Sri Lanka Equity News: January 2016

Friday, January 29, 2016

Fitch Affirms SriLankan Airlines' Government Guaranteed Bonds at 'BB-'

Fitch Ratings has affirmed the rating on SriLankan Airlines Limited’s (SLA) US dollar-denominated government guaranteed bonds at ‘BB-.

KEY RATING DRIVERS
The national carrier’s bonds are rated at the same level as SLA’s parent, the state of Sri Lanka, due to the unconditional and irrevocable guarantee of principal and interest of the notes provided by government. The state held 99.5% of SLA through direct and indirect holdings at end-2015.
SLA is the national airline of Sri Lanka, and has a 72% share of the total airline seating capacity of the country. The government has identified tourism as a key economic growth driver in the medium term; and the company is well positioned to capture the benefits of this trend as the leading airline in Sri Lanka.
RATING SENSITIVITIES
Negative: Developments that may, individually or collectively, lead to negative rating action include: – Negative rating action on the Sri Lankan sovereign Positive: Developments that may, individually or collectively, lead to positive rating action include: – Positive rating action on the Sri Lankan sovereign.

Colombo inflation drops below 1-pct in January

Jan 29, 2016 (LBO) – Consumer prices in Sri Lanka's capital Colombo has dropped to 0.9 percent in January 2016 from a year earlier, down from 2.8 percent in December 2015 with the inflation index dropping 0.2 percent in the month, the state statistics office said.
The CCPI for all items for the month of January 2016 was 184.9 recording a decrease of 0.16 percent compared to the previous month for which the index was 185.2
Year on year inflation of Food Group has decreased from 4.2 percent in December 2015 to ‐ 0.2 percent in January 2016 while Non‐food Group has increased by 1.5 percent to 2.0 percent during this period.
The overall rate of inflation as measured by CCPI is 0.9 percent in January 2016 and inflation calculated for December 2015 was 2.8 percent.
The month on month index point decrease was due to the decrease of food items by 0.27 percent and increase of non‐food items by 0.10 percent, the state statistics office said.

Sri Lanka deepening trade agreements, exploring China FTA: Malik

Jan 29, 2016 (LBO) – Sri Lanka is deepening its free trade agreements with India and Pakistan, and negotiating an FTA with China, Malik Samarawickrama, minister of development strategies and international trade, said.
“PM Modi’s ‘Make in India’ strategy will create opportunities for linking into new and expanding value chains in domestic as well as multinational companies operating in India,” Samarawickrama said.
He was speaking at the Invest in East 2016 International Investment Promotion Forum.
“In order to take advantage of these changes in the overall landscape, which have improved the prospects for capitalizing on our proximity to India, we are planning to deepen and widen bilateral relations through the Indo – Lanka Economic and Technology Co-operation Agreement.”
The intention is to sign the agreement by mid-2016, he said.
Sri Lanka is also deepening the FTA with Pakistan and negotiating a FTA with China, he added.
“With preferential access to both the Indian and Pakistani markets, Sri Lanka can act as a bridge for investors from both countries to penetrate each other’s markets.”
“Indian investors, who wish to have preferential access to Central Asia can also locate in Sri Lanka and have access to those markets through Pakistan, which has a regional cooperation agreement with those countries.”
The agreements with China, India and Pakistan will give Sri Lanka preferential access to a market of almost 3 billion people. One could argue that this is our ‘Unique Selling Point,’ he said.
Merits of seeking to join the Trans Pacific Partnership (TPP) is also being explored, while priority has been attached to lifting the EU fisheries ban and the restoration of GSP+.
“We are making encouraging progress on these fronts. Our government is very conscious that we need development, which is inclusive and regionally balanced for it to be sustainable and touch the lives of all our people.”
The Western region megapolis programme will be supplemented by a regionally balanced urban upliftment program, he said. This will be centered on five second-tier cities around the country.
“We also have plans for 45 new Industrial Parks around the country, which will be developed and managed by the private sector.”
“In the Eastern Province, a Master Plan is being developed for Trincomalee. It will include an economic zone, a tourist area and development around one of the great natural harbours of the world. Plans are already on the way to build two power plants and an economic zone.”
“In addition, developments around the Hambantota Port and Mattala Airport also provide opportunities for investment in light and heavy engineering; logistics and airline maintenance, repair and overhaul.”
Sri Lanka has enormous potential as a tourism destination, he added. Other areas, which have significant potential include high value added apparel, value added and blended tea, rubber gloves, rubber tyres, ICT-BPM, shipping and logistics and minerals, particularly, silica and quartz, Samarawickrama said.

John Keells Holdings 9-month net up 6-pct, 3Q net down

Jan 29, 2016 (LBO) – Sri Lanka’s diversified John Keells Holdings said group net profit grew six percent in the nine months to December despite a weaker performance in transportation, leisure, information technology and plantation sectors in the third quarter.
Net profit grew six percent to 10.6 billion rupees in the nine months to December, but net profit was down six percent to 4.4 billion rupees in the third quarter.
The Transportation sector profit before tax (PBT) of 464 million rupees in the third quarter is a decrease of 32 per cent over the same period last year.
“The decline in (transportation) profitability is mainly attributable to the lower contribution from the Group’s Bunkering business and to a lesser extent the Ports business.”
“The Port of Colombo witnessed a year on year growth in excess of 5 per cent overall, which underscores the potential and augurs well for capacity led growth.”
The Bunkering business maintained its market share during the quarter under review. However, revenue and profitability were significantly impacted due to the steep reduction in global oil prices where inventory purchased at higher prices had to be marketed at prevailing market prices, the company said.
The Leisure industry group PBT of 1.22 billion rupees in the third quarter of 2015/16 was a decrease of 13 per cent over the same period last year.
“The City Hotels sector, with the exception of Cinnamon Red, witnessed a decrease in occupancies against the corresponding period of the previous year due to the increased supply of room inventory within Colombo and the lower volumes generated through the corporate and MICE segments.”
The Consumer Foods and Retail industry group PBT grew 86 percent to 1.08 billion rupees in the third quarter over the same period last year.
“Both the Frozen Confectionery and the Beverage businesses recorded encouraging results compared to the corresponding period of the previous financial year.”
The Property industry group PBT grew 48 percent to 558 million rupees in the third quarter over the same period last year.
“The improved performance is mainly on account of the revenue recognised, post the final tranches received as at 31 December 2015, at the “7th Sense” residential development project.”
“The construction of Cinnamon Life is in progress with pre-sales of both the residential and commercial space continuing to be encouraging. However, the project has encountered some unforeseen delays and as such, the construction of Cinnamon Life is now expected to be completed in the calendar year 2019.”
John Keells Holdings said the Information Technology industry group PBT of 92 million rupees in the third quarter was a 24 percent decrease over the same period last year.
“The Office Automation business, which is the largest contributor to profits, witnessed a decline in its performance mainly due to lower margins on account of the depreciation of the Rupee, despite recording a growth in volumes across its three main product segments.”
The Financial Services industry group PBT of 1.09 billion rupees in the third quarter of 2015/16 is a decline of 1 per cent over the third quarter of the previous financial year.
“The decline is due to Union Assurance PLC treating the post segregated general insurance company as an associate following the sale of a 78 per cent stake in January 2015.”
The Plantation Services sector recorded a PBT of 796 million rupees in the third quarter of 2015/16, which is a decrease of 29 per cent over the third quarter of the previous financial year.
“The decline in PBT is mainly attributable to the capital gain of 610 million rupees recorded in the third quarter of the previous financial year. The performance of the Plantation Services sector was negatively impacted as tea prices continued to remain depressed.”

Thursday, January 28, 2016

Government should engage with public on FTAs: Deshal De Mel

Jan 28, 2016 (LBO) – Sri Lanka’s government needs to engage with the public when negotiating Free Trade Agreements with other countries, economist Deshal De Mel said.
De Mel on his blog stated that local manufacturing and services enterprises may have disruptive impacts through the Free Trade Agreement with China.
“It is curious that there is almost no public debate about the FTA that is being negotiated with China, which has an infinitely higher probability of having disruptive impacts on local manufacturing and services enterprises,” De Mel said.
He has also shared some facts about Trade in Services agreements that would apply to CEPA, ETCA, or any such agreement.
Full text of the blog post is reproduced below.
The Four Letter Word (CEPA)
Over the last 10 years I have disliked engaging in debates about the Indo-Lanka CEPA (now ETCA) because these are almost always characterised by non-rational, emotional, and misinformed views. The fact that successive governments have kept this agreement shrouded in secrecy is largely to blame for this. I never understood the government’s reluctance to engage the public and I do hope this changes this time around. The drama relating to CEPA is also partly due to Sri Lanka’s and Sri Lankans’ thorny relationship with India. For instance, it is curious that there is almost no public debate about the Free Trade Agreement that is being negotiated with China, which has an infinitely higher probability of having disruptive impacts on local manufacturing and services enterprises.
CEPA is (once again) in the news cycle and it is an opportune time to share some thoughts. I was involved in the negotiations and drafting of the CEPA between 2005-2008, during which time the Institute of Policy Studies, where I was employed, was assisting the Government of Sri Lanka in negotiating the Services Chapter of the agreement. These views are however my own. I have no involvement in the current incarnation of CEPA (ETCA), but what I hope to do is to share some facts about Trade in Services agreements that would apply to CEPA, ETCA, or any such agreement.
· Why deepen integration with the Indian economy? – Sri Lanka has a relatively small market of around US$ 75 billion (that’s around Apple’s annual gross profit) and population of 20 million. An economy of this nature cannot grow in a sustainable manner if it has an inward focus. By deepening integration with a market like India, we can create a stronger incentive to attract FDI hoping to tap into the broader South Asian market and also to create avenues for local companies to expand and achieve scale. The two countries at present have an agreement that covers trade in goods, but services account for 60% of Sri Lankan GDP, and it makes sense to allow the benefits of competition and liberalization to reach that part of the economy as well. In an ideal world, we would have a multilateral or at least regional trade agreement that creates more substantive liberalization, however given the failings of the WTO, the next most logical market to tap into is the large neighbouring market that is India.
· Why liberalise? – Competition can create significant benefits for economic growth and development. It creates incentives for industry to innovate and to improve productivity so as to remain competitive. Higher productivity in the long term can translate into higher real wages. Competition creates benefits for consumers in terms of better prices, gives consumers the benefit of choice, and creates incentives to improve service quality to remain competitive. Many incumbent industries are weary of competition – and would argue that there is no need for it. However, there is very little consultation of consumer interest since consumers are large dispersed groups that are usually poorly organized and fail to articulate their collective interest.
· What about regulation? – Few would argue that markets function perfectly – markets fail on several accounts such as imperfect information, negative externalities and so on. Therefore there is a clear case for smart, unobtrusive regulation that can help markets work more effectively. The good news is that agreements on trade in services allow regulations to remain. With regard to mode 4 of trade in services (movement of natural persons), any workers that enter a country using such an agreement would still have to comply with all national regulations including immigration regulations, the regulations and quality assurance processes stipulated by the relevant industry or professional body. If they fail to meet such criteria they would not be able to gain access to the market.
· Won’t Sri Lanka’s market get flooded? – Unlike agreements on trade in goods, agreements on trade in services are negotiated on a ‘positive list’ basis. For Free Trade Agreements (FTAs) involving goods a negative list approach is usually adopted where other than products specified in a ‘negative list’, every other product is liberalized. For trade in services the opposite applies. The liberalizing country can choose exactly what sector or sub-sector it wants to liberalize, and everything else remains at status quo. Therefore the extent of liberalization is entirely up to us.
· What about dislocations within the sectors that are liberalized? – When making commitments to liberalise a services sector, a country again has the flexibility to state what exactly it wishes to liberalise and what it wishes to exclude from liberalization. For instance, a country could place a numerical limit on the number of foreign employees allowed, and also stipulate a minimal level of educational/professional qualification for entry and so on. It can also limit its commitments to a narrow sub-sector of a broader sector where the economy would benefit from foreign investment, labour, or technology. Therefore a country can tailor its liberalization commitments to meet its economic priorities.
· What then are the risks? – Since we have flexibility in tailoring commitments to our needs, the risk we undergo is the risk of making a mistake due to inadequate data or other lack of information. There is also a risk of mal-regulation where the capacity of our regulatory bodies maybe inadequate to address instances of market failure. Usually such trade in services agreements leave a provision for adjusting commitments after a 3 year period (could be negotiated) to account for such learnings.
· Doesn’t trade in services already take place? – Yes, we have foreign investment in service providers (Dialog, Etisalat, HSBC, Citi Bank, AIA Insurance, KPMG, E&Y, Taj Hotels and many more), and we have foreign employees working in foreign and local service sector companies. What a Trade in Services Agreement does is it creates an institutional framework within which trade in services can occur. At present, it is a unilateral approach where at any time the rules of the game can be changed by either party. An agreement creates a rule based framework in which this trade occurs. When two countries of asymmetric size are engaged in economic exchange, it is in the interest of the smaller, relatively less powerful country to operate within a rule based framework, rather than in a (relative) legal vacuum. And in a nut-shell that is what CEPA is; it is a framework of rules to govern trade between India and Sri Lanka.

Chances of March Fed rate hike drop after FOMC statement

Jan 28, 2016 (LBO) – The chances of a U.S. Fed rate hike in March dimmed after a FOMC policy statement on Wednesday acknowledged global economic risks, as analysts interpreted the carefully worded statement.
The FOMC decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent after a two-day policy meeting.
“The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook,” the statement said.
The probability of a March rate hike fell to 25 percent based on CME Fed Fund Futures. The probability of a June rate hike is now priced at 46 percent.
“Information received since the Federal Open Market Committee met in December suggests that labor market conditions improved further even as economic growth slowed late last year.”
“Household spending and business fixed investment have been increasing at moderate rates in recent months, and the housing sector has improved further; however, net exports have been soft and inventory investment slowed,”
Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports, the statement added.
U.S. stocks retreated after the announcement with the Nasdaq down 2.2 percent, and S&P 500 down 1.1 percent.

Sri Lanka foreign reserves estimated at USD7.3bln end Dec: CB

Jan 28, 2016 (LBO) – Sri Lanka’s gross official reserves were estimated at 7.3 billion US dollars by end December 2015, the Central Bank said.

The figure remained unchanged from end November equivalent to 4.6 months of imports, while total foreign assets amounted to 9.1 billion US dollars, equivalent to 5.7 months of imports.

During the year to November, the overall BOP is estimated to have recorded a deficit of 1,274.2 million US dollars, compared to a surplus of 1,628.3 million US dollars during the corresponding period of 2014.

Foreign investments in the Colombo Stock Exchange during 2015 recorded a net inflow of four million US dollars, reflecting net outflows from the secondary market amounting to 32.3 million US dollars and inflows to the primary market amounting to 36.3 million US dollars.

The rupee has depreciated against the US dollar by 9.03 percent during 2015. During 2016 up to 27 January 2016, the rupee has appreciated by 0.1 percent against the US dollar.

Based on cross currency exchange rate movements, the Sri Lankan rupee has appreciated against the euro by 0.7 percent, the Australian dollar by 3.8 per cent and the pound sterling by 3.5 per cent and the Indian rupee by 2.2 per cent.

The rupee has depreciated against the Japanese yen by 1.8 percent during this period.

Foreign investments in the government securities market recorded a net outflow of 1,093.4 million US dollars during 2015 compared to a net outflow of 113.1 million US dollars during 2014.

During the first eleven months of 2015, the net long term loan inflows to the Government amounted to 179.0 million US dollars.

Sri Lanka successfully issued the ninth international sovereign bond of 1,500 million US dollars on 28 October 2015 and the proceeds have been received in the first week of November 2015.

Sri Lanka trade deficit widens 1 pct in 11 months to Nov

Jan 28, 2016 (LBO) Sri Lanka’s trade deficit for the first eleven months of 2015 marginally increased by one percent to 7.6 billion dollars, the central bank said.

Worker remittances declined 7.2 percent to 574.5 million dollars in November 2015, year-on-year, although cumulative inflow from remittances was up marginal 0.8 per cent to 6.4 billion during the first eleven months of 2015.

“The comparatively low growth in workers’ remittances during this period could be attributed to the drop in income in oil exporting Middle Eastern countries with decline in world oil prices,” a statement said.

BOP is estimated to have recorded a deficit of 1.3 billion dollars during the year to November, compared with a surplus of 1.6 billion during the corresponding period of 2014.

In terms of trade, earnings from exports declined by 9.3 percent to 835 million dollars in November 2015, the central bank said.

“This was mainly due to the declines recorded in tea, rubber products, petroleum products and garments exports. The currency depreciation and geo-political development, particularly in the Middle East countries caused continued decline in demand for tea,” the central bank said.

Accordingly export earnings from tea declined significantly by 21.1 per cent, year-on-year, in November 2015.

The average export price of tea remained unchanged from the previous month at US dollar 4.11 per kilogram though down from US dollars 4.75 per kilogram recorded in November 2014.

Earnings from rubber product exports continued to weaken and recorded a 19.5 per cent decline, year-on-year, in November. Petroleum product exports recorded a 40.5 per cent decline as a result of the lower prices for bunkering and aviation fuel, despite bunkering quantity increased by 32.9 per cent, year-on-year, in November 2015.

Export earnings from garments, which contribute nearly 46 per cent to the total exports, declined by 2.7 per cent in November 2015, reflecting low exports to EU markets.

However, earnings from spice exports continuously recorded a growth so far this year. Adding to that, sub categories of gems and edible nuts showed growth in the month of November 2015.

On a cumulative basis, earnings from exports declined by 4.4 per cent to US dollars 9,679 million during the first eleven months of 2015, reflecting the significant decline in earnings from tea, rubber products and sea food exports.

In line with the substantial decline in international oil prices, expenditure on imports in November 2015 continued to decline by 11.0 per cent, year on year, to US dollars 1,465 million, the lowest monthly import expenditure in 2015.

“Despite the increase in import expenditures on consumer goods and investment goods, a substantial reduction in import expenditure on intermediate goods led to this decline.”

The drop in international oil prices in November 2015 resulted in a 27.9 per cent decline in the fuel import bill despite the increases in import volumes of both crude oil and refined petroleum.
The average import price of crude oil declined to US dollars 45.46 per barrel in November 2015 compared to US dollars 76.82 per barrel recorded in November 2014.

In addition, import expenditure on textiles and textile articles, fertiliser and diamonds and precious stones and metals also declined by 22.3 per cent, 61.6 per cent and 80.7 per cent, respectively, on a year-on-year basis, contributing more than 55 per cent of the overall decline in import expenditure in November 2015.

Import expenditure on rice declined significantly in November 2015 for the seventh consecutive month mainly due to the availability of rice in the local market and higher imports recorded in the previous year.

Import expenditure on transport equipment declined by 41.4 per cent, year-on-year, mainly due to the higher imports in November 2014 largely reflecting the impact of the import of a cruise ship and three light vessels.

Even though, expenditure on vehicle imports recorded a lower value in November 2015, compared to the previous month, it increased by 25.0 per cent on a year-on-year basis mainly due to the increase of importation of motor cars. Further, imports of building materials and machinery and equipment, increased during the month.

On a cumulative basis, expenditure on imports declined by 2.1 per cent to US dollars 17,244 million during the first eleven months of 2015.

The cumulative earnings from tourism increased to 2.8 billion dollars during 2015 compared with 2.4 billion dollars in 2014.

Wednesday, January 27, 2016

China will avoid hard landing, won't cause recession: BofA

Jan 27, 2016 (LBO) – Whatever does cause the next global recession, it probably won’t be China, according to Bank of America Merrill Lynch.

Their analysts believe the world’s second-largest economy will avoid a hard landing and risks from financial market turbulence can be contained by the Chinese government, according to a Bloomberg report.

“We don’t view the slowing in Chinese growth as having sizable spillovers into developed markets generally, but certain economies will be harder hit than others,” Michael Hanson, senior global and U.S. economist said.

Although China’s slowdown will affect investor confidence, it won’t unduly affect the global economy based on an analysis of trade, portfolio and commodity channels, he said.

Billionaire investor George Soros recently predicted China’s economy was headed for a hard landing which will worsen global deflationary pressures.

Willem Buiter, chief economist at Citigroup Inc., said his base case is for the world to suffer recession-like growth of less than 2 percent this year.

However, contrary opinions have been expressed. Virgin Group Founder Sir Richard Branson believes markets are overreacting.

“I think the markets are (as they often do) overreacting. I think they’re forgetting the reason that oil is priced at such a low level is excess supply over demand — and that’s a good thing,” he said during an interview in Davos last week.

“The only people who are going to suffer from it are obviously oil producing nations and oil companies,” he said. Consumer, airlines and most businesses will benefit from 25 dollars per barrel oil, he added.

According to Branson, oil prices could stay low for quite a long time.

“I personally think that oil is to stay low for some years to come and then you’ve got the clean energy revolution that’s been agreed [upon] in Paris coming along. You could see a situation where oil never really goes above 40 dollars for many, many, many, years to come if ever.”

Economist Joseph Stiglitz in Colombo this month highlighted why the Indian economy was a bright spot in South Asia, again bucking the global trend.

OPA worried about professional services agreement with India

Jan 27, 2015 (LBO) – The Organisation of Professional Associations (OPA) in a statement yesterday said it was deeply concerned about Sri Lanka’s intended bilateral agreement with India named “Economic Technology Cooperation Agreement (ETCA).”

“OPA with 46 Associations of professionals of the country, having substantial professional resources in the country in any discipline, is of firm opinion that it is absolutely unnecessary for foreign professional services to be allowed liberally in the country by such a bilateral agreement with any country,” the statement said.

“Such an agreement to bring foreign professional services to the country can be detrimental to the local professional resource base.”

Any organisation requiring to hire foreign professional expertise for a particular job function may be allowed on request on acceptable reasons for which no such bilateral country agreement is warranted, OPA President Prof. Rohana Kuruppu said.

Tuesday, January 26, 2016

Orient Finance IPO raises Rs987 mln on opening day

Jan 26, 2016 (LBO) – Orient Finance PLC’s initial public offering had received applications for shares worth 986.9 million rupees on Monday, the company said in a statement to the Colombo Stock Exchange.

The company is offering 71.5 million voting shares at 15 rupees a share to raise 1,072.5 million rupees.

The IPO received 262 applications for shares worth 136 million rupees, and one application for 850.9 million rupees, the company said.

Ceylon Chamber launches National Agenda Committees

Jan 26, 2016 (LBO) – The Ceylon Chamber of Commerce is launching a set of thought-leadership groups called National Agenda Committees (NACs) to put forward innovative solutions for key national economic challenges.

The NACs will be multi-stakeholder groups functioning under the chamber, a statement said.

“The Sri Lankan economy is at an important inflection point and the private sector has an important role to play in influencing the future trajectory,” Chairman Samantha Ranatunga said.

“Some key challenges and bottlenecks need to be tackled and we need to develop cutting-edge thinking. What better way to do this than by bringing the best minds together to develop new ideas and solutions?”

Five NACs being launched this month are the ‘National Agenda Committee on Investment Climate’, ‘National Agenda Committee on Infrastructure’, ‘National Agenda Committee on Finance and Capital’, ‘National Agenda Committee on Logistics and Transport’, and ‘National Agenda Committee on the Innovation Eco-system’.

“The NACs will start as communities of interest, and move to become communities of purpose and communities of action. The members for each NAC are being carefully selected to represent the most relevant, current and knowledgeable individuals from business, government, academia, and civil society,” Chief Economist of the CCC and curator of the NACs, Anushka Wijesinha said.

Sri Lanka remittances contract in 2015: Frontier Research

Jan 26, 2016 (LBO) – Sri Lanka has experienced a contraction in inward remittances after several years amidst falling oil prices and slower hiring in the Gulf nations, a top research firm said.

2015 remittance inflows have contracted 0.5 percent against the previous year, Frontier Research said.

In 2014 remittances grew around 9.5 percent, which followed 7 percent growth in 2013. In 2011 inward remittances grew 25 percent.

“But remittances is still one of the biggest foreign income earners because it is about 7 billion inflows that we get,” analyst at Frontier Research Shiran Fernando said.

The research firm said falling oil prices and its impact on Gulf nations could be one reason behind this contraction of remittances.

“We are seeing probably less hiring from Gulf nations, so growth from that base is not improving,” Fernando said.

Frontier Research also said the next reason for the reduction of remittances could be the weakend euro against the dollar.

“Sri Lanka also has people working in European nations as well. Since the euro has weakend against the dollar; they are sending in less than what they would have in 2014.”

Fernando said the high growth eventually has to subside and this could be the start of it.

“But it’s too early to call that the growth has actually reached a saturation level,” Fernando said.

“With oil falling to 30 dollars a barrel, it’s positive for us in terms of our fuel bill but remittances could hurt even more in 2016 if this trend continues.”

Fernando further said Gulf nations are looking to cut down expenditure because earlier they were planning there government budgets based on a dollar of about 135 though it is about 30 now.

“So cutting down on public expenditure, things like infrastructure would mean fewer opportunities for Sri Lankan workers trying to get jobs there.”

“I think 2016 is a number that we certainly need to keep an eye on,” Fernando added.

New ministry to restructure rather than run public enterprises: Kabir Hashim

Jan 26, 2016 (LBO) – The mandate of Sri Lanka’s new Public Enterprise Development ministry is restructuring rather than running the country’s large portfolio of state-owned enterprises, Kabir Hashim, Sri Lanka’s minister of Public Enterprise Development, told the publishing and consultancy firm Oxford Business Group.

“The main objective is to reduce the burden SOEs place on the treasury as fast as possible,” he said. “We have a large number that are major liabilities and cause a drain on the budget every year. We feel that most of that can be changed.”

In the past, SOEs have been hijacked for political gain, resulting in a lack of fiscal discipline, Hashim acknowledged.

“There has, in the past, been intervention from government, the ministry and sometimes the minister, leaving little room for technocrats to manage these enterprises,” he said. “Even though the ministry has only recently been established, we are already trying to encourage these enterprises to make changes and do things differently.”

Hashim acknowledged that key social challenges had, at times, stalled reform efforts, pointing, in particular, to the public’s dependence on the government for employment and the country’s pension scheme.

“Only under the recent budget have we made the first moves towards a contributory pension scheme for both public and private sectors,” he said. “With the pension now available in both [sectors], we feel people will start naturally gravitating towards the private sector. Since it is unsustainable for the public sector to keep absorbing people, this is an essential step forward.”

On the subject of employment, the minister said he was optimistic that public-private partnerships (PPPs), increased foreign direct investment (FDI) and the emergence of more high-value industries linked to technology in the economy would lead to job growth. “The 1m jobs that the prime minister talks about will come from both sides of the equation,” he told OBG.

The full interview with Hashim will appear in The Report: Sri Lanka 2016, OBG’s first report on the economy.

Opinion: Rite of passage, boom and bust cycle of the economy

By Ashini Samarasinghe

Where economic performance is concerned, Sri Lanka tends to emphasize on the importance of economic growth or GDP growth over other economic indicators. This has led to expectations of consistently higher growth rates over time. However, we have not as yet been able to maintain high growth rates over a long period of time as the economy tends to experience a slowdown (what is called “economic adjustments”) from time to time.

We are experiencing a somewhat similar situation/adjustment presently. In the past one to two years we saw demand conditions in the economy improving substantially, particularly due to the low interest rate environment. The surge in non-oil imports such as vehicles and food items seen recently is a good indicator of this. The build-up of unsustainable demand conditions is now exerting pressure on the broader economy, calling for adjustments in macroeconomic variables such as interest rates and exchange rate which will eventually lead to a slowdown in economic growth.

The flip side is that such periods of adjustment are not unusual and even countries that have been viewed as having very successful growth stories in the past have had to deal with sharp downturns/adjustments along the way.

Based on a study we did on economic growth cycles, we see that a sharp slowdown in economic growth or an even worse total economic meltdown after a period of rapid growth most often seems to be a “Rite of Passage” in the Economic growth stories of most countries. This includes most Asian economies like Malaysia that Sri Lanka aspires to emulate. Here we present some key findings from a study focused on other countries’ experiences on what seems to be an inevitable cycle in economic growth.

Key Findings
Most economies that have seen a period of strong growth in excess of 7% over a period of at least 5 years has seen a crash or a major economic downturn afterwards. This is a common phenomenon even among more developed, high income countries like Japan. Singapore is a classic case in question as after every 9-10 years of over 7% growth the country has experienced a slowdown/recession.

Apart from the rapid growth in the period before, other economic issues seen in common were high current account deficits and/or a transformational “story” that attracted speculative investment and caused a real estate boom and/or construction boom often as a result of public investments (public investment on infrastructure to encourage more foreign/private investments in the domestic industrialization process) and/or accumulation of short-term external debt which ultimately drags the economy to a debt overhang.

If the challenge was a full scale Economic crisis, it was usually triggered by an exogenous/external shock which could not be dealt with due to domestic vulnerabilities of an economy as mentioned above. What usually happens is such external shocks expose the economic vulnerabilities of an economy leading to a sharp drop in FDIs and reversal of hot money flows which the country enjoyed during its high-growth era.

For instance, 1973 oil shock brought attention to Brazil’s burgeoning current account deficit which saw the economy spiraling into a debt crisis in 1982, and the 1997 Asian Financial Crisis highlighted the inefficient management of Indonesia’s liberalized capital account eventually dragging the country into an economic crisis.

A less pronounced slowdown in growth is most often caused by internal factors such as a contraction in a dominant industry like construction (e.g. Singapore 1984, Botswana 1989). In the case of Japan, the slowdown was mostly due to a maturing economy.

It is difficult to find a country which has avoided such a boom-bust cycle in economic growth. Most countries slow down after a five year period of above 7% growth (Israel, Hong Kong, Oman). A few countries have sustained rapid growth beyond five years (Singapore, Japan, Brazil, Malaysia, Indonesia, Thailand, Gabon) but have rarely gone beyond ten years.

Botswana is the exception to this which enjoyed rapid growth for over two decades (22 years, even through external crisis periods such as 1973 oil shock) before experiencing a slowdown (not a crash). However, Botswana’s growth was mainly driven by natural resources. The country possesses large deposits of diamonds and earnings from the diamond industry have fueled the country’s growth story so far. Nevertheless, sound economic policies and institutions have contributed by ensuring the productive investment of diamond earnings.

This is in contrast to Gabon which also enjoys the advantage of natural resources (oil) but nevertheless has been unable to sustain rapid growth due to inefficiencies in investment decisions.

The idea that some countries can see sustained strong economic growth for very long periods is pretty much a myth in reality. Sri Lanka is no exception to this. Thus, expectations of maintaining high economic growth rates over a long period of time may prove to be unrealistic.

(- Ashini Samarasinghe is a Research Economist at Frontier Research responsible for economic modeling and macro-economic forecasting. She also covers thematic research such as gold price movements, household income, expenditure movements and money supply & liquidity -)

Sri Lanka's Rebirth, blog by Joseph E Stiglitz

By Joseph E. Stiglitz

COLOMBO – Sri Lanka has been deservedly praised for the progress it has made since the end of the war against the separatist Tamil Tigers in 2009. The economy has grown at an average annual rate of 6.7%, and education and health statistics are impressive.

All developing countries face myriad challenges, but this is especially the case for a country that has suffered an intense 30-year civil war. The government will need to set priorities; but success will require a comprehensive approach.

Underlying wars such as the fight with the Tamil Tigers are, typically, social and economic grievances such as real or perceived discrimination, and the failure of government to address wealth and income disparities adequately. Thus, more than transitional justice is required in Sri Lanka (or, to take another example, in Colombia, where peace with the FARC guerillas seems increasingly likely). What is required is full integration of the Tamils, Sri Lanka’s embittered minority, into the country’s economic life.

Markets on their own won’t solve this problem. Sri Lanka will need balanced affirmative-action programs that address the various dimensions of economic disparity and are attuned to the inequalities within the Tamil population. It will do no good to give a leg up to Sri Lanka’s many rich Tamils, while leaving poor, lower-caste Tamils further behind.

Economic integration of the northern Tamil region will require heavy public investment in infrastructure, education, technology, and much else. Indeed, such investments are needed for the entire country. And yet tax revenue as a share of GDP is only 11.6%, about one-third that of Brazil.

Like many other developing countries, Sri Lanka simply enjoyed the fruits of high commodity prices in recent years (tea and rubber account for 22% of exports). Sri Lanka should have used the commodity boom to diversify its export base; the previous government of Mahinda Rajapaksa did not. With export prices down, and with tourism likely to suffer from the global economic downturn, a balance-of-payments crisis looms.

Some suggest that Sri Lanka turn to the International Monetary Fund, promising belt tightening. That would be hugely unpopular. Too many countries have lost their economic sovereignty in IMF programs. Besides, the IMF would almost surely tell Sri Lankan officials not that they’re spending too much, but that they’re taxing too little.

Fortunately, there are many taxes that the authorities can impose that would increase efficiency, growth, and equity. Sri Lanka has abundant sunshine and wind; a carbon tax would raise considerable revenue, increase aggregate demand, move the country toward a green economy, and improve the balance of payments. A progressive property tax would encourage more resources to go into productive investments, while reducing inequality and, again, boosting revenues substantially. A tax on luxury goods, most of which are imported, would serve similar goals.

(- Joseph E. Stiglitz is the recipient of the Nobel Memorial Prize in Economic Sciences in 2001 and the John Bates Clark Medal in 1979. He is University Professor at Columbia University, Co-Chair of the High-Level Expert Group on the Measurement of Economic Performance and Social Progress at the OECD, and Chief Economist of the Roosevelt Institute -)

Monday, January 25, 2016

Interview: Listing of Sri Lanka non-strategic investments may take a year, says Eran

Jan 25, 2016 (LBO) – Sri Lanka’s government is putting in place processes to list some of its non-strategic investments on the Colombo Stock Exchange, although this may not take place immediately, Eran Wickramaratne, deputy minister of Public Enterprise Development, told Lanka Business Online.

“Within a year that’s possible. But whatever we are doing, we want to do it properly and transparently and we are putting the processes in place,” he said.

In budget plans for 2016, the government said it wants to streamline its portfolio of investments and will exit partially or fully from investments in Lanka Hospitals, Hotel Developers PLC (Colombo Hilton), Hyatt Residencies, Waters Edge, Grand Oriental Hotel, Ceylinco Hospital and Mobitel by listing such investments on the Colombo Stock Exchange.

The government’s portfolio includes enterprises engaged in maintaining and controlling strategic infrastructure in power generation, transmission, ports, airports, water supply etc., as well as non-strategic investments in hotels, condominiums etc.

The government is also coming up with an institutional framework to manage investments in commercial ventures, Wickramaratne said.

“We are simultaneous looking at models in other countries and in the region, but we have to come up with a model that suits our needs,” he said. “If the government is investing in commercial enterprises, they can be managed by professionals who can make professional decisions.”

In terms of advisors for these processes, Harvard University’s Center for International Development recently supported holding the Sri Lanka Economic Forum, and advisors would be sought on a case by case basis, he said.

“We had the economic summit, and we had professors who could be consulted on economic matters.”

“It depends on what the area is. Different institutions, as the need is there, get local or foreign consultants. We are open to getting expertise wherever we think there is a gap,” he said.

PM holds meetings with Branson, other investors

Jan 24, 2015 (LBO) – Sri Lanka’s Prime Minister Ranil Wickremesinghe and government officials met several business leaders and heads of state on the sidelines of the World Economic Forum.

Richard Branson of the Virgin group, Cyrus Mistry, chairman of the Tata Group, Kevin Sneader of McKinsey and Company and Jean-Philippe Courtois, President of Microsoft International were some of the investors who expressed interest in investing in the island.

Courtois said a delegation will visit Sri Lanka to discuss a technology agreement in the near future.

“There is a good response from investors, now we have to build on this goodwill,” Wickremesinghe told reporters.

Government officials also met the head of the IMF, Christine Lagarde and President of ADB Takehiko Nakao to discuss possibilities of concessional borrowing and cheaper refinancing.

Wickremesinghe is the first Sri Lankan leader to attend the World Economic Forum which concludes in Davos, Switzerland on Sunday.

Friday, January 22, 2016

Jan 22, 2016 (LBO) - Central Bankers in the modern era should have a dual mandate which concentrate on employment targeting in addition to conventional inflation targeting, lead author of the 2015 Global Human Development Report said.

Jan 22, 2016 (LBO) – Sri Lanka’s economic policy is governed by political pressures which is evident in the perverse link between the trade deficit and the budget deficit, a top economist observed.

Nishan de Mel of Verité Research says the inconsistency in government policies is the key underlying problem contributing to this issue.

Trade taxes are reduced to increase revenue, especially from motor vehicles, widening the trade deficit and creating pressures on the exchange rate, he said.

“Normally, if you have a budget deficit and if you have a trade deficit you have a solution,” de Mel said.

“Why don’t you increase your taxes on trade that will automatically reduce imports and increase revenue,” he said.

“Because if you increase your taxes on trade, when there is a trade deficit; that’s a good policy and when you do that you are going to increase the tax income.”

De Mel however stated that since Sri Lanka has very high trade taxes especially on motor vehicles the government revenue increases from reducing the taxes as shown in the graph.

“Our trade taxes especially on vehicles are so high; you make more money from reducing the taxes than by increasing the taxes.”

De Mel referred to this politically driven policy as a perverse link between the trade deficit and the budget deficit.

He was speaking at a forum organized in collaboration with Asia Securities and Verité Research recently.

In his address, de Mel also stated that the growth outlook for Sri Lanka in 2016 remains fairly positive, with the construction sector continuing to drive growth.

Sri Lanka has relied on construction and import driven consumption in repeating cycles of boom and bust.

This has driven post war growth but has not developed into a model for sustainable growth.

Long term sustainable growth requires key structural issues in the Sri Lankan economy to be addressed, he outlined.

These include the low labour force participation rate, especially amongst females, compared to the rest of South Asia; the high dependence on employment in the agriculture sector, which is the least productive sector; and declining government revenue.

Central Bankers should have dual mandate, says author of HDR 2015

Jan 22, 2016 (LBO) – Central Bankers in the modern era should have a dual mandate which concentrate on employment targeting in addition to conventional inflation targeting, lead author of the 2015 Global Human Development Report said.

Making the South Asian regional release yesterday in Colombo Selim Jahan stated that enhancing human development through work requires holistic policy interventions.

“In most countries, the Central Bank has a single mandate and the mandate is inflation targeting,” Jahan said.

“Maybe the time has come that the Central Bank should have a dual mandate; employment targeting in addition to inflation targeting,”

“If that is done, then the monetary policies can really help fiscal policies in order to create jobs and work in economies.” he added.

Jahan who is also a Director of UNDP’s Human Development Report Office said the time has come to change the conventional ideology on growth and employment.

“We have been told that if we grow, jobs will be created automatically; that is not what happened.”

“We have experiences of jobless growth over time, if that is the case why can’t we think about employment led growth?” he asked.

“Why can’t we think about creating jobs, try to enhance their skills and productivity, that will generate growth which will further create employment and will end up with a kind of a virtual circle or a upward spiral,” Jahan further questioned.

The Human Development Index (HDI) is a measurement that assesses long-term progress in three basic dimensions of human development: a long and healthy life, access to knowledge and a decent standard of living.

Accordingly, South Asia´s HDI value of 0.607 is below the average value of 0.666 for the developing world.

Sri Lanka’s HDI value for 2014 however is 0.757— which places the country in the high human development category— ranking the country at 73 out of 188 countries and territories.

Korea EXIM Bank opens representative office in Sri Lanka

Jan 22, 2015 (LBO) – The Export-Import Bank of Korea, an official export credit agency of the Republic of Korea, announced Friday the opening of their representative office in Colombo.

This new presence comes in response to increased bilateral ties between the governments of Korea and Sri Lanka, in trade, foreign direct investment, development assistance, cultural affairs, and personnel exchanges. The opening of the representative office also coincides with the Bank’s 40th anniversary, a statement said.

The State Minister for National Policies and Economic Affairs, Niroshan Perera, the ambassador of the Republic of Korea to Sri Lanka, Won-sam Chang, and the Chairman of Korea Eximbank, Dr. Duk-Hoon Lee were present at this opening along with representatives from the government, United Nations, international development organizations and, the Korean and Sri Lankan business community.

Officiating the opening ceremony, the State Minister thanked the Korea Eximbank for its unbridled support to enhancing key economic infrastructure needs of Sri Lanka, specifically in the sectors of transport, water supply and, vocational education and training.

Through the opening of its representative office in Colombo, the Korea Eximbank reaffirms its commitment to continuously reflect and support the evolving development demands of Sri Lanka, as a trusted partner, the statement said.. Its office is located at Korea ODA Center, 9/2, Dudley Senanayake Mawatha, Colombo 8.

Thursday, January 21, 2016

Asia Securities estimates 5-6 percent GDP growth and 3-pct inflation in 2016

Jan 21, 2016 (LBO) – Sri Lanka will grow at a speed of 5 to 6 percent this year while having 3 percent annual inflation, brokerage firm Asia Securities said.

“We also estimate that the exchange rate to be around 150 rupees per US dollar at the end of the year,” Kanishka Perera, Head of Research at Asia Securities told a seminar.

The firm stated that interest rates will move up by 100 to 125 basis points in 2016 while seeing a fiscal deficit of 7 percent for this year.

Sri Lanka should look at IMF package seriously: Kelegama

Jan 21, 2016 (LBO) – Sri Lanka should look at the IMF package very seriously as the temporary measures would not fix the fundamental issues of the economy, an economist said.

Saman Kelegama, Executive Director of the Institute of Policy Studies told a forum that the country needs to bring down the over heated economy through austerity measures.

“Belgium funds or swap arrangements with India are temporary measures. They don’t fix the economic fundamental problem of the country,” Kelegama said.

“You can use that to get some breathing space but you will be fall back to the same state when you have to pay back,” he stressed.

Sri Lanka’s official foreign reserves stood at 7.29 billion US dollars at the end of December 2015.

“With the 7 billion reserves, we also have to see what the upcoming payments are. We have many debts maturing this year. 2016 pension payment itself is about 4.5 billion,”

“This 7 billion reserves or bulk of it are borrowed funds; not earned funds. So in that environment we approached the IMF,” Kelegama pointed out.

“We go to the lender of last resort when we have a problem that cannot be resolved. So we are close to that situation,” he stressed.

China eyes more investment opportunities in Sri Lanka: PM (VIDEO)

Jan 21, 2016 (LBO) – Prime Minister Ranil Wickremesinghe said in Switzerland that Sri Lanka is expecting more investments from the China apart from the ongoing infrastructure projects.
“Infrastructure alone is not sufficient and we are discussing bringing more Chinese investments,” Wickremesinghe said at a press conference held during the World Economic Forum in progress in Davos, Switzerland.
“I think the Chinese government has also decided that some of its manufacturing industries should move out and Sri Lanka is one of the locations they are looking at.”
Within Sri Lanka there is a number of infrastructure development projects that have been funded by the Chinese government.
“We are now going ahead with some of these projects like the further development of the Hambantota Port and the Port City,”
“And are also looking at more participation in the logistics and real estate sector.”
The Sri Lankan Premier is scheduled to visit China in March this year.

Central Bank negotiating with IMF for SBA: Amunugama-Updated

Jan 21, 2015 (LBO) – The Central Bank is negotiating with the IMF for a one billion dollar stand-by arrangement, Special Assignments Minister Sarath Amunugama said at an SLFP media briefing, according to a media report.

Amunugama said discussions were ongoing and the first tranche of the SBA could come in by late February or early March.

However when asked, Minister Amunugama told LBO that the arrangement has not been finalized yet.

“An IMF team is coming here in March not only to have discussions about a stand-by arrangement but also to discuss about the economy,” Amunugama said.

“We are thinking about whether we have to go ahead with the 1 billion US dollars worth SBA. The newspaper report is wrong. Nothing has been finalized yet; not even the letter has been sent,” he further stated.

In Davos, Prime Minister Ranil Wickremesinghe said an appropriate arrangement would be entered into with the IMF if necessary.

Sri Lanka inflation NCPI at 4.2-pct in December 2015

Jan 21, 2016 (LBO) – Sri Lanka’s consumer prices rose 4.2 percent in the 12-months to December 2015 from a year earlier, data from the state statistics office showed.

In November 2015, the index which is termed as National Consumer Price Index reported 4.8 percent inflation.

Year on year inflation of Food Group has been decreased from 4.6 percent in November to 2.6 percent in December while Non-food Group increased by 4.9 percent to 5.6 percent during this period.

On year on year basis, contribution of food commodities to inflation was 1.18 percent in December 2015 compared to December 2014, the state statistics office said.

The index for all items for the month of December 2015 was 113.2.

An increase of 1.2 index points or a percentage of 1.1 has been noted in December 2015 compared to November 2015 for which the index was 112.0.

“The index increased by 1.01 percent and this was due to the value change increase of food items by 0.89 percent and value change increase of non-food items by 0.12 percent respectively.” the state statistics office said.

National Consumer Price Index is the latest Consumer Price Index of the Statistics Department that has been released monthly from October 2015.

Wednesday, January 20, 2016

Probability of US March rate hike drops, eyes on Davos

Jan 20, 2016 (LBO) – The probability of a rate hike by the U.S. Fed by March fell to 40 percent with equity markets off to a bad start this year, as focus turns to the World Economic Forum in Davos.

JPMorgan expects the next US interest rate hike in June, and some analysts predict just two interest rate hikes by the US Fed this year. The European Central Bank could cut its depost rate, while Bank of Canada may ease monetary policy this week.

According to CME fed fund futures, the probability of a US rate hike in March is 40 percent, which increases to 58 percent by June.

Brent Crude was at 28.72 dollars per barrel on Wednesday, with China shares down 0.79 percent and the Hang Seng down 2.8 percent after US stocks meandered overnight.

With S&P 500 down 8 percent in two weeks and the Nasdaq falling 10 percent during that time, analysts say the Fed will keep an eye on the dollar which could strengthen more as China’s currency continues to lose value.

Attention at the World Economic Forum turns to the state of the global economy after China this week said its economy grew 6.9 percent in 2015, compared with 7.3 percent a year earlier, its slowest growth in 25 years.

Meantime, the International Monetary Fund cut its estimate for growth in the world economy this year to 3.4 percent from 3.6 percent, while the International Labor Organization predicts global unemployment will climb this year by 2.3 million to 199.4 million.

Joe Biden got the Davos forum underway calling for a quantum leap in the fight against cancer, while actor Leonardo DiCaprio called for fossil fuels to be left in the ground.

According to a UBS report released Tuesday, the richest stand to gain more from the introduction of new technology than those in poorer countries.

The so-called fourth industrial revolution, with greater use of artificial intelligence and robots, will affect emerging marketes reducing the competitive advantage of their cheap labour, the report said.

Interview: Attractive returns on Sri Lanka bonds due to volatility

Jan 20, 2016 (LBO) – Out of emerging markets, Sri Lanka bonds offer well above average returns through trading opportunities due to strong volatility, a market participant said.

Data shows rupee treasury bonds posting more than 25 turning points last year, a clear sign of volatility in the secondary market. Swings of between 25 to 100 basis points during such turns is possible.

In October, 10-year bonds offered yields of 10.25 percent, which dropped to 9.50 percent within two weeks. This is a 4.6 percent capital gain, and an annualized return of 129 percent.

This month, 10-year yields fell to 10.35 percent from 11 percent within a week. This is a return of 3.5 percent, when annualized works out to 182 percent.

“Many of our clients made above average returns last year. Providing an advisory role, we allow customers to leverage and take trading positions,” Kasun Palisena, chief executive of Perpetual Treasuries, said.

Investing in Sri Lanka bonds in the secondary market can be done in multiples of 50 million rupees, with 10 percent of bonds outstanding available to foreign investors.

Several foreign funds have taken positions in Sri Lanka bonds in recent years such as emerging market funds of Franklin Templeton and Aberdeen.

Sri Lanka’s Central Bank tightened the Statutory Reserve Ratio last month citing rising inflation, after the US tightened interest rates. It is expected to watch for signs of inflation and international policy direction in coming months.

This week, the chances of the US Fed hiking interest rates in March fell to 40 percent. The island’s bond yield curve, which may have made an exaggerated move upwards, has begun to correct.

Palisena said Sri Lanka 10-year bonds provide some of the highest returns in the Asia Pacific, at 10.35 percent, while Indian treasury bonds, sought after by foreign funds these days, offer 7.8 percent.

Indonesia 10-year bonds yield 8.5 percent and Pakistan bonds yield 9.1 percent.

US 10-year treasuries, in comparison, offer 2.04 percent, Japanese counterparts 0.2 percent, China 2.7 percent, Philippines 4 percent and Malaysia 4.1 percent.

“Sri Lanka has never defaulted on sovereign debt, and with several foreign and local banks operating in the island, the market is well regulated,” he said.

Sri Lanka raised 1.5 billion dollars in a sovereign bond issue in October, an issue oversubscribed 2.2 times, priced at 6.85 percent. The island is expected to go to international markets this year to raise a similar amount.

“It was a capital outflow that triggered a balance of payments deficit last year. We expect a flow of capital back to emerging markets this year,” Palisena said.

Growth in developing economies forecast at 4.3-pct for 2016: IMF

Jan 20, 2016 (LBO) – Growth in emerging market are projected to increase from four percent in 2015 to 4.3 and 4.7 percent in 2016 and 2017, respectively, the latest International Monetary Fund’s global forecast says.

“Growth in China is expected to slow to 6.3 percent in 2016 and 6.0 percent in 2017, primarily reflecting weaker investment growth as the economy continues to rebalance,” the IMF said.

“India and the rest of emerging Asia are generally projected to continue growing at a robust pace, although with some countries facing strong headwinds from China’s economic re-balancing and global manufacturing weakness.”

Higher growth is projected for the Middle East, but lower oil prices, and in some cases geopolitical tensions and domestic strife, continue to weigh on the outlook.

Global growth is projected at 3.4 percent in 2016 and 3.6 percent in 2017 which has been revised downward by 0.2 percentage point for both years, on weaker pickup in emerging economies than was forecast in October.

In terms of the country composition, the forecast says the revisions are largely accounted for by Brazil, where the recession caused by political uncertainty amid continued fallout from the Petrobras investigation is proving to be deeper and more protracted than previously expected; the Middle East, where prospects are hurt by lower oil prices; and the United States, where growth momentum is now expected to hold steady rather than gather further steam.

Prospects for global trade growth have also been marked down by more than 0.5 percentage point for 2016 and 2017, reflecting developments in China as well as distressed economies.

Tuesday, January 19, 2016

Interview: Controlled tea liberalization possible, says Tea Board Chief

Jan 18, 2016 (LBO) – Better marketing and branding of Sri Lankan teas overseas, together with the potential for liberalising the industry, were just some of the issues discussed with Rohan Pethiyagoda, the newly inducted Chairman of the Sri Lankan Tea Board, in an interview with the Oxford Business Group.

Tea export volumes out of Sri Lanka showed a distinct decline in the year to November 2015 in comparison to the previous year, while global prices remained low.

Pethiyagoda believes the price component is at least in part owing to there being insufficient brand value attached to Ceylon Tea, whether in terms of retail branding by individual companies or generic branding through “Ceylon Tea.”

“Sri Lanka needs to think more in finding itself a niche or multiple niches in the global beverage market, rather than just looking at manufacturing bulk tea and selling it to the highest bidder,” he said.

“This is a crude way of doing it, maintaining the status quo, and we have done it for a century and a half. Our marketing efforts need to ensure that Ceylon Tea continues to communicate superior quality, as does Swiss Chocolate, French Wine, or Colombian Coffee.”

Delicate issues around tea import liberalisation were also discussed in the interview. Many tea exporters have long called for multi-origin blending in Sri Lanka to help mitigate costs, while tea purists say this taints the Ceylon brand and could potentially displace a large portion of Sri Lanka’s rural population that depends on the industry.

Pethiyagoda told Oxford Business Group that while he would like to see markets as free as possible, he understands both sides.

“The worst thing we can do is try and become protectionist and think only in terms of the interests of one group. However, you have to balance that with the fact that there are hundreds of thousands of people whose livelihoods depend on this, and these are not rich people. You have to be socially conscious not to damage too many people as a result of allowing market forces to proliferate.”

Given the implications of the new budget, Pethiyagoda expects efforts to liberalise the industry to occur in a piecemeal fashion.

“We can control it and learn and if things go well open up the system a little more. Everyone from regional plantation companies to buyers have their own interests to protect. The job of the Tea Board is to protect them all.”

The full interview with Pethiyagoda will appear in The Report: Sri Lanka 2016, OBG’s first report on the country’s economy detailing a sector-by-sector analysis for investors.

Prime Minister to attend World Economic Forum

Jan 18, 2016 (LBO) – Prime Minister Ranil Wickremesinghe is due to leave Sri Lanka on 19th January 2016 for the World Economic Forum that will be held in Davos-klosters, Switzerland from 20th to the 23rd January 2016.

This is the first time Sri Lanka has been invited to participate in the World Economic Forum. During his visit, the Prime Minister will engage with international investor community on possible investments in Sri Lanka.

Over 40 heads of state will be in attendance at the Forum, which will focus this year on new trends within the global economic sphere.

The Annual Meeting of the World Economic Forum is recognized as a singularly important event that brings the world’s leaders together to engage with the international community on shaping global, regional and industry agendas that drive the world economy.

The Prime Minister will be accompanied by the Minister of Finance Ravi Karunanayake, Minister of Development Strategies & International Trade Malik Samarawickrema, Secretary to the Prime Minister Saman Ekanayake, Governor Central Bank Arjun Mahendran, Additional Secretary Saman Athaudahetti and Personal Assistant to the Prime Minister Sandra Perera.

Monday, January 18, 2016

Tony Weerasinghe launches online retail brokerage Ustocktrade

Jan 18, 2015 (LBO) – Tony Weerasinghe a founder of software company MilleniumIT has launched a low-cost U.S. online retail brokerage, Ustocktrade.

Ustocktrade, which generates revenue from a one-dollar-a-month membership fee and a one-dollar-per-trade fee, aims to “bring Wall Street to Main Street” Weerasinghe said.

Part of the firm’s goal is to encourage non-traditional investors, such as university students and low-income earners, to take part in the stock market, according to a Reuters report.

Ustocktrade is a private stock trading platform, also known as an alternative trading system.

The value of orders on Ustocktrade is capped at 10,000 dollars and high-frequency trading firms are kept out. It needs 20,000 users to break even, Weerasinghe said.

The brokerage does not send orders to other trading platforms. To help get trades get done, Ustocktrade is enlisting “superusers,” that will be the counterparties to trades that do not have a natural match.

There is only one superuser so far, but Ustocktrade is currently in talks with two or three others, Weerasinghe said. He declined to name of the superuser, but said the person or firm is obligated to not let any transactions fail during trading hours, and will trade for free in return.

Daniel Ham, a former chief operating officer of eBX LLC, the parent of trading venue Level ATS, and long-time Boston Stock Exchange executive, heads the company’s brokerage arm, Ustocktrade Securities.

An added product, Ustocktrain, is a free trading simulator, providing virtual cash to practice investing using real-time market data to prepare for the real stock market.

Weerasinghe said the firm will help fund a non-profit organization called the Cainan Foundation set up to build schools for disadvantaged children.

Profits from the brokerage will fund the foundation’s first school in Sri Lanka.

Weerasinghe continued to work as head of global development for the London Stock Exchange Group after selling MilleniumIT to the London Stock Exchange for around 30 million dollars.

Sri Lanka targets USD5 bn FDI in next three years: Malik

Jan 18, 2016 (LBO) – Sri Lanka is targeting five billion US dollars worth of foreign direct investments (FDI) in the next three years, Minister of Development Strategies and International Trade said.

“We are targeting 5-6 billion US dollars in FDI the next three and I am quite optimistic that we will get there,”Malik Samarawickrama, Minister of Development Strategies and International Trade told reporters in Colombo, Monday.

“It will no doubt be a challenge with the prevailing global climate but we are very positive because now Sri Lanka is well placed to attract this kind of investment as people are also looking for new places,’

“Of course you can’t do things over night and we have a plan for it. Investors want consistent policy not so much the tax breaks. They don’t want the policy to change each time the government changes.”

The Minister says that several road shows have also been planned for this year.

“We have a program to attract investments country wise and will have road shows in Mumbai, Tokyo, Beijing and even Europe and the United States and so on,”

“So within the course of this year we hope to cover 5-6 major countries and at the same time I have been invited to China,”

“They will come up with a program to set up industries – particularly in the Southern and Western regions. They want to have economic zones and bring in the investors themselves.”

He also said that in 2015 FDI was below one billion US dollars.

“FDI was less than a billion US dollars about 700 – 800 million US dollars last year – this is very low.”

Data shows that in 2014 FDI was 1650 million US dollars.

Thursday, January 14, 2016

CCP by first quarter 2017: CSE Chairman

Jan 14, 2016 (LBO) – Sri Lanka’s Colombo Stock Exchange aims to establish the Central Counter Party (CCP) system, a new risk management system, by early 2017, a senior official said.

“We have to properly draft the laws. This is a difficult task but we are doing that with the help of some consultants,” Vajira Kulathilake, chairman Colombo Stock Exchange said.

“I expect by 2017 first quarter it will come and through this we can bring in new products to attract foreign investor too.”

The CCP will allow delivery upon settlement and establishing a derivatives market including short selling which will raise the Colombo bourse to international standards.

Kulathilake says that the proposed Securities and Exchange Commission act will be the legal back bone for the CCP while the proposed demutualization process would help with the governance side.

“The SEC act will be the legal back bone of the all the things that we are proposing to do, not only criminal but also civil proceedings,” he said.

“We will start the demutualization process soon and this will help the governance side.”

Analysts say that the present SEC Act was introduced in 1987 and though there were three amendments thereafter, an overall review of the provisions to align it to the global market trends has not been done.

“It has been a long time – changes have happened new products have come in and people have found ways to avoid regulation. So it is time that all this is covered,” he said.

“So actually the new act is a must to regulate these things.”

Sri Lanka's reconciliation process key to its economic success: UK Minister

Jan 14, 2016 (LBO) – Sri Lanka commitment to reconciliation will be a driver of its future economic development, a visiting Minister said.

“It is reconciliation that will, I believe, be the bedrock on which Sri Lanka’s future economic success will be built,” Hugo Swire, Minister of State at the Foreign and Commonwealth Office in the United Kingdom, said.

“I also look forward to meeting resettled families, members of civil society and religious leaders to hear directly from them about the progress in reconciliation and economic development.”

One vital aspect of reconciliation and economic development and a growing area of cooperation between the UK and Sri Lanka – is tackling corruption, he added.

“This was, of course, a key election promise of President Sirisena and this is why the UK is providing anti-corruption training and anti-bribery expertise to the Sri Lankan authorities.”

“Because the elimination of corruption improves business confidence, not only for the existing business community, but it also helps make Sri Lanka a destination of choice for new foreign direct investment.”

UK is one of the top 10 investors in Sri Lanka but the balance of trade has risen significantly in favor of Sri Lanka in recent years.

On exports, the UK is Sri Lanka’s third-largest market, with exports in 2014 growing a significant 36 percent, to well over 1 billion pounds.

British exports to Sri Lanka were 165 million pounds in the same year.

“We have made reducing that trade gap a priority – and the latest figures show UK exports to Sri Lanka increased by nearly 50 percent last year,” he added.

Wednesday, January 13, 2016

Obama gives last state of the union address

Jan 13, 2016 (LBO) – U.S. President Barack Obama gave his final state of the union address on Tuesday attempting to bridge an optimistic assessment of the nation’s progress with public anxiety over terrorism abroad.

In a wide-ranging speech Obama painted a hopeful portrait of the nation after seven years in office.

“As frustration grows, there will be voices urging us to fall back into tribes, to scapegoat fellow citizens who don’t look like us, or pray like us, or vote like we do, or share the same background,” Obama said.

“We can’t afford to go down that path. It won’t deliver the economy we want, or the security we want, but most of all, it contradicts everything that makes us the envy of the world.”

After nearly 10,000 air strikes, the United States has taken out centers of the ISIL, he said, adding the country remains the strongest in the world in terms of military capacity.

But rebuilding a nation cannot be the responsibility of one party and fall on the United States, Obama said.

In terms of political culture, Obama said rancor between political parties has increased during his term in office, which is one of his regrets, and there was a collective responsibility to fix the political system.

Obama also emphasized the need to reduce the influence of money in politics.

Sri Lanka stocks up after 7 days of losses

Jan 13, 2016 (LBO) – Sri Lankan stocks were up 0.31 percent after seven consecutive days of losses with gains in John Keels Holdings and Telecom stocks, brokers said.

The Colombo benchmark All Share Price Index closed lower 20.02 points at 6,554.37 down 0.31 percent. S&P SL20 closed 12.53 points down at 3,405.57 down 0.37 percent.

Turnover was at 926 million rupees, with only 114 stocks closing positive against 40 negative.

“We saw bargain hunters entering the market, today,” Lanka Securities said.

The main index was pushed up by gains John Keells Holdings with the stock closing at 168.00 rupees, up 1.70 rupees with one off the floor trade of 800,000 shares at 168.00 rupees.

Sri lanka Telecom closed at 44.40 rupees, up 0.80 rupees and Dialog Axaita closed at 10.20 rupees, up 0.20 rupees.

In banking Commercial Bank closed at 133.90 rupees, down 1.10 rupees with one off the floor trade of 670,000 shares at 134.00 rupees.

Tuesday, January 12, 2016

An investor to park USD1 bln in dollar deposits, says Finance Minister

Jan 12, 2016 (LBO) – An investor has promised to park 1 billion dollars in dollar deposits in Sri Lanka to help the island nation defend its currency, according to a media report quoting the finance minister.

The investor was Belgian and was working with a Sri Lankan partner, Finance Minister Ravi Karunanayake told Reuters.

The investor has promised to transfer the money in two equal tranches from banks in Brussels and Luxembourg, he said.

“Instead of going for bonds and other borrowing, we are permitting it to take place,” Karunanayake said.

“This is better than negative returns in Europe.”

This is part of an effort to increase foreign reserves and defend the rupee, which has hovered around record lows since the central bank floated it on Sept. 4.

Medium term growth prospects for Sri Lanka market: CT CLSA

Jan 12, 2016 (LBO) – The Sri Lankan economy is forecast to grow 6 percent 2016 with fiscal proposals to stimulate manufacturing, export and construction offering growth prospects in the medium term, CT CLSA Securities said in its Sri Lanka Outlook 2016 report.

“The 2016E fiscal proposals to stimulate manufacturing, export and construction sectors are expected to be key catalysts for sustainable economic growth in the medium term,” the report said.

Signs pointing to a recovery in emerging markets together with improved valuations post correction may encourage investors to revisit emerging markets, CT CLSA said.

Some of these funds may also flow into frontier markets, as investors seek diversification opportunities, the securities firm said.

“Prospects for most Asian frontier economies, including Sri Lanka are brighter than its counterparts in the Middle East and Africa, as net commodity importers.”

CT CLSA sees a forward market valuation of 13x for 2016 in view of modest earnings growth of 6 percent year-on-year.

Although island’s market rates low in scale and liquidity, it offers relative stability and steady growth — the market is also relatively insulated, the report said.

The Colombo ASPI and S&P SL20 declined 6 percent and 11 percent respectively in 2015, compared with gains of 23 percent and 25 percent respectively in 2014 largely due to weak investor sentiment and uncertainty in economic and policy direction.

Foreigners were net sellers in 2015, for the first time since 2011, with a net outflow of 4.3 billion rupees compared with an inflow of 22.1 billion rupees in 2014.

Despite closing on a negative note, intra year gains were witnessed amid positive quarterly earnings (1Q2015: +3 percent YoY, 2Q2015: +14 percent YoY, 4Q2014: +12 percent YoY)

Interest rates

In terms of interest rates, if the authorities continue to keep policy interest rates stable in the near term, real rates would likely enter into the negative territory in 2Q2016E.

“Thus we expect the CBSL to increase policy interest rates by at least 50bps during 2016E to avoid negative real rates amid forecast higher inflationary pressures in 2016E.”

“We forecast 12 month Treasury yields to rise 150bps during 2016E and then remain broadly stable in 2017E.”

The Rupee, currently near its lowest recorded level against the dollar at 144, a drop of 10 percent in 2015, is expected to stabilize at 149 rupees by end 2016 and 153 by end 2017.

Sectors

In terms of sectors, the banking sector is expected to undergo another challenging year in 2016 with the authorities expected to tighten credit expansion, and due to increased effective tax rates which increased by 5.5 percent in the 2016 National Budget.

The manufacturing sector is expected to rebound in 2016, amid recommencement of large scale government led infrastructure projects, such as the Colombo port city project, andn the Central Expressway.

Demand for private healthcare has increased, while continued momentum of consumption spending will support the beverage, food and tobacco sector.

Sri Lanka stocks close with highest intra-day loss in 5 months

Jan 12, 2016 (LBO) – Sri Lankan stocks closed down at 1.74 percent for a seventh consecutive day with losses across the board as regional markets also dropped, brokers said.

The Colombo benchmark All Share Price Index shed 115.97 points to end at 6,534.35 down 1.74 percent. S&P SL20 closed 71.00 points down at 3,392.04 down 2.05 percent.

Turnover was at 998 million rupees, with only 18 stocks closing positive against 156 negative.

The main index showed losses in Lion Brewery closing at 551.40 rupees, down 58.60 rupees and John Keells Holdings closing at 163.30 rupees.

“Market confidence is low as local and global economic concerns are effecting investor sentiment,” Lanka Securities said.

Losses were also seen in the banking sector Commercial Bank closing at 135.00, rupees, down 2.60 rupees and Hatton National Bank closed at 200.90 rupees, down 4.40 rupees.

DFCC closed at 153.50 rupees, down 2.50 rupees.

Peoples Insurance started trading on the CSE today and closed at 14.90 rupees, down 0.10 rupees with over 1.5 million shares traded.

Monday, January 11, 2016

Sri Lanka foreign reserves at USD7.3 bln end Dec

Jan 11, 2016 (LBO) – Sri Lanka’s official foreign reserves was slightly higher at 7.29 billion dollars at the end of December, up from 7.28 billion dollars at the end of November, figures released by the Central Bank shows.

This figure is down from 8.21 billion dollars in foreign reserves at the end of 2014.

The Dec 2015 reserves included 6,455 million dollars in foreign reserves and 760 million dollars in gold.

Foreign reserves improved after Sri Lanka raised 1.5 billion dollars in a 10-year sovereign bond issue in late October. Sri Lanka may go to international markets to raise up to 1.5 billion dollars this year.

SEC advises TKS Securities over possible violation of rules

Jan 11, 2016 (LBO) – Sri Lanka’s securities watchdog has advised TKS Securities, a registered stockbroker, that their agent has made representations to the public as an investment advisor.

The Securities and Exchange Commission said they are aware that an Agent of TKS Securities is carrying on business under a name of ‘Investor Eye’ or ‘Ayojana Guru’ and offering investment advice to the public independently of TKS Securities.

“A Stockbroker may offer investment advice to clients; it may do so only through certified Investment Advisors employed by such Stockbroker,” SEC said in a statement.

An Agent or any person employed by such Agent cannot provide any investment advice.

The stockbroker has been further advised that it will be held responsible for any violations committed by its Agents of the Stockbroker Rules of the CSE and SEC.

The Securities and Exchange Commission in November 2015 renewed the license granted to TKS Securities to function in the capacity of a Stockbroker.

Friday, January 8, 2016

Emerging Asia leverage, capital outflows constrain policy space: Fitch

Jan 08, 2015 (LBO) – Emerging Asia’s private consumption has remained resilient in the face of weaker external demand but investment has slowed down more substantially, particularly in the private sector, Fitch ratings said.

The full statement follows

Fitch Ratings-Hong Kong-07 January 2016: Fitch Ratings says Emerging Asia’s (EM Asia) private consumption has remained resilient in the face of weaker external demand. However investment has slowed down more substantially, particularly in the private sector. The slowdown may not only reflect cyclical factors, but also lower potential growth for countries most economically linked to China.

High leverage and risk of capital outflows constrain the use of monetary policy as a countercyclical tool in some EM Asia economies. Fiscal policy could be a substitute where monetary policy is inflexible. Lower government deficits and debt levels could increase fiscal space, but politics and policy rules could also prove to be a barrier in practice.

The January edition of “Asia-Pacific Sovereigns Chart of the Month” is available at www.fitchratings.com or by clicking on the link in this media release.

Link to Fitch Ratings’ Report: APAC Sovereigns Chart of the Month Jan 2016 – Leverage, Capital Outflows Constrain Policy Space in Emerging Asia

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