31st May 1998
By Mel Gunasekera
The Government of Sri Lanka (GOSL) is expected to go for a sovereign rating to back up the Fixed Rate Bond to be issued later this year.
Deputy Finance Minister, Prof. G L Peiris confirmed in a speech last week that Sri Lanka intends to go for a sovereign rating by the end of this year.
Informed sources say that the bond will be between US$ 100-US$ 200 mn. The Sunday Times Business learns that the Central Bank is however yet to select a rating agency for the job.
The government needs to go for a sovereign rating to gear itself to borrow more in the international market in the future, financial sources said.
As the country's per capita income increases, concessionary loans are drying up and the government is compelled to look towards the international capital market to raise debt for future infrastructural projects, they explained.
Sri Lanka's per capita income is rising steadily and touched US$ 814 in 1997, up from US$ 759 in 1996. A country becomes ineligible for concessionary aid when its per capita income touches the 'magic' US$ 925 mark. When Sri Lanka reaches this benchmark, she graduates from a low-income economy to a lower middle income economy.
"As the Sri Lankan economy becomes robust and open, you need to attract capital on an open basis. The government sees this as a task that needs to be done and has taken the lead role by going for a sovereign rating," a top economist said.
There has been a general crunch in aid flow worldwide, with Japan leading the pack by curtailing world aid flow by 10 per cent. Analysts say the establishment of a sovereign rating will set a benchmark for the private sector to have access to international finance markets.
In 1997, Sri Lanka successfully raised US$ 50 mn through a Floating Rate Note (FRN), without an official country rating. Financial sources said the international rating agencies gave Sri Lanka a BB+ rating.
Sri Lanka was able to issue the note at LIBOR (London Inter Bank Offered Rate) plus 1.5 per cent interest, which analysts say was very favourable considering the country ventured out to the international market without a sovereign rating.
Analysts say that Sri Lanka may go for a high value note this time to attract the big players in the market. The big institutional players are keen on bond issues as it shields them from market fluctuations and protects them against high interest rates.
Sovereign ratings are conducted by the cream of international rating agencies like Moodies, Standard and Poor. The agencies compile an offering circular (report) which takes into consideration the political, micro and macro economic scenario in the country. The entire process usually takes around six months to complete.
The World Bank says that Sri Lanka's medium term prospects look good if there is no further deterioration of the security situation and a programme of fiscal adjustment and structural reforms is implemented effectively.
But it also noted that, without a forceful reform programme, Sri Lanka is unlikely to join the ranks of the middle income countries, "a category that is generally recognised to be more consistent with its potential."
These comments are from the World Bank report on Sri Lanka's recent economic developments and prospects presented to the Paris aid group meeting last week, a copy of which was obtained by The Sunday Times Business ahead of the meeting.
With per capita income rising close to 850 US dollars from 375 dollars, 10 years ago, Sri Lanka is slowly moving away from the league of poor nations to the middle-income bracket in which less concessional foreign aid would be made available.
The World Bank report, prepared by Eric Bell, senior country economist for the bank's South Asia region, dealt in detail with the country's achievements in social and economic development.
It said that the government was facing the difficult challenge of restoring peace, maintaining the economic momentum and reducing poverty - all at a time when financial constraints were tightening and popular expectations were rising.
"The economic improvements in 1997 (6.4 percent from 3.8 percent in 1996) should also be viewed with caution as they come on the heels of a significant slowdown in 1996. Also the East Asian crisis has reinforced the need for greater vigilance in economic policy management," it said.
The report, discussing the civil conflict, noted that while it was difficult to quantify the real impact, Sri Lanka's social fabric was constantly under pressure due to factors such as conscription of children and women into the guerrilla movement, rising school drop-out rates in war-torn regions, and increasing number of female-headed households (Owing to soldier-and civilian-husbands dying in the war or who are constantly at the warfront).
"A less obvious but important impact of the conflict is
the distraction of government from administration and economic policy making," the report said.
The World Bank said that Sri Lanka continues to face serious problems with unemployment (and underemployment) relatively high, 22 percent of the population estimated to live below the poverty line and education and health outcomes - long time success stories in Sri Lanka - eroding, given the country's epidemiological transition and the rising expectations of its population.
It said that there could be no sustainable improvement in the overall performance unless bold changes were made in economic policies, particularly in consolidating the fiscal situation and accelerating structural economic reforms.
"Sri Lanka can ill-afford the slowdown in the bace of fiscal adjustment that is planned for 1998. Budget policies for 1998 have weak points that should be monitored carefully.
" The World Bank said that the one percent reduction in the overall budget deficit (this year) was insufficient in view of the government's own plans to cut the deficit to four percent of gross domestic product by 2000, and also that this cut was based on savings in defence spending which is unlikely in view of the current security situation.
Last year Sri Lanka spent about 30 percent of its total current expenditure on interest payments, 25 percent on defence and 10.6 percent on government pensions, the World Bank said, adding that the country spent less on education and health where expenditures were much lower than countries with similar socio-economic backgrounds.
"With this (current) structure of expenditures, Sri Lanka is not well poised to promote long term economic growth and protect its human resource development," the report said.
It said the pension bill was unaffordable and needed revision. Referring to the social welfare and poverty sector, the World Bank said the Samurdhi programmes were costly and covered 50 percent of the population whereas the proportion of the population living below the poverty line is estimated at 22 percent.
The World Bank urged a containment of the programme by way of reducing the number of Samurdhi mobilisers, now numbering 37,000, freezing budgetary allocations and reducing the number of beneficiaries.
Private economists said that this would be a hard pill to swallow for the government which has already approved the permanent appointment of some 10,000 mobilisers, further eating into budgetary resources. More Samurdhi workers are seeking permanent employment and have staged large-scale demonstrations in support of their demands.
They are threatening to withdraw support to the government if they are not made permanent. The report said that the large poverty programmes have been costly, fiscally unsustainable, and have sometimes led to a miscalculation of resources.
The Colombo office of the United Nations Development Programme recently began a comprehensive study - at the request of the government - to ascertain the impact of poverty alleviation programmes and suggest remedial measures, if any.
Another issue of concern that the World Bank feels should be addressed is that Sri Lanka's long standing success in human resource development is eroding.
While the country continues to outdo low-income countries in this field, its lead over countries with similar backgrounds is diminishing.
Dealing with "risk and uncertainties", the World Bank said that despite economic success in 1997, the situation remained precarious with the security risk and policy reform being key areas of concern.
"Because of its large upfront political costs, fiscal adjustment and public expenditure restructuring may not be carried out in a sustainable manner, especially as Sri Lanka is now entering a crucial period of election cycles," the report said, adding that a deterioration in the policy framework would be damaging to the country.
The Tourist Board estimates 450,000 arrivals for 1998, a 23 per cent increase from 1997 and 10.5 per cent higher than the all time high of 407,500 arrivals in 1994, a UBS global research, John Keells Stock- brokers' report says.
The largest number of arrivals is from Western Europe mainly the UK, the report says. With European economies steady, arrivals are expected to improve from this region over the next two years.
However, with regional currency depreciations, destinations like Thailand, Malaysia and Indonesia have become relatively cheaper and John Keells Stockbrokers do not expect arrivals to increase by more than 10 per cent.
Arrivals in January were 14 per cent in line with their forecasts the report says.
Meanwhile business arrivals are expected to increase at a CAGR of 8 per cent through to 1999. Although business travel accounts for only 4 per cent of arrivals, they command a premium of US$15 per day over leisure travellers and also average a longer period of occupancy in five star hotels.
While leisure travellers stay in five stars for an average of two nights to and from their resorts, business travellers spend a longer time in five stars, the report says.
The six registered five star properties with a total of 2,400 rooms were in over supply, leading to a price war in the past. However, following extensive damage to Hilton and Galadari in November 1997, room supply shrunk to 1,421.
Despite regional currency devaluations, Colombo's five star rates are significantly below regional room tariffs, the report points out.
Colombo Hilton who has the highest room charge lags behind regional rates.
Hilton charges a premium of approx. 40 per cent over its competitors and is the acknowledged leader in Business travel market. With the damage to Hilton and Galadari, competition was diluted from end 1997 onwards. But with their reopening and the opening of Oberoi's Crescat, room rates will be more competitive.
International rating agency Doff & Phelps (DCR) is expected to sign a LOI (Letter of Intent) with the Central Bank of Sri Lanka this week, financial sources said.
The LOI will open the field for local financial organisations to link up with this international rating agency.
The Central Bank will select about 15 to 20 local partners to take up a maximum 2 per cent stake per company in the agency, to maintain its independence.Funding will come from the International Finance Corporation (IFC), Rating Agency Malaysia Berhad, the Central Bank of Sri Lanka and local partners.
There is also speculation that the Central Bank would permit more agencies to set up operations here. However, financial sources say that the local debt market, still in its infancy does not warrant too many agencies.
DCR is said to be one of the four leading US credit agencies with offices in 14 countries, including Malaysia, Hong Kong, Singapore.
The Central Bank conducted a feasibility study with the Canadian Bond Rating Services (CBRS) to establish a rating agency in Sri Lanka, last year. However, there was no commitment to allow CBRS to set up their own agency here.
While Sri Lanka's equity markets are fairly well developed, the debt markets are lagging behind and need the services of a rating agency for public debt issues. The government has also given incentives to local corporates to issue debt instruments but so far only a few companies have taken up the challenge.
Vanik Incorporation has been the most prolific issuer of quoted debt so far. Commercial Bank and Ceylinco Securities followed suit with quoted debentures. Singer Sri Lanka also recently issued a zero coupon note and Hatton National Bank is expected to go for a debenture issue soon.
Most of these public issues sans a rating have not been unsuccessful. But the emergence of a rating agency is generally expected to boost the debt market.
The financial sectors' reaction to the entry of a rating agency was mixed.
Bede Fernando, Director/General Manager Ceylinco Securities and Financial Services said while Pension Funds, Unit Trusts and Insurance Funds will have a better option to invest in the debt market, there could be doubts about the costs involved for the process. This may deter certain companies from seeking a rating.
Such a rating would also instill financial discipline on the companies themselves. It would be beneficial to interested parties to get a better risk profile of the company, Assistant Director Fixed Income Securities MB Financial Services, Mahinda Wickremasinghe said. Rating agency would instill confidence even when it comes to buying and selling shares. "The rating agency is not the Messiah, it's only a tool. All ratings are fallible the judgment will be made by humans and their could be errors. But the debt market would receive a substantial boost once the rating agency becomes active and starts rating instruments," he said. - MG
The much awaited Paris 'do' is over and little Lanka came away 780 million dollars, some 80 million more than what Colombo expected, but 70 million less than what it got last year.
Will this news arrest the downward trend at the Colombo Stock Market?
No, say many brokers. Overseas buying, they point out, has continued to be disappointing mostly because there has been a flight of investors in the aftermath of the crises in India and Indonesia.
Many ''popular'' stores in the city are known to stock electronic goods at ''duty free'' prices, but available to all local customers.
This trade network is well established, with these stores having ''couriers'' who travel overseas for just buying goods for them.
The authorities have been turning a blind eye to this for some time now but now two corporate giants are complaining that their sales have been hit by this network and are lobbying for action.
The industrious people recently announced the addition of 56 garment factories, to the existing 200 set up by the late lovable leader.
But now they have also received a warning from others that they may be in deep trouble if the factories are set up without guarantees of increased quotas.
They point out the case of the star in this sector which is now in trouble precisely for the same reason.
And moreover, most of the new factories are located in the South, so the political fall-out could be deadly, they say.....
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