12th October 1997


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East Asian threat looms large

By Asantha Sirimanne

Sri Lankan exports are likely to face severe competition from East Asian nations after falling currency made their exports cheaper, analysts have warned.

While Malaysia is a major producer of Rubber, Thailand, Indonesia and Philippines are major players in the coconut market.

But international commodity prices, themselves have not come down significantly, though rubber prices have started easing long before the East Asian Currency crises. As a result plantations companies are not expected to suffer too much from the effects of currency devaluations.

"When it comes to high value added products however, East Asian exports will become much cheaper," says Avanka Herat, analyst at Jardine Fleming HNB Securities.

Listed companies engaged in rubber products, and coconut based products such as desiccated coconut and activated carbon could be hit. These include the Richard Piers Group, Samson International, Coco Lanka and the Hayleys Group.

Hayleys Group is a top exporter of both high value added rubber and coconut products and is one of the largest producers of activated carbon in the world.

However the group already has activated carbon factories in East Asia which would be able to benefit from any advantages accruing to those countries.

However most analysts believe that there is unlikely to be a significant impact on Sri Lankan exports in the very short term.

Existing contracts with buyers are likely to be allowed to remain, until new supply sources could be found to replace them.

"Price is not the only criteria," says Mr. Herat. "Competitors will also have to be able to offer comparable quality."

Countries such as Indonesia is also a major competitor for Sri Lankan ceramic exports. This would hit items such as wall and floor tiles, though porcelain tableware is expected to escape relatively unscathed. Listed companies that could be affected include, Lanka Ceramics, Lanka Walltiles and Royal Ceramics.

Sri Lankan tile exports to North America suffered badly from 1994, partly due to productions disruption caused by labour unrest under the PA administration. Our products had been replaced by South American exporters, particularly of Mexican origin. Some analysts believe that the Mexican currency crises may have helped her producers to easily push aside Sri Lankan tiles.

There could be more compelling reasons preventing East Asian countries from posing an immediate threat to local exporters.

Indonesia in particular had jacked up interest rates in a bid to prop up the Rupiah. Over nigh rates are hovering around 50 per cent reminiscent of a time in Sri Lanka when the Central Bank tightened money supply to unbearable levels.

High domestic interest rates encourage capital to remain inside and also attract capital flow into the country, though interest rates sometimes have little effect when other factors weigh overwhelmingly on the opposite side.

"Most of these countries have raised interest rates, which is going to increase the cost of production very sharply," says Associate Director of Socgen Crosby Securities Dr. Anush Amerasinghe.

With producers now having to cope with a higher interest bill, they are more likely to preserve existing dollar prices, and use the broader margins to set off the interest.

However on the short Sri Lankan capital markets are likely to affected as investors retreat from East Asia.

Though South Asian markets have performed well, and knowledgeable investors are likely to pay more attention to South Asia many investors are expected to think otherwise.

"Investors, particularly in North America tend not to regard South Asia as a distinct region," said Tim Kilpatrick Managing Director of ABN-Amro Hoare Govett Asia who bought into Forbes & Walker Stock Brokers. "Therefore they will reduce their exposure to Asia as a whole."

Asian Hotels keep hands clean

Auditors of Asian Hotels Corporation group have qualified the accounts of the company, saying the group has not provided depreciation and foreign currency loans have not been translated into rupees as required by Sri Lankan Accounting Standards.

Though accounts showed that the group has made a profit of Rs 100 mn and Asian Hotels Corporation had made a profit of Rs 69 mn net profit after minority interest, auditors said depreciation has not been provided for furniture, fittings, equipment and soft furniture of the hotel.

"Had depreciation been provided on the estimated useful lives of the above assets, the depreciation charge for the year would amount to Rs 13.7 mn," shareholders were told in the annual report.

The company added that no depreciation has been provided for on buildings of the hotel as cost of maintenance and the normal wear and tear of the building is charged to the profit and loss account.

Had depreciation been provided based on the estimated useful lives of the asset, the depreciation charge for the year would amount to Rs 4.9 mn.

The auditors said the long term portion of a foreign currency loan has not been translated to rupees in accordance with Sri Lanka Accounting Standard - 21.

The accounts said loan installments due after balance sheet date are stated at exchange rates prevailing at the time the loans were obtained. If the amounts were translated into local currency at the exchange rate prevailing at the Balance sheet a provision of Rs 16 mn would be required.

No such provision had been made.

A subsidiary of Asian Hotels Hotel Services Ceylon Ltd., which houses the Ceylon Intercontinental has also not provided depreciation based on the estimated useful lives of the its fixed assets amounting to Rs 15.1 mn.

Group turnover was Rs 537 mn for the year ended 31t March 1997.

Associate company Trans Asia Hotel had made a profit of Rs 144 mn for the year.

Chairman Tan Asian Hotel Sri Azmi wan Hamzah said group turnover would rise next year with opening of the apartment tower built by Crescat Development Ltd.

A shopping boulevard consisting of 72 shops including a super market and food court is expected to be opened by the end of this year. Out of a total 149 apartment's 58 had been sold or booked by end March.

Tan Sri Azmi said disputes have risen between Asian Hotels Corporation and the operator Oberoi Hotels (Pvt.) Ltd.

"These differences and disputes are for determination before an Arbitral Tribunal comprising international arbitrators," he said.

Continue to Business page 2 * Foreign hand favours business * IMF stress on financial health * Govt. urged to provide apparel guidance

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