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28th June 1998

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The next one

The debenture issue of the bank bearing the name of a hill country town was an overwhelming success, being over-subscribed on its day of issue. Two more debenture issues are on the cards in the near future and a similar response is expected. At least one other state bank is now planning its own debenture issue, we hear, encouraged by the response to the 'partner in progress'........

In the fray

A further ten per cent stake of the state telecommunication giant is to be privatised, the telecom-cum-media man announced last week. The chaps from the land of the rising sun, who already own management rights and a substantial stake will make a big bid for this stake, we hear.

But others are not discouraged and rivals are also considering their options. We, only hope that the government will be a winner here, because of the competitive bids..........

Merger next?

The troubled local tyre maker is now back on the correct track with production resuming.

But it will be a tough task to win back the lost market share, company executives say.

What of the merger with its rival in the same trade? Details are still being worked out, they say.


By 1996, the plantation sector's contribution to the national economy had decreased to 3.96 per cent of GDP, 20.2 per cent of export revenue, and 13.3 per cent of employment.

However, the total output of tea, rubber and coconut increased by 90 per cent, 18 per cent and 36 per cent respectively in spite of the reduction in the cultivated area for all three crops, a recent NDB magazine -Achievers states.

The area under rubber cultivation 260,000 ha had declined to 162,000 ha by 1996. However, the output of rubber, increased from 95 mn kgs to 112 mn kgs during the same period, while rubber exports decreased from 92 mn kgs in 1948 to 72.1 mn kgs in 1996, due to an expansion in domestic rubber-based industries.

However, there have been drastic changes in the coconut plantations. Total area under cultivation decreased from 433,000 ha to 416,000 ha during the 1948-1996 period. The output of coconuts increased, despite the reduction in land area cultivated, from 1,868 mn nuts in 1948 to 2,546 mn nuts in 1996. Exports declined from 970-mn nuts equivalent to 508 mn nuts, during the same period, mainly due to the increase domestic nut consumption.

In the early 1990s, Sri Lanka's average productivity of tea and rubber lagged behind those of key competitors by 30-40 per cent. However, coconut yields were impressive. One reason for this may be that the majority of the plantation area was privately owned and thus was more likely to be regularly fertilised and well maintained. The graph above indicates that in the case of tea, average yields have hardly improved in 1990-97, in relation to those of Kenya and India. However, there is likely to be an increase in the yields within the next five years, given that in estates under private ownership, the management has been fertilsing acreage under cultivation.

Some firms are also looking at new methods of crop management and harvesting. The high tea prices, which have persisted since 1996, have brought almost all tea estates out of the red. The Net Sales Average (NSA) price now exceeds the Cost of Production (COP). For instance, the 36 estates, are still managed by the SLSPC and JEDB. The combined loss of these two entities reduced from Rs. 102 mn in 1995 to Rs. 7 mn in 1996 and a profit of over Rs. 100 mn was achieved in 1997. The tea industry is likely to remain in high gear with the innovative and aggressive private sector management at the helm of a majority of Sri Lanka's larger plantations.

The enthusiasm of the tea smallholders is also likely to add to the future success of this sector. Concerns should be focussed more on the future of rubber and coconut lands, which are facing a high degree of competition from other sectors and are yet to move to a higher plane of productivity.

Global recession hits Lanka worst

By Feizal Samath

It's bottoms down for the Sri Lankan economy this year! That's what a private economic research agency forecasts running contrary to what government figures show.

Econsult Pvt Ltd, says a global recession and internal factors would affect the country's economy this year.

It says that economic growth or GDP is seen rising by five percent or little over that, this year compared to a revised estimate of 5.5 per cent to 6.0 percent which the Central Bank research division announced last week. Earlier the bank and the government had forecast a growth rate of over 6.0 percent.

In an interview with The Sunday Times Business, a spokesperson for Econsult said that industry - excluding the garments sector - has been the worst affected in the last two years due to internal and external competitiveness, the East Asian crisis and a combination of other factors.

She expressed doubts as to the accuracy of last year's official growth rate of 6.4 percent in the light of an industrial slowdown. "It is difficult to accept the government figure of 8.0 percent for industrial growth last year. We had forecast growth in this sector at five percent," she said.

Outside the gloom and doom - the positive side of the economy this year is the favourable tea prices and an improved paddy sector. "The agricultural sector should see some improvement this year," she said. Garments will do well with only a moderate fall if the global situation weakens further.

But that probably is the only silver lining in the country's economy this year - at least the way private economists see it - while the government trots out a favourable picture of the economy in a recession-hit world economy.

The government and the Central Bank, while underscoring the negative fallout from the East Asian crisis and slower growth in the world economy, says Sri Lanka has been able to withstand the initial shock of the Asian crisis and the economic mood is positive and upbeat. Econsult reckons annual inflation this year should end at around 11 to 12 per cent which is not with the government's estimate of a single digit or a 10 percent rate.

Some of the critical areas in the economy are the balance of payments, budget deficit, inflation, industrial growth, interest rates and employment.The industrial slowdown has led to laying off of staff and none or little new recruitment and Econsult cannot comprehend the government figures of unemployment falling last year by three percentage points.

"It is not so much the figure that worries us but the fact that when industry is not hiring but firing, how can unemployment fall?" the spokesperson asked.

The agency also doubts, like many other foreign donors, whether the government would be able to keep to its targeted budget deficit level of 6.5 percent as a percentage of GDP this year with spending pressures like an escalation in the intensity of the northeast war. Econsult says their deficit forecast is 8.0 percent.

Both the International Monetary Fund (IMF) and the World Bank are 'hoping against hope' that Sri Lanka would be able to keep to the four percent budget deficit target as a percentage of GDP, set for 2000. As the IMF Colombo representative Anton Op de Beke said recently, "the government did well to keep the deficit on track (in 1994/95) and I hope they would be able to pull off the same trick again."

He was responding to questions on a possible rise in spending by the government next year, ahead of the parliamentary polls in two years. Other analysts said that huge spending on populist programmes has been a tradition by all governments before parliamentary or presidential polls.

The IMF representative said he was also worried that plans to give permanent employment to Samurdhi workers would put pressure on the government budget.

He said that while golden handshakes - via World Bank funds — were given to retire public sector employees in a bid to trim the civil service, new employment was being created, adding to the numbers in the service.

Tbill rates going down

By Mel Gunasekera

An excess of Rs. 9 bn in the money market system is expected to push the Treasury Bill and Treasury Bond rates down in the next two months, Central Bank sources said.

The said the excess money would come into the system via captive sources like the EPF and ETF whose rupee loans are due to mature in July and August.While Rs. 91 bn worth of rupee loans are returning, the government will re-issue only Rs. 82 bn in rupee loans, creating an excess of Rs. 9 bn in the system, CB sources said.

The recent Tbill auctions have seen a decline in interest rates. The rates, which were steady at 11.86 per cent for 3-month bills, have dipped to 11. 78 per cent at last weeks Tbill auction. Six-month bills have declined from 11.94 per cent to 11.91 per cent, but 12-month bills have remained steady at 12.09 per cent.

The margins on 12-month bills have been between 11.86 per cent –12.09 per cent for a while. The nuclear blasts in neighbouring India and Pakistan saw the overnight repo rates being pushed upto 12.1/4 per cent, but it has stabilised at 12.1 per cent since then, primary dealers said.

The Central Bank has artificially kept the rates at 12.1 per cent to prevent speculative buying of dollars, dealers said. Analysts say that if interest rates were market driven, overnight rates would dip to 11.5 per cent.

Primary dealers allege, the bond rates are not fluctuating either, as the EPF dictates terms by putting a ceiling on the bid rate, thus not permitting the primary dealers to bid at market rates.

However, dealers said it was unlikely that there would be a sharp rise in interest rates as in the past, unless something drastic happens to the economy. The market is buzzing when Central Bank increases the repo rate by 1/8 per cent. It's a big thing. I see it as a positive sign, that people think a 1/8th change is important. It shows the stability we have in the market. This is a healthy sign of a stable interest rate, compared to the Wild West scenario in the past," a top primary dealer said.

The Central Bank has indicated to the primary dealers that the rates would flatten out in September/October and pick up in November/December, so we can expect a relatively stable rate by the year-end, he said.

The government has done well in controlling the rates despite the volatility in the regional markets, he said. The budget deficit is fairly under control, but the private sector credit is not expanding fast as expected, and there is a lot of money available in Treasury Bills, he added.

FDI takes a dip

Foreign Direct Investment (FDI) this year has declined in value terms, a top research house said.

A report by Jardine Fleming (JF) states that investment agreements signed by the Board of Investments (BOI) over January-May 1998 have declined in value terms in line with the slowing domestic economy and the regional economic crisis.

The number of projects signed, however, has increased to 88, from 66 in the corresponding period last year, JF says.

In terms of sector, the majority of the projects were in services, which included infrastructure, leisure, financial and hospital projects. This sector received 34 project agreements, valued at US$ 139 mn.

Garments, textiles and leather industry received the second highest number of agreements, with 29 projects to the value of US$ 18.3 mn, JF Research said.

The decline in investments is in line with expectations, researcher Azra Jafferjee said. Sri Lanka is going for a decline in actual FDI to US$ 100 mn in 1998, from US$ 129 mn in 1997, JF estimates. Since the bulk of Sri Lanka's FDI comes from East Asian countries such as, Korea, Taiwan, Japan, Malaysia and Singapore, the regional slowdown will take a heavy toll on FDI flows, she said.

Domestic investment sentiment has been hampered by the unfavourable external climate, with domestic investors placing investment on hold until conditions stabilise. "It was with these factors in mind that we downgraded our GDP growth projections early this year to 5.4 per cent in 1998. We expect improvement to a GDP growth of 5.6 per cent in 1999,"she said.

The economy in the second half of 1998

At the end of the first half of this year we can be reasonably satisfied with our economic performance despite the largely unfavourable global conditions, which have created considerable havoc in several economies of Asia.

However there are signs that our performance in the second half of this year may not be as good. Economic forecasters and analysts have pruned down the country's economic performance to below 5 percent on the basis that many of the unfavourable global factors would impact on the economy more in the second half of this year.

Already there are some signs that this may have already begun to occur. Many exports have fared badly. The stock market has hit a low level.

Exporters fear that the devaluation of Asian currencies have left Sri Lanka in a less competitive position and contend that the country has not depreciated the currency adequately to enable them to compete in the fiercely price competitive international market.

In recent years tea export growth has been an important contributor to the country's economic performance. An increased production of tea has been coupled with improved prices and been a stimulus to the economy.

However in the next few months it is likely that tea prices would come down. This is partly due to some countries getting rid of their stocks of tea and partly owing to problems in Eastern Europe.

There has also been a seasonal factor in that tea produced during the last few months has been poor in flavour and quality. While these factors are likely to depress tea prices in the next few months, there is an expectation that in the latter part of this year tea prices may pick up.

With respect to industries, garment exports have held their own and since these constitute a significant proportion of our industrial exports, there has been modest industrial export growth. The performance of many other industries has been poor. Rubber manufactured exports in particular have suffered as did a wide range of other industrial exports.

Industrial export growth has been less than 3 percent in the first four months. The decline in intermediate goods imports by a little over 2 percent appears to confirm that industrial exports may not increase in the second half of the year. Tourist arrivals too increased only marginally. This too no doubt reflects the decline of Asian tourists.

The Central Bank has predicted that the country would register a balance of payments surplus. This would be favourable to our foreign exchange reserves. It is also noteworthy that this balance of payments surplus would be achieved with a significant increase in investment goods imports.

The fact that in the first four months of this year investment goods imports have increased by as much as 22 percent is indeed a good sign for the long-term economic growth of the country. On the other hand, consumer goods imports have remained static and thereby assisted in bringing the deficit in the trade balance within a more manageable magnitude.

Despite the Central Bank's forecast of a balance of payments surplus, there have been considerable outflows of foreign funds in the Colombo Stock Market and unless there is a reversal of this trend, private investment outflows could affect our balance of payments position and foreign exchange reserves adversely.

The most recent policy of the US government to support the Japanese Yen is indeed good news. There were serious fears that the Japanese economy would slide downwards and affect the Chinese economy and further strain the East Asian and South East Asian economies. There is a ray of hope that there may be a Japanese economic revival.

This may change not only the economic performance of these countries but also the global investor climate. If the investors who ran away from Asian markets were to return, then there is every possibility that many of the East Asian countries would revive.

The US action with respect to Japan underlies the global inter-dependence of modern economies.

The US did not intervene to prop up the Yen because of an altruistic concern. It did so because the depreciation of the Yen would pose a serious threat to American and European economies by the flooding of cheap Japanese goods.

If Japan were to take significant corrective action to correct some of its economic fundamentals, then it would be possible for the country to once again be an impetus to Asian economic revival.

Current trends seem somewhat disadvantageous. There are however some signs that in the latter part of this year these trends would be reversed and even if the country records somewhat lower economic growth this year, that we may be able to catch up in 1999.

Improvements in economic conditions in Asia, consequent on American initiatives to assist the Japanese economy, is one of the significant moves to help the recovery of Asian economies.

Meanwhile Sri Lankan policies must respond to the emerging conditions and not remain passive as global competitive conditions keep changing.

Making most of your money

The local business world is buzzing with new investment instruments/opportunities, tailor-made to be within reach of the general investing public.When equity investments, directly through the share market or indirectly through the unit trusts seem unattractive like right now in a depressed market, investing in debt instruments like the recently issued HNB, Ceylinco and Commercial Bank debentures may seem an attractive alternative to the investing public.

This week 'The Sunday Times Business' (STB) begins a special information cum education column where specialists in their fields talk to us about Investment opportunities in equity and debt markets and how to read and understand macro and micro economic indicators in relation to investments etc.

This column is launched with the specific objective of informing investing public about investment opportunities, their inherent risks and how best to optimize returns on investments/saving.

Each week STB will discuss different investment instruments and macro economic factors that affect the returns on these instruments.

While we regret our inability to discuss each subject at length, we are aware of the lack of general information and knowledge about investment instruments. Our objective is to inform the investing public of the risks and returns of these instruments.

We begin our series with SAVINGS and have the valuable service of a money market specialist, Mangala Boyagoda, Director, DFCC Bank, to guide the readers through the maze of what savings is all about.

Readers are invited to send their queries on each of our topics to the STB Investment Guide. We will forward your queries to our specialists and publish their answers in this column. Suggestions for future topics are also welcome.

Over to you Mr. Boyagoda…

Q: What are savings?

A: Savings are made from a person's income. However, larger part of our income goes for consumption. The rest is used for savings for future use.

Q: How can you save?

A: You can save in two ways, by either cash or investments. By cash we mean that savings confined to the money in bank deposits, i.e. savings, fixed deposits and current accounts.

Investments can be categorised into two groups, i.e. tangible and non-tangible.

Tangible means plant and machinery, vehicles, land and buildings, gold, silver, and other metals.

Non-tangible means treasury bills, Central Bank securities, government loans, commercial paper, debentures, government bonds, corporate bonds, Unit Trusts and shares.

Q: What should an investor consider before choosing an investment instrument?

A: Traditionally, people have confined their savings to bank deposits.

But there are three important factors an investor should take into account before deciding on the best method to save.

They are the credit risk, liquidity and return of the investment.

Any investment decision must be based on these three factors. The bottom line is higher your investment risk, the higher the return you get, lower the risk, lower the return.

Q: How do the banks calculate the interest rate on savings accounts?

A: The calculations are made on the quarterly minimum balance.

For instance, on January 1 you deposit Rs. 100,000 and on March 29 you withdrew Rs. 90,000, then the interest is calculated for the balance Rs. 10,000.

Some banks pay on monthly minimum balance. Other banks pay on the daily balance and credit it to the account monthly on a monthly basis. As a saver it is important that you should know how your bank is calculating your interest before you go and invest your money there.

Q: Is there a limit on how many withdrawals you can make from your savings account?

A: Yes, four withdrawals per month. If you withdraw more than four times the bank will not pay your monthly interest on your account.

Q: Do you mean to say that savers are losing money?

A: It is essential that the banks educate the savers to pick and choose the right decision.

Q: What about withdrawing money from fixed deposits?

A: If you withdraw your money from a fixed deposit account prematurely, the bank would re-pay you at a penal rate; i.e. they would pay less than the fixed deposit rate, normally at the savings rate.

Q: How does Sri Lanka's savings levels fare compared to the rest of Asia?

A: As a country, our savings ratio is 17.3 per cent of GDP(Gross Domestic Product). We have the lowest ratio compared to the rest of Asia. In Malaysia, Thailand, Korea, Indonesia the savings ratio is around 30 per cent to 35 per cent. In India it's around 24 per cent to 25 per cent.

The National Savings Bank (NSB) was set up 25 years ago to increase the savings base in this country. However, since then, the savings level has moved only 3 per cent to .5 per cent in Sri Lanka.

Q: According to analysts, if Sri Lanka is to achieve a 7 per cent GNP growth our savings level should be around 30 per cent of GDP. What methods are required to increase the savings base?

A: Sri Lanka has over Rs. 150 bn in way of savings accounts and more than Rs. 170 bn worth of fixed deposits in the banking system. At present, savings get an interest rate of 6 per cent to 8 per cent. Interest rates on fixed deposits range from 9 per cent to 11 per cent.

Nearly 65 per cent of the savings deposits are with the state-owned banks. If we are to save for the future, we need to evaluate the return we get on our deposits against inflation and see how much we are getting above inflation, which we refer to as real return.

Q: How do we calculate the real return on investments?

A: Real return on investment is calculated by deducting the interest rate from the inflation rate.

For instance if interest rate is 13 per cent and a country's inflation is 10 per cent, then people get a positive return of 3 per cent.

However, if the interest rate is less than inflation then the investor gets a negative return.

Investors should ensure that they get a positive return on their investments. A positive return would raise their living standards and an increase in their purchasing power.

If the return is less, then it erodes the savings, the purchasing power decreases. Down the line they become poor and poorer.

Q: So it is essential that you compare the interest rates with the country's inflation rate?

A: Yes. Always compare it with inflation when taking an investment decision.

Q: What are the other areas that an investor should look into?

A: He must always evaluate the repayment capacity of the borrower or institution that he intends to invest in.

First, you need to give a weightage to your credit risk whether it's high, medium or low.

Second, liquidity is important. An investor should be able to take his money out prematurely.Third, the liquidity of the secondary market needs to be evaluated to assess whether the liquidity is high, medium or low.

Q: Can Sri Lankans convert their savings into other currencies?

A: No. Due to capital control in our exchange rates, Sri Lankans cannot convert their savings to other currencies. So we are compelled to invest in our own country. Hence, the locals must be vigilant enough and invest in the right investment.

Q: What does national savings mean?

A: National savings is the country saving ratio in comparison to its GDP. There are three components that contribute to national savings: government savings, corporate savings and individuals' savings.

Government savings are low, due to the on going civil war. Corporate savings are on the rise due to good corporate results over the last two years. The government reducing the tax burden on the corporate sector has also contributed to the increase of corporate savings. This is a healthy sign. However, individual savings are determined on the purchasing power of the country's individuals.

Q: Why is it important to increase the domestic savings levels?

A: Domestic savings is a key indicator of the purchasing power of the people in a country, so it is important for all to get together and see how best we can increase Sri Lanka's savings levels.

Before embarking on any investment, savers should ensure that they get a low credit risk, high liquidity and a positive return above inflation on their investments.

There is a low awareness of savings levels in Sri Lanka. Our people go for credit risk not for the return they get when compared with inflation.

High-growns pick up

Colombo's tea market finally ended its three-week dismal spell of weakening tea prices as high growns, the worst affected, picked up and showed gains in the wake of better demand and a slight improvement in quality.

Brokers said the slide was halted this week as high growns at the bottom level - which accounts for the bulk of this category being sold - gained by a couple of rupees at different levels.BOPs moved up to Rs.90-95 per kilo from the Rs.80-85 range seen in recent weeks. The fall in tea prices is normally a seasonal phenomenon during the cropping period - when there is a surfeit of not-so-good quality teas - but this year some external factors complicated matters, like a glut of poor, cheap teas in the world market from Kenya, for instance.

Brokers said that hopefully the worst is over and that high growns would maintain current or higher levels in the weeks to come in addition to better quality teas being produced.However some western types in the high grown segment lost Rs.10-20 but brokers said this was not a worrying factor. They said that an improvement in the demand from CIS states also helped to boost high growns while purchases for an old Tunis tender also added to the favourable picture.

But the reverse occurred in the highly successful low grown segment which faltered after weeks of booming prices to record a fall in the range of Rs.5-8 per kilo. Brokers said the drop was partly due to a correction in view of high prices in the range of the 150-rupee levels fetched for these teas earlier.

"Many analysts felt the market was too high for these teas and prices were bound to fall," one broker noted. "The correction was overdue."

There were large quantities of low growns offered for sale last week and much more is expected in following weeks which should further affect price levels. Demand has also fallen for these teas.

Brokers contend that one of the reasons for the slump in demand for low growns is because of the summer in the Middle East when consumers prefer other cold beverages to something hot like tea. The Middle East is Sri Lanka's main market for low grown tea sales.In the rubber markets, trading has been dull and the bounce uneven. "It has been very dull with little or no demand," said broker Ashok Jayawickrema of John Keells brokers.

He said the poor demand and weak conditions would continue in the next few weeks owing to poor overseas demand.

Vanik reports record profit

Vanik Incorporation Limited, the investment bank that tripled in assets last year when it acquired Forbes Ceylon Ltd., and Forbes and Walker Ltd., has reported spectacular growth in profits and turnover in the first quarter of 1998, in its first release of financial results as a mulit-faceted group of companies.

According to its recently published consolidated profit and loss account, Vanik's profit after tax in the three months ending March 31, 1998 was Rs. 88.4 million, up a spectacular 8535 per cent over the corresponding period last year. Gross income during the quarter under review grew 336 percent to Rs. 937.2 million.

Financial services sector comprising companies in the Vanik group before the Forbes acquisition, contributed 50 percent of the turnover, a company release says.

The financial services companies benefited from favourable interest rates, a relatively stable share market and sales of selected investments, release added.

Substantial contributions from Forbes Group companies in the plantations, food products, and tourism sector accounted for the balance 50 percent of group turnover, is a clear illustration of the effective integration of the Forbes Group into Vanik Incorporation, which is now a diversified group of 33 companies.

The group's vastly improved performance is also reflected in the earning per share of Vanik which has jumped to Rs. 3.34 from Rs. 0.01 in the first quarter of 1997, the release said.

Following the release of the first quarter results, Vanik has announced a five per cent interim dividend becoming one of the first quoted companies to declare an interim dividend for 1998. The dividend would be paid to shareholders on June 22.

Vanik has also announced the appointment of two new directors following the resignation of Stephen Potter of Commonwealth Development Corporation (CDC), who has been promoted to take up the post of Regional Director - South East Asia and Naim Farooqui who represents Asian Finance and Investment Corporation Ltd., (AFIC). Steven Enderby, new Country Manager for CDC and Rizan Siddiqi, Director of Risk Management and Operations for AFIC succeeds them.

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