21st February 1999
By Mel Gunasekera
The International Fi nance Corporation (IFC) will set up a few investment banks here with local collaboration, to kick-start the secondary market for corporate bonds.
"We are talking with some institutions to set up an investment banking operation that would deal with government and corporate debt," IFC's Country Co-ordinator, Sri Lanka, Sanjiva Senanayake told The Sunday Times Business.
Proposals from two leading financial institutions have already been forwarded to the local office.
The investment banks would work closely with corporate issuers in issuing, listing , buying and selling debt. This would also apply to the government debt as well, he said. The proposed rating agency Doff and Phelps Credit Rating Lanka Ltd. is expected to rate all listed bonds, promoting secondary market operations.
Secondary market activities for government debt is in the process of being re-structured with the setting up of subsidiaries for primary dealership.
Debt market analysts say the Central Bank would eventually move out of secondary market activities, leaving it to the dedicated primary dealers.
For the first time, the possibility of having corporate entities dealing solely with debt would then become a reality.
The corporate debt market is still in its infancy with only a few institutions dealing with secondary market debt. After years of inactivity, there was a surge of public debt issues last year, with a number of commercial banks leading the way.
The issues come in the wake of attempts by both the government and Colombo Stock Exchange to boost the debt side of our capital markets.
It is no accident that local debt markets are undeveloped. While the equity market has been given a plethora of incentives over the years, it was only in the last budget that the debt market was given a few incentives. But market analysts say a total liberalisation of debt is necessary for secondary level trading.
With these issues in mind, the IFC took a keen interest to help set up the first credit rating agency in Sri Lanka, Mr. Senanayake said.
IFC, the private sector investment arm of the World Bank, opened an office in Colombo last June to promote investments here.
It is also part of a strategic decision taken to develop IFC's regional operational presence, to get closer to the marketplace and establish closer contact with customers.
A high-powered team of IFC officials were in Colombo last week to review the progress, explore areas for future investments and have discussions with senior government officials including Deputy Finance Minister Prof. G L Pieris and Central Bank Governor A S Jayawardena.
The team led by IFC's Vice President Investment Operations, Jemal-Ud-Din Kassum also included Mr. Rashad Kaldany (Director South and South East Asia), Mr. Eric Cruikshank (Manager South and South East Asia) and Ms. Usha Rao-Monari (Manager South and South East Asia).
The team was also here to sign the agreement with John Keells and Central Finance to set up the Nation's Trust Bank of which IFC has a 15 per cent stake.
Mr. Kassum told the media last week that they were confident of Sri Lanka's long term potential and "would be tripling IFC's investments from the present US$ 40 mn within the next six to nine months".
IFC's present investments are in financial services, hotel and tourism, power and infrastructure sectors.
Further investments are expected in these areas as well as new sectors
such as financial markets, software development, manufacturing and service
The crisis hit local rubber industry dropped to a low ebb when crepe producers were forced to produce rubber at a loss of Rs. 28 a kilo in the past few weeks.
No 1 quality latex crepe is selling around Rs. 45 per kilo, while the all-inclusive cost of production averages Rs. 70. With a net sale average (NSA) of around Rs. 42 per kilo rubber is being produced in Sri Lanka at a loss of Rs. 28 per kilo, Major Malcolm Peiris Free Lanka Management Co., told the Sunday Times Business.
Meanwhile The International Natural Rubber Organisation is on the brink of collapse after last week's announcement that two of its key members are pulling out.
Worldwide prices have also plunged with latex crepes, which sold at Rs. 75 per kilo in March 1998 declining since mid-1998.
Since July 1998 prices declined to Rs. 65, September Rs. 52, November Rs. 50, January 1999 Rs. 47 and now Rs. 43.
The rubber industry was dealt several body blows when a series of global events affected prices.
Rubber prices fell sharply when largest producers Thailand, Indonesia and Malaysia, depreciated their currencies.
Western lobbies about skin allergies from natural crepe have resulted in the medical profession refusing to use natural surgical gloves.
On top of this Regional Plantation Companies (RPC) are incurring heavy losses in rubber due to extremely poor demand.
"This has adversely affected the liquidity position of plantation companies exposed to rubber and many companies are compelled to curtail expenditure, which in the long-term will be detrimental to the industry," Major Peiris said.
Planters Association Secretary General, S.K. Seneviratne said, many rubber smallholders sell their field latex to plantation company factories for processing. Current prices paid to them, which are based on market prices, are unremunerative and some of the smallholders have stopped tapping.
There are also reports that some of the smallholders are felling trees and selling them for firewood, he said.
Since the prevailing low prices will have serious repercussions on the long-term viability of the natural rubber industry in Sri Lanka, the Planters' Association together with the Colombo Rubber Traders' Association are appealing to the Finance Ministry and the Plantation Ministry for some relief to safeguard the industry from decline.
The proposals being put forward include: to consider a three year moratorium on the lease rental in respect of the rubber hectarage; GST exemption from major imports to this industry, such as packing materials, chemicals, power, agricultural equipment and machinery; and to consider the eligibility to qualify for investment tax relief on capital expenditure incurred on replanting.
The natural rubber industry has also been hit by the protein allergy problem. The lobby on the protein allergy problem began in USA about three years ago and is now spreading to Europe. The rubber producers feel it's a concerted effort by USA to destroy the natural rubber producing countries.
Nearly 60 per cent of natural rubber is used to produce tyres, while 20 per cent is used for gloves and the balance to manufacture condoms, balloons, rubber bands for local as well as for export.
Sri Lanka consumes about 40 per cent of local rubber annually. With
an annual growth of about 3 per cent Sri Lanka lags behind other natural
rubber producing countries which usually notches an average 4.3 per cent
Plantation companies supplying timber to the State Timber Corporation are complaining that they are losing millions of rupees due to a recent Presidential directive temporarily banning the felling of timber on state land, the Planters' Association said.
In view of this directive, the Forest Department is not clear on whether this embargo extends to the harvesting of trees on lands leased by the state to the Regional Plantation Companies (RPC), Planters' Association Secretary General, S.K. Seneviratne said.
RPCs complain that from the time plantations were handed over to them many plantation companies have disposed of mature eucalyptus trees that are in excess to the State Timber Corporation for use in the conversion to railway sleepers for the CGR and transmission poles for the CEB.
Mr. Seneviratne said the RPC's articles of association (approved by the state) have categorically granted among other provisions, the right to harvest trees on lands leased out to these companies.
Accordingly the Planters' Association is of the view that the RPCs have received approval for their forest harvesting and planting should not be hampered by the embargo.
"The embargo has very serious implications as some of the privatised plantation companies have entered into contracts with the State Timber Corporation to supply railway sleepers and electric posts," he said.
However, Director Plantation Monitoring Division, Malcolm Talwatte said the Plantation Ministry is working on removing the ban and was confident the matter would be resolved soon.
The Sunday Times Business learns that a three-member presidential committee
has been appointed to look into this matter and their report should be
submitted within the next two weeks.
Politics has it
The No,2 slot in the watchdog that watches over securities changing hands is vacant these days and fifteen persons were vying for the job. But it was felt that someone from within its own ranks and with 'good' political credentials could be better suited, though he may be lesser qualified. So, the academic one who also deputises in financial matters has made his thinking known on the matter and selection will be on those lines, we hear.
Rooms by class
Tourism is not th0e high turnover industry it once was and many hoteliers
are on the lookout for ways and means to boost business. One solution is
to slash room rates but this would mean undercutting. So, one hotelier
is planning a different strategy: categorise all rooms into three main
classes - luxury, business and economy - and charge different rates. The
plan is to introduce this concept by the end of this year......
The aggregates of the 12-month trade figures just released, hides a lot. The apparent good news: a trade deficit which fell 1.2% in US$ terms in a year of intense South East Asian Competition. The apparent bad news: a dramatic slowdown in exports with growth in total exports slowing to just 1.9% compared to 13.3% in 1997.
And though a growth in imports of just 0.9%, was positive in terms of the trade deficit, at first glance it is also worrying in it being the typical signs of a slowing economy. But there is more in the details than in these aggregates.
Agricultural exports saw a growth of 2.6%. Tea performed well in the first half but growth of 8.4% for the full year masks a very poor performance in the second, as growth in the first half was 17.4%.
The collapse in Tea prices following the increased Kenyan crop and the Russian crisis was the cause and it seems unlikely that there could be a turnaround this year. Minor agricultural exports did well for the year, rising to 17.7% but again the better half was the first, with growth being as high as 33% at end June.
Coconut and Rubber were not spared with falls of 20% and 44% respectively but for these two commodities the fall in the first half was greater, possibly signalling an improvement this year.
Falling prices for our commodity exports was in a context of rising global deflationary pressure especially on commodities. Unusually for a third world economy, the overall effect netted more towards Sri Lanka, as prices for key imports collapsed. Falling prices of key imports such as wheat, sugar, and petroleum, aided considerably in the easing of the trade deficit and the effect was reflected in a fall in imports of both consumer food items and intermediate goods imports. It also helped in containing inflation and the budget deficit.
Thus the flat overall import number was much more a reflection of falling import prices, than the slowdown in the economy. In fact an indicator of consumer demand, imports of consumer goods other than food rose by a robust 20.5% led by a strong growth in imports of motor cars and cycles. The investment picture as reflected in the trade statistics appeared strong with a growth of 11.5% in imports of investment goods.
Apart from falling commodity prices slack import growth was also a reflection of increased value addition in the garments industry. Imports of textiles fell to 56.5% of Garment exports compared to 60.8% the previous year continuing a very favourable trend. The garment industries weakness has been the low value addition within Sri Lanka, with net export proceeds being much less than the gross export of garments due to the high import cost of imported textiles.Some years back imports came to 70% of garments exported. The fall in the ratio to 56% from 70% implies a net gain to the country in excess of US$ 300 million. This figure is in excess of the total of all agricultural exports excluding tea and it approaches almost half the value of tea exports.
Another expression of the importance of this development is that actual net earnings from garments appear to have grown by 20% in 1998 compared to the 8.2% reflected by the unadjusted garments exports number.
Yet despite this strong performance in the garments exports, East Asian competition had a serious effect on other industrial exports which fell by 5%. The rubber and leather goods category and food beverage export categories showed some resilience. However the devaluations in south East Asia left many exporters in a situation that they just could not compete with the prices offered by competitors in the east. Mineral and Gem exports also took a severe beating in 1998 with their exposure to markets in East Asia.
Where does this leave us for 1999 and what would this mean for the rupee? The appreciation in East Asian currencies from mid 1998 is likely to afford some respite to some of our exporters, with the perceived loss in competitiveness of the rupee being less dramatic than it was in mid 1998.With a continuation of the current favourable trend in import price, the slow growth in exports is unlikely to have significant balance of payments implications. A steady growth in worker remittances has also been recorded in 1998 and provided a boost to the current account and a recent recovery in tourism could boost 1999 invisibles.
With a closed capital account, and a steady trade deficit the government has considerable leverage in choosing the direction of the exchange rate. And it seems that with elections coming up the devaluation of the rupee is unlikely to be any more than in 1998 as devaluations have historically had a strong impact on the cost of living.
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