with the handover. Accordingly O&M, one of the largest advertising agencies in Hong Kong has had to beef up operations in the mainland, Mr. Young said.

China is developing like the US, with eight different economies and marketing regions coming up, and O&M has to service each of these markets differently, Mr. Young explained.

There has been a flood of brand management from Hong Kong to the mainland, and most of our clients went over to the mainland , Mr. Young told The Sunday Times Business.

Three more offices will be set up in Shenyang, Wuhen and Chengdan to supplement existing offices in Beijing, Shanghai, and Canton. With 100 more to be added to their staff of 300 in China (200 in Hong Kong) there is great potential for human resource exports from India and Sri Lanka, to O&M offices in China, Mr. Young said.

Advertising in China is moving in two main directions, he said. One is brand advertising for the hitherto unknown Chinese electrical, electronic consumer goods, motor vehicles, food and textiles. The other is the privatisation process managed by semi governmental organisations.

While China still represents a relatively small percentage of Asian revenue, behind Hong Kong, Taiwan and India, its growth potential is absolutely critical to O&M's Asian business, Mr. Young said. The buzzword in advertising is integration, he added.

When advertising alone is inadequate to penetrate or sustain markets, additional methods like telemarketing (which the company is in the process of setting up now) direct marketing and PR /Communications are also deployed.

Phoenix in Colombo will benefit directly from the introduction of these skills from its international partner.

As we move closer to the 21 century, advertising like any other industry has grown more complex. On the one hand advertising is moving towards globalisation of brand management like in the case of O&M client IBM or American Express or Kodak. On the other hand a premium is being placed on creativity, Young said. And in this context Asians display exceptional talent, he added. This trend is leading to distinctive cultural advertising pockets, he said.

Business Bug

Double chips

A world-renowned fast food chain has decided to set up shop in Sri Lanka, after a preliminary market survey revealed much scope for the fast food sector.

The chain will be launched early next year with two outlets in Colombo, initially.

And the local franchise will be awarded to a company now more popular in the electronic goods industry....

Go Susanthika, go!

Just as much as there were many offers to sponsor our champion cricketers after their World Cup win, similar offers are coming the way of Susanthika J.

A leading bank and several companies have already submitted sponsorship packages to the golden girl, we hear.

But, a diversified blue chip which features the star in one of its advertisements is likely to get the nod....

Another bid?

Trading in shares of a leading finance company has been hectic last week.

This raised many eyebrows, for the company was at the centre of a take-over controversy not so long ago.

The watchdogs are now closely monitoring the trading to see if this is yet another take-over bid.....

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