12th October 1997


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Foreign hand favours business

Market focus by analyst

The Market retained its composure from the downward trend to stabilize around ASPI 780 levels. Large volumes of Asia-capital/CDIC/Magpek/NDB/DFCC were the major contributors to the increase in the weekly turnover.

Foreign activity was evident with large volumes of share transfers taking place. Retail investors were mainly on the selling side with some speculating heavily in Junk stock (low price-loss com.,).

Watawala Plantations issue was fully oversubscribed several times over on the opening day itself. The main allocation basis used for Maskeliya issue is expected to be implemented in allocating the shares to the applicants.

Corporate results for the 3rd quarter 1997 is expected to be in line with the previous quarter results, with improvements recorded in asset/profit growth all round. It is expected that the 3rd quarter 1997 results would trickle in the middle of October.

Plantation sector: ''Led by the increase in demand for tea in the world market, the plantation sector is expected to achieve a weighted average earnings growth in the region of 25% over the year.

The production increased nearly 6% to achieve 178 million kg as against 170 million kg achieved in the same period last year. The plantation sector also would benefit with average price climbing to Rs 170 per kg. Therefore the Plantation IPOs would be a very sound investment.

Manufacturing sector analysis: Export led manufacturing sector companies should perform well as most companies have been fortunate enough to increase their exports through intensive marketing campaigns.

Mainly the ceramic sector, which is well represented in the market would lead the way with earning grouwth.

This sector is highly susceptible to labour unrest, which plagues these comapnies from time to time.

Companies quoted: Lanka Ceramics/Lanka Tiles/Royal Ceramics/Dankotuwa.

Banking sector: The sector is the highest capitalized in the market with nearly 60% of transactions being contributed by companies quoted in the banking sector. Due to the increase in lending margins with borrowing cost coming down for banks, profits have increased, therefore stock prices are expected to appreciate.

IMF stress on financial health

The International Monetary Fund has called for the strengthening of regulation and financial health of Sri Lanka's banking system.

"Priority should be given to strengthening the financial systems and its efficiency" IMF Resident Representative Anton Op de Beke said.

He was speaking at the Entrepreneur of the Year Award ceremony of the Federation of Chamber of Commerce and Industry of Sri Lanka.

If Sri Lanka was to fully benefit from the capital flows it was hoping to attract, the banking system had to be sound.

"Prudential regulation and supervision must be improve," he said. "Specific measures should be put in place to structurally improve the financial health of the two state - owned commercial banks."

In recent years the two banks had received budgetary support amounting to 5 per cent of the 1996 Gross Domestic Product in Sri Lanka.

"To put this in perspective, this is about three times the total amount the government is spending on health care this year," Mr. de Beke said.

Though the budget deficit is expected to be down to about 7 per cent of GDP in 1977, further improvement was expected in this year's budget.

Mr. Beke said with taxes already at a high level, expenditure will have to be curtailed, with reforms in the civil service and pensions.

"The civil service is over-staffed and expensive, thrives on excessive regulation and lacks incentives to reward good performance," he said.

"The civil service pension system is without an actuarial base. It already relies heavily on budgetary support and this will only increase as the population ages".

Govt. urged to provide apparel guidance

By Mel Gunasekera

A leading Canadian apparel exporter is requesting the Sri Lankan government to set-up and a powerful Advisory Committee on the Sri Lankan apparel industry which would make recommendations to guide the industry through its turbulent times ahead. Already Sri Lanka is feeling the pinch with the threat of NAFTA (North American Free Trade Agreement) the gradual phase out of quota restrictions by the year 2005.

"The apparel industry is the biggest money-spinner in Sri Lanka. But, if the industry is to progress the government must get to grips in what they are hoping to do in 10 years time," Chairman, Nygard International Peter Nygard said addressing members of the Sri Lanka Apparel Exporters Association on "The effect of NAFTA and Mexico on the Sri Lankan Garment Industry."

He said that if the industry is to remain competitive, there need to be continued investment into technology and productivity. "You need effective labour laws that are competitive which will offer maximum efficiency, if you are to remain competitive."

The phase out of quota system does look scary, but necessary measure need to be in place. He cited an example of China's apparel industry, which in his view, is capable of supplying the entire world requirement of garments to the USA at a competitive price, once the quota restrictions are lifted.

"China has a 42 bn labour force, all raw materials are produced locally. Since the government is keen to provide employment to its 42 bn workforce, they can supply high quality, high fashion, intricate garments at 10 per cent of what it would cost to produce in Sri Lanka."

He reckons China is a formidable force, once it receives membership to the World Trade Organisation - something Sri Lanka needs to be aware of.

Mexico's apparel industry, on the other hand, has grown in leaps and bounds since joining NAFTA.

"The government officials are adopting a very aggressive drive to attract foreign investors, and they are coming in droves from North America. They have an excellent infrastructure facilities in place together with a good highway network that gives quick access to the USA," Fuel and electricity in Mexico is cheaper than Sri Lanka.

The scenario in Mexico is that she has all the advantages in quick turnaround times, substantially lower duties, no quotas and lower production costs. A number of foreign firms from South Korea, Taiwan are setting up operations there by way of joint ventures for the sole purpose of producing apparels in Mexico to get a foot into the USA market.

"So my advice to Sri Lanka, is to join NAFTA, this wonderful trade organisation which will give access to the large North American market." He said, that there was nothing stopping Sri Lanka in joining this 'club'. "Why not ask Canada to sponsor you as a member to receive the benefits? Its upto your officials to come up with a good appeal to back your case….NAFTA is not only for the north Americans, its open to all, I hear that even India has applied for observation status from ASIAN, so why not you?"

Peter Nygard also spoke of the need to embrace technology. He said everything in his factory in Canada was computerised. Fabric brought, goes directly to the cutting board, which is transported to the next section by computers. "Our computer network is connected to the retail outlet cash machines. Once a customer has purchased something, it automatically records goes into the order books for re-ordering." The company intends phasing out the use of labour by January next year, where even mundane things like telephone calls will be answered by computers. Even factories producing their products can communicate with them by computers.

The company employs around 1,800 workers of which around 250 are based in their factory in Canada. They produce around 25,000 pieces of garments a week and plan to increase it to 75,000 per week in the near future.

Nygard International commenced operations in Sri Lanka about 1 ½ years ago. Mr. Nygard said that he was quite happy with the conditions in Sri Lanka and is looking forward to transfer some of his technologies with his local counterpart by way of a joint venture. "We will have technicians from both Sri Lanka and Canada visit each other's country's frequently to make sure they are aware of the rapid changes taking place."

The company hopes to import around 2 mn pieces of blouses from Sri Lanka next year. "I am happy with the way things are going, but infrastructure needs to be improved, their needs to be quick turnaround times, a liberalisation of textile imports and so forth," he said.

It is interesting to note, that most of what Mr. Nygard suggested is not new to Sri Lanka. Experts like Mr. Lyn Fernando, Dr. Saman Kelegama too have highlighted the need for duty-free textile imports, quick lead times, the need to employ technology etc. way back as 1993.

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