10th October 1999

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Not exciting now, waiting for the big ones, say foreign fund managers

By the Business Editor

"Colombo is not that exciting, but improving," said Ayaz Ibrahim of Indocam Asset Management at the two day Fund Managers' coConnce in Colombo last week.

Ibrahim told an audience of just five foreign fund managers, about 20 foreign stock brokers and a larger representation of local fund managers, stock brokers, corporates and bankers why he was here, despite Colombo not offering him too much, right now.

One of Indocam's funds, the Himalayan Fund is dedicated to Asia and US$ 350 million is dedicated only to the sub-continent

At a market capitalisation of just US$ 1.4 billion, Colombo is interesting only to dedicated funds, emerging market funds, value investors and niche market funds, foreign fund managers and brokers told the Sunday Times Business (STB).

And the demand for Asian dedicated country funds have been declining, so Colombo has to somehow attract regional funds, Ibrahim said.

There is an upside to Colombo: Although returns from Colombo average no more than 6% per annum, it is cheap and interest rates are declining, he noted. There are no big scams here, no capital gains tax, corporates are relatively transparent, the regulatory framework good and the CDS, the best in Asia, Ibrahim said.

Although Colombo fares miserably on the MSCI (Morgan Stanley Capital Index) at just 0.1% which forces some funds to forget the bourse, the forthcoming Sri Lanka Telecom public issue (which may be quoted outside Colombo) could give a massive boost to the market, managers said.

The government is expecting at least US$ 100 million for a 10% stake of SLT to be privatised by next August.

With the telecom giant NTT's backing, the SLT issue is expected to come out at a high premium but prices have not been finalised yet. Bids for the selection of an advisor to manage the issue is now in progress. Brokers estimate that even at US$ 100 million the issue will boost the market by an additional Rs. 7 billion.

Fund managers were also obviously watching the insurance sector liberalisation and the privatisation of the pension funds.

Acting Finance Minister, Ratnasiri Wickremanayake's announcement that state ventures would be listed on the exchange without actually privatising them, generated interest all round.

Said one investment manager, "If at least 10% of the Bank of Ceylon was to be listed without privatising the bank, imagine what it would do to the market?"

Positive signals on the privatisation of huge state ventures and BOI chief, Tilan Wijesinghe's promise that top foreign joint venture companies including P and O, Sri Lankan Airlines, Shell Gas, Asia Power and MAS Holdings could be listed in the future stirred interest.

But some foreign funds questioned the macro economic picture projected by top Treasury and Central Bank officials. For example, Investment Manager, Stewart Ivory and Co., Mr. David Gait was not happy with the government targets for reducing budget deficit to 5% of GDP by 2002. This year to the deficit is off target with the Central Bank predicting a deficit of 8% of GDP.

Lunch table conversation among fund mangers raised some important issues: the country's confidence in the opposition leader, the sincerity of the proposed peace talks amidst information that "there is too much money being made from the war for it to be stopped".

The opposition leader who gave strong signals on the liberalising of capital markets (see excerpts on page 4) did not make the same impression with subsequent outbursts with a newspaper editor of the state media and a stock exchange official.

The opposition leader's threats to inquire into the Air Lanka sale to Emirates and the recent P and O deal when he takes over caused further concern among foreign funds who considered them negative signals for foreign investment of any nature. MD, Indosuez WI Carr Securities Mr. Brian Brown said, "This flip flop does not inspire confidence."

Although BOI chief managed to diffuse concern with clarifications made by Mr. Arjuna Mahendran, representing SG Securities Singapore, on exclusivity clauses referred to by the opposition leader, seeds of doubt were already cast. If the conference was all about selling Colombo to foreign funds, the sellers took a long time about it. Those defending long speeches going into history lessons and complaints about over regulation etc. said that the presenters would have wanted to give the total picture to foreigners.

One fund manager also observed that a top minister took at least five minutes to thank top officials present and to say how pleased he was to be there!

Definitely the art of effective modern public speaking has to be learnt and many people in the audience agreed that the man who sold Colombo best was Himalayan Funds, Ayaz Ibrahim with his sharp, concise talk complete with power point presentation and all. Director General, SEC, Mr. Kumar Paul who honed in on many occasions during the sessions with promises of deregulation and tighter regulation as the case may be, told the STB that the conference was a learning experience and we were still at the very beginning of the curve.

"We wanted to give the total picture the good and the bad, the government and the opposition views and to that extent we succeeded," he said.

Director General, CSE, Mr. Hiran Mendis told STB that they wanted the macro and micro picture disseminated to the foreign and local funds and brokers.

"This was a forum for regulators, economists, opposition and government, to take cognizance of our weaknesses and work from there. As an immediate measure we will follow up on our weaknesses," he said and added that the conference will be an annual event.

As another interesting speaker, Marc Faber of Marc Faber Ltd. said: Yahoo (top US internet company) is worth US$ 46 billion. The world's richest man David Gates is personally worth US$ 100 billion and his company Microsoft is worth US$ 500 billion. In comparison Colombo is worth just US$ 1.4 billion. Obviously Colombo has to become more visible and liquid at least in South Asia to make it exciting for foreign funds and the government and the regulatory machine has to take huge strides to make it happen.

Sri Lanka's first rating agency DCR (Duff and Phelps Credit Rating Co.) kicked off last week with a presentation to the corporate world, making history in the domestic debt market.

"After the United States made rating mandatory for corporate bonds, the debt market really took off," said DCR's Executive Vice President and General Consel based in Chicago, Ernest Elsner at a media briefing to introduce the agency to Colombo. "Sixty-five per cent of all capital is raised in the debt markets in the United States," he said. "The balance is mainly bank borrowings," he added.

DCR together with other US based rating agencies, like Standard and Poor and Moodys have an international presence but is particularly strong in the emerging markets with more international offices than any other agency, their profile says.

The local company has the partnership of International Finance Corporation (IFC),

CEO, DCR Colombo, Ravi Abeysuriya, said at the media briefing last week that his main concern now is to bring the cost of capital down by rating bonds and to create proper awareness of the role of a rating agency.

The Colombo Stock Exchange has announced that it will list bonds debentures on a separate board and has also said that companies not listed on the stock (equity) board can list debt on the new board. The CSE has also announced that it is not mandatory to have a rating to list corporate bonds, but that a bank guarantee could be accepted as an alternative.

Abeysuriya said that already few corporates have approached them for rating but initially their rating will not be announced publicly, unless the company wishes to. He also said that unsolicited ratings would not be done.

DCR also said that they have been approached by the government for a sovereign rating at a future date but that it would initially commence a shadow rating with the assistance of the government.

Ratings would be cheap at 0.2% to 0.4% of the cost of the issue, Abeysuriya said.

While DCR presence in Colombo is widely regarded as a positive signal, some debt market specialists had some misgivings about DCR's ratings in the context of debt regulation here.

If rating is not mandatory and the CSE will accept listings without a rating a company with a bad profile will not go for a rating before they list their debt. Who wants to pay to get a poor rating if its not mandatory? they asked."

Only if and when rating of debt is made mandatory as it is in most developed markets will the real effect of rating be seen , they said.

In brief

Public float

The Colombo Stock Exchange (CSE) has given a two-year grace period to listed companies to increase their public float.

A CSE survey has shown that 25% of the listed companies do not maintain their required public float, CSE Director General, Hiran Mendis said.

"We will give companies time to release more shares to the public," he said. At present, companies listed on the main board requires a minimum 25% public float, while those on the secondary board are required to keep minimum 10% in public hands.

In 1998, trading value as a percentage of market capitalisation, which is an indicator of liquidity was 15.5% - one of the lowest in the region. Mendis urged listed companies to increase public float in order to increase liquidity, to create a dynamic secondary market, which in turn will encourage primary market activities.

Commercial Bank

Commercial Bank plans to open a few branches in the SAARC region beginning with India and Maldives, Managing Director, Amitha Gooneratne said.

On the domestic front, the bank will step up its branch expansion network complemented by an advanced IT system. A subsidiary to deal in Central Bank securities will be formed later this year and the bank will launch Mastercard with direct affiliation with Mastercard International.


Hatton National Bank (HNB) has applied for Reserve Bank of India's permission to open a branch in Madras, DGM (Strategic Development), Nihal Kekulawela said. Presently HNB has an office in Pakistan.

HNB recently opened its 100 branch, will slow down its branch expansion programme over the next few years.

"We want to open around 10-12 branches over the next few years. With HNB increasingly depending on IT systems, we will curtail our staff recruitment programme over the next few years," he said.

Insurance doors open to foreigners

By Mel Gunasekera

The government will open the door to foreigners in the insurance industry within the first quarter of next year, a top PERC official said.

"With the new insurance bill to be passed in parliment soon, we will permit foreign ownership upto 49 percent in insurance companies in line with similar regulation in the banking sector, PERC Director General, Mano Tittawella told The Sunday Times Business.

Parliament is also expected to take up the much awaited draft insurance bill in December or next January. Tittawella said that the bill may be pushed to January because of the budget deficit.

At present, the insurance industry is closed to foreigners - a move, the industry says prevents international technical expertise being transferred. Industry analysts say that foreign involvement facilitates sound technical collaboration, improves quality and paves the way to raise insurance penetration levels in the country.

The government hopes to offer 39 per cent of NIC to a strategic investor and recently called for applicants to select a financial advisory group to assist in the privatisation process.

The financial advisory group should have extensive re-structuring and advisory experience in the insurance sector and be associated actuarial, legal and audit/accounting expertise, PERC said.

In addition to advising the government on NIC's restructure, the financial advisory group should also possess the ability to market this transaction and assist the government to select a reputed and suitable strategic investor.

NIC was started with the hope of eventually providing reinsurance services to the local insurance companies. Reinsurance is a specialised business and its commercial viability depends on underwriting trends. Setting up such an operation requires large volumes of business and hefty capital.

Converting NIC into a specialist reinsurer has been on the cards, but the government has been rather silent on the whole issue lately, industry sources said.

NIC is already engaged in reinsurance of certain classes of business on a limited scale, NDBS research analyst, Rizwan Nayeem said. Given the significant amount of reinsurance premiums paid overseas, it will take time for NIC to gain advantage over foreign re-insurers. NIC's entrance will eventually reduce the overall re-insurance bill of the industry which was Rs. 2.9 bn in 1998 against a total gross written premiums of Rs. 11.8 bn, Nayeem said.

Unlike its sister company Sri Lanka Insurance Corporation, NIC controls around 5 per cent of the life insurance market and 6 per cent of the general insurance market as at end 1998.

Freight rates up

By Dinali Goonawardena

Shipping lines last week increased freight rates by US $300 per TEU from Colombo to UK, Europe and Scandinavia, industry sources said.

"Rates have been increased at very short notice to shippers and with no reason given. This violates the memorandum of understanding between the Ceylon Association of Shipping Agents (CASA) and shippers," Chairman, Sri Lanka Shippers Council, Rohan Masakorale told The Sunday Times Business (STB).

"We are unable to give our customers adequate notice of rate increases and include these increases in our negotiations," he said.

The India Pakistan Bangladesh Ceylon Conference increased rates by US $300 from Colombo to UK, Europe and Scandinavia and notified shippers through a newspaper advertisement on September 10. The rate increase became effective October 1. "Shipping alliances used to notify shippers three months in advance but shipowners are losing money and they can not wait for too long to implement rate changes," Chairman, CASA, Pushpa Amarasekera told STB.

"Sri Lankan exporters are feeling the bite as rates are increased. Export growth is affected and low value products are being wiped out of the world market as freight charges surpass the value of goods," Mr Masakorale said.

However Amarasekera claimed this was merely a rate restoration. "Rates from Colombo to Europe were as high as US $1200 per TEU four years ago and subsequently fell to around US$600 per TEU. The rate increase has only brought rates up to US$850 to US$1000 per TEU," he said. Amarasekera said 90 per cent of container line operators from Colombo were losing money.

Budget deficit off target again

Sri Lanka's budget deficit will be off-target once again this year, with the Central Bank predicting a deficit of eight percent of GDP this year, Central Bank's Director Economic Research, R A Jayatissa told a fund managers' meeting last week.

The budget deficit was 9.2 percent of GDP last year and the government was hoping to lower it to around to six percent this year.

While the rising defence bill was responsible for last year's ballooning deficit, economic analysts say this year's defence bill will be responsible for a higher-than expected deficit.

The Appropriation Bill presented in parliament last week said the 1999 defence budget topped Rs. 52.2 bn overshooting the estimated Rs. 47 bn for 1999.

A shortfall in revenue collection from GST and the impact on debt services due to enhanced borrowing in the last quarter of 1998 are also responsible for the revised deficit targets, Executive Director Institute of Policy Studies, Dr. Saman Kelegama said.

The debt service ratio is expected to be 11.6 per cent this year, higher than 11 per cent recorded last year, Jayatissa said, at the same forum.

Kelegama said the targeted deficit was financiable from the available resources in the domestic markets without creating pressure on interest rates.

However, he warned that the government's expenditure might rise ahead of next year's presidential and parliamentary elections.

The current account deficit was expected to be five percent of GDP in 1999, higher than the 1.8 percent last year.

Jayatissa predicted a four percent growth in 1999, but said exports will decline to three percent while imports will rise by five percent.

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