News Bulletin - August 2013

7/30/2019 News Bulletin - August 2013

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In Economic news:

In Business news:In Consumer news:

Tourist arrivals in Jul 13 grow 9.5%YoY as Sri Lanka outperforms regional average

Vehicle registrations grow 3.3%YoY as government attempts to control imports

to save the currency

Tea exports recover but production continue to decline due to bad weather

Business condence retreats for the fourth consecutive month as index falls to

lowest point since Jul12

Assistance scheme for dairy farmers to increase domestic milk production

DFCC Downgraded by Fitch on concerns over competitiveness of commercialbanking operations

Monthly Bul let in : August 2013

FDIs trickle in as 2013 target of $2.0bn looms large

Pawning gold losing shine as international gold prices slide from record high

Sri Lanka secures funding from ADB and the World Bank for education and

health projects

Ination rose to 6.3% YoY in Aug 13 (+20bps MoM)

June exports grow for the rst time in 15 months helps contract rst half trade

decit by 7.1% YoY

Rupee ended the month at 131.69/135.01 vs. USD (rupee weaker ~1.4% MoM)

on high importer demand and low exporter activity

All Share Price Index closes at 5,834.04, down 3.4% MoM, down 3.4% YTD.

Fonterra nds itself besieged on all fronts as

concerns over contamination proliferate

Import duty on big onions and potatoes

increased to protect farmers

Airtel looks to exit Sri Lanka


2/112

In Economic news:


FDIs trickle in as target looms large. The Central Bankof Sri Lanka (CBSL) revised Sri Lankas Foreign Direct Investment (FDIs)for the rst half of the year to $537m from $430m. While inows are

signicantly higher than previous year (+19.7% YoY) the run rate is belowthat required to meet $2.0bn annual target. However encouraginglyFDI pipeline for the second half of the year looks healthy with mixeddevelopment Crown Ltd. ($400m) slated to take hold and projects such

as Shangri La, ITC Hotel and the Krrish Square look to get recorded.

Mr. Andrew Colquhoun, Head of Asia Pacic Sovereigns at Fitch Ratings,

speaking at Fitch Ratings Sri Lanka Sovereign and Banking roundtablecommended Sri Lankas growth outperforming regional trends butcautioned of the growing portion of capital inows being debt and notinvestments. He noted that this trend would not be sustainable in the

long run and that reduced debt levels and improved scal disciplinecould contribute to a higher a rating.

However Governor of the CBSL Mr. Ajith Nivard Cabraal, voiced discontentat rating agencies continued pessimistic rating on Sri Lanka claimingseveral positive developments in the country had not been reected in

recent rating updates and as such discourage foreign investment.

Pawning gold losing its shine.Fitch Ratings Lanka (Fitch)and Standard & Poor (S&P) cautioned Sri Lankas commercial banks onpawning loans and its ill eects on the system. Since 2010 loans grantedagainst pawned gold has risen signicantly in the country on growing

international gold prices and looser domestic regulatory restrictions (nolimitations on the maximum permissible loan to value).

Several commercial banks view pawning loans as risk free. However thisis debatable as these loans are extremely sensitive to gold prices andnon-requirement of submitting borrowers credit history to the creditbureau could lead to higher non-performing loans. Gold prices have

fallen from around $1,776 an ounce in late 2012 to around $1,380 an

ounce (Aug 13). Pawning loans account for about 14% of commercialbanks total loan portfolio.

Source: Commercial BanksLoans and Advances to the Private Sector for 2Q13

and August 2013 is not available

Source: CBSL, Gold.org

Source: CBSL

Sri Lanka to improve in Ease of Doing Businessindex. CBSL governor Mr. Ajith Nivard Cabraal stated Sri Lanka has theobjective of reaching a rank as high as 30th in International MonetaryFunds Ease of Doing Business (EODB) Index by 2016. The governor

believes Sri Lankas low ination, robust banking system and interest ratesto beattractive for international businesses in the future. CBSL expectsto maintain ination at single digits through the rest of 2013 and it to

ease to mid-single digits in 2014. Citing countrys rapid improvementfrom 96th to 81st in the 2013 EODB index the governor believes a similarimprovement is likely at the next assessment.


3/113

In Economic news:

Sri Lanka secures more international funding.Sri Lanka secured $400m in budgetary support and loans from theAsian Development Bank (ADB) and the World Bank. ADB is to channel$200m into the education sector under the rst ever results basedlending scheme. Further tranches of the loan will be payable based onachievement of objectives such as the rollout of a full curriculum in schools,


Road and port development continues. Governmentsfocus on infrastructure development remains well in the spotlight as it

rmly lays the foundation for a $100bn, $4,000 GDP per capita economyby 2016. Key highlights during the month;

Credit to state continues unabated. In Jun 13, Credit to thecentral government rose a staggering 24.6% YoY to Rs.1,259.1bn and creditto state enterprises was also up 23.0% YoY to 338.9bn. Further evidencingpublic sector crowding the loan market, credit to private sector enterprises

only grew 8.9% YoY its lowest level in recent years. Government and stateenterprises credit is now 39.6% of total debt, its highest level in recent years(26.1% in Nov 2010).

Deputy Central Bank Governor Mr. Nandalal Weerasinghe stated that privatesector credit utilisation is actually higher than bank loan data suggest due tothe sector raising money through other means such as corporate bonds. Wenote that several companies have indeed raised money through corporate

debt, this only accounts for a small percentage of the entire private sectorin the country.

Source: CBSL

Source: CBSL

implementation of a technology stream, and

training principals and teachers. The $200mWorld Bank loan is to be utilized in the Second

Health Sector Development Programmeunder the Five Year National Health SectorDevelopment Plan (NHSDP) 2013-2017.

Receives go ahead for the $4.5bn Northern expressway from Colomboto Jana via Kurunegala and Dambulla with connections to Kandy andTrincomalee. The rst two stages of phase one (Colombo to Dambulla) is

to be developed by China Merchants Holdings (International) CompanyLtd. and China Merchants Hua Jian Highway Investment Company Ltd. ata cost of $1.5bn.

Colombo South container terminal of the Colombo port commenced

operations. Costing $500m the terminal is now the only port in South Asiaable to handle the largest Triple-E Class vessels (carrying 18,000 containers)

thus increasing ports container capacity to 12.7 million per annum fromcurrent 4.5million. The China Merchant Holdings International has 85%stake in the project with Sri Lanka Ports Authority owning the remaining

15%.

With the intention of generating about $1bn in revenue Colombo andHambantota ports were declared as free ports. The move is aimed at

developing trans-shipment industries and exports through such zones.Moreover Katunayake and Mattala airports were declared as bonded zonesencouraging the establishment of businesses.


4/114

In Economic news:


AG approves second coal power plant. Sri Lankas second coal power plant to be builtin Sampur, Trincomalee by India based National Thermal Power Corporation (NTPC) Ltd received thenod from Sri Lankas Attorney General. The $500m plant is expected to generate 500MW and be built inassociation with the Ceylon Electricity Board (50/50 stake). The agreement was sealed after six years ofwrangling with charges of unfair benets being awarded to NTPC, environmental pollution and highercost of power generation being alleged. Some state ocials have noted that each unit of power produced

from the new plant would cost Rs.18 higher than Rs.13 incurred at the Norichcholai coal plant.

The rupee ended themonth at 131.69/135.01vs. USD (rupee weaker~1.4% MoM). During themonth the Sri Lankan Rupeedropped to an all-time low

135.00 to 135.15 compoundedby panic buying by importers,exporters staying away awaitingfurther depreciation and sell o

of government treasuries in view

of U.S Federal Reserve easing itsTreasury purchases. Althoughthe Central Bank believed the

downward trend was temporaryit directed the market towards133.40 using state banks.

Source: CBSL

Source: CBSL

More blocks for exploration. Petroleum ResourcesDevelopment Secretariat made available additional blocks for oshoreoil and gas exploration. Six ultra-deep water blocks of approximately

Ination rose to 6.3%YoY in Aug 13 (+20bpsMoM). However the annualaverage ination dipped to8.0% from 8.3% in Jul 13 on foodand non-alcoholic beverage

prices declining 0.8% MoM. Thissegment constitutes about 40%of the ination index

18,000 and 26,000 sq. km. are to be allocated around the countryscoastline. Currently Cairn Lanka is the only gas explorer to have

discovered gas in two of the four wells it was allocated.


5/115

In Economic news:


The All Share PriceIndex closed at5,834.04, down 3.4%MoM, down 3.4% YTD.Apart from food and beverages(+5.1% MoM) all other sectorsended the month in negativeterritory with sectors, diversiedholdings (-11.7% MoM), services(-9.7%) and stores & supplies(-9.2%) performing the worst.

Navara Capital, an investment

banking services provideracquired New World Securities(Pvt.) Ltd. (NWS) a registeredtrading partner of the ColomboStock Exchange. NavaraCapital intends to leverageNWSs strengths in corporatenance and consultancy as itforays into stock broking. NWSwas established in 2011 withJapanese investments and wassubsequently acquired by RoyalCeramics and its ManagingDirector Mr. Nimal Perera in Apr2013. Separately the ColomboStock Exchange (CSE) permitted

foreign investors to trade in listedmutual fund, Namal Acuity Value Fund placing no limit on the units thatcan be held by non-residents.

Exports grow after 15 months. Sri Lankas exportsgrew 6.8% YoY in Jun 13 to $807.4m. The increase is the rst since Feb 12but cumulative exports in the rst six months of 2013 remain 4.5% lowerthan a year earlier.

Imports also grew a signicant 15.3% YoY in June but were lower 5.8%YoYduring Jan-Jun 2013. As a result the cumulative trade decit was $4.5bnfor Jan Jun 2013, 7.1% lower than previous year. CBSL commentingon the periodic performance stated that earnings rom tourism, workersremittances, oreign direct investments (FDI) and investments in Governmentsecurities showed a noteworthy growth during the frst hal o 2013. Inowsinto government treasuries and securities increased 57.9% YoY in Jan-Junwhile long term loans declined 15.4% YoY.

Source: CSE

Source:CBSL

In bond and debenture news;

Hatton National Bank oered Rs.2.0bn in deep discount bonds with anoption of another Rs.1.0bn should the initial oer be oversubscribed. The10 year unsecured senior bond is sold at a discount of 67.715 cents onthe rupee. Fitch Ratings Lankas expected rating was AA-.

National Savings Bank (NSB) is to issue $500m worth of unsecured,unsubordinated debt to foreign investors at 7.0%. The issue has beenrated BB- (Exp) by Fitch Ratings. The yield is slightly higher than the veyear bonds issued by Bank of Ceylon earlier this year due to comparativelysmaller size and higher risk prole at NSB. Proceeds would be investedin Sri Lanka developments bonds and follows the decision by thegovernment to avoid issuing sovereign debt. Road show destinationsinclude New York, Boston, London and Singapore.

Softlogic Finance PLC announced a further issue of Rs.250m indebentures as its initial Rs.250m issue was oversubscribed. The instrumentis senior, unsecured and redeemable with a tenure of three years.


6/116


In Business news:

Tourist arrivals up 9.5% in Jul13.Tourist arrivals inJul13 grew 9.5%YoY to 98,944 with arrivals reaching 611,255for Jan-Jul (+12.5%YoY). Most of Sri Lankas large marketsincluding India, UK and Germany showed stable growth.However there is a cause for concern in the per formance of theMiddle Eastern market as arrivals in Jul13 declined 49.9%YoYto just 2,751. This key o season market has performed poorlyover the last few months due to volatile regional conditions.

Chinese arrivals remain strong growing 84.4%YoY to 3,626

although it still represents just 3.4% of the total arrivals. Indianarrivals grew by 29.9%YoY to 15,032. Sri Lankas tourismearnings appear to be growing faster than tourist arrivalswhich remain an encouraging sign although this couldsimply be due to higher prices and may not translate intohigher margins for the sector.

According to the World Tourism Organisation global tourismhas shown a surprise improvement with tourist numbersgrowing 5.2%YoYin 1H13. The report shows growth of 6.2%and 11.6% in tourist arrivals to Asia and South East Asia. SriLankas cumulative growth to Jun 13 was 13.1% higher thanthe same period last year.

In other related news, shareholders of John Keells Holdingsapproved the Waterfront Development project as a Major

Transaction. The companys board of directors also resolvedto raise Rs.39.8bn from shareholders by way of rights issueand attached warrants. The Waterfront Development Projectis Sri Lankas biggest private sector investment at $850m.

Source: SLTDA

Source: SLTDA


7/117

In Business news:


Vehicle registrations up 3.3%YoY in Jul13. Motorvehicle registrations grew 3.3%YoY and 13.9%MoM in Jul13 hinting at aslight recovery in the market. Total vehicle registrations were 27,797 led

by motor cars, specically reconditioned cars from Japan which grew141.9%YoY and 12.8%MoM.

SUV registrations, a category heavily reliant on duty free permitsissued by the government, also grew 45.2%YoY and 56.3%MoM. Theintroduction of a new category for vehicles valued between $30,000-$35,000 may also boost registrations according to JB Securities.However there is a lower tax exemption which could increase the costof the vehicles.

The government has revised the tax rate on single cab trucks tocorrect an anomaly on taxing such vehicles according to the Ministryof Finance. The revised rate will consider the cargo carrying capacity

Source: JB Securities

of the vehicle rather than its engine position and is expected to makecertain brands such as the Indian Mahindra trucks cheaper.

Moreover in late Aug 2013, CBSL issued a directive that with immediateeect, Letters of Credit facilities opened with commercial banks to importvehicles to require a margin deposit of 100%. CBSL noted that duringthe year 2013, the currencies of several trading partner economies have

sharply depreciated against the Sri Lankan rupee and believes thiscould lead to higher imports. The move is aimed at avoiding any furtherdepreciation of the rupee on higher imports.

In related news Colonial Motors PLC, one of Sri Lankas oldest companies inthe automotive industry decided to phase out its vehicle sales operationsand restructure itself as a property development and investment holdingcompany. Vehicle sale operations would be carried out solely throughKIA Motors (Lanka) Ltd a subsidiary of the company. Moreover Dieseland Motor Engineering PLC, a company servicing both the higher andlower end of the market, reported a 91.8% YoY drop in second quarter netprots as revenue declined 42.2%YoY to Rs.5.0bn.

Source:Forbes & Walker Website

Tea exports recover but

production falls in Jul13 Sri Lankastea exports recovered in Jul 13 growing12.6%YoY and 20.3%MoM to 29.9m kgs.However production decreased 6.0%YoY to22.6m kgs. as high elevation production fell

13.1%YoY to 3.1m kgs due to adverse weatherconditions.

Moreover the decision to develop Sri Lanka asa tea hub has met opposition. While the actionwould increase exports some believe it couldlead to the dilution of the brand that is PureCeylon Tea.


8/118

In Business news:


Dairy farmers to receive assistance. Dairyfarmers are to receive concessionary loans through aCommercial Scale Dairy Development Loan Scheme(CSDDLS) of the CBSL. The communiqu by theCBSL highlights the importance of milk in alleviatingnutritional poverty and the inability of Sri Lankas dairyindustry to provide the necessary production levelscurrent in demand.

The CSDDLS expects to provide concessionary loansfor several aspects of dairy farming including but notlimited to Purchase of cows (for a farm with at least 25 cows) Fodder production and grass cultivation Farm development and construction of bio-gas units,irrigation systems construction of wells etc. Purchase of machinery and equipment Purchase of freezer trucks for milk transportation andconstruction of cooling room facilities

NDB to acquire Union Bank? Dailyft.lk reported of a possible takeover by NationalDevelopment Bank PLC (NDB) of Union Bank ofColombo PLC (UBC) with several rounds of talksalready being held. However both banks havenot made a public statement. NDB have a statedobjective of expanding into the commercial bankingsector which earned the bank a downgrade byFitch Ratings in Jun13 AA-. However the synergiesinvolved in such an acquisition cannot be deniedgiven that UBC has focused on the SME sector which

is a sector of expertise for NDB. UBC has a 38 branchnetwork which would also enhance NDBs presencearound the island.

Business condence retreats further in Jul13.The LMDNielsen Business Condence Index experienced a sharp decline falling14 points to 111. According to Mr. Shaheen Cader, Managing Directorof Nielsen Sri Lanka, deteriorating consumer spending capacity is themain concern of businesses. This comes in the wake of a preliminaryreport on the country s Household Income and Expenditure for 2012/13by the Department of Census and Statistics which found that householdexpenditure was outgrowing household income by as much as 3%.

48% of business condence survey respondents say their businessvolumes have decreased from the same time last year. This is a drastic

DFCC downgraded by Fitch.Fitch Ratings (Fitch) downgraded DFCC

Banks national long-term rating AA- witha stable outlook. The banks commercialbanking subsidiary DFCC Vardhana Bank(DVB) has also been rated as AA- with astable outlook. The concerns raised by Fitchare similar to those cited in its downgradeof NDB Bank earlier this year. They believethat DFCC could face greater risk as itdelves into the competitive commercialbanking sphere in Sri Lanka. They also feelthat DVBs growth into a core subsidiaryof DFCC requires a more integrated viewwhen considering stability.

Source:Forbes & Walker Website

increase from 19% in Jun13. Of those polled 33% believe sales volumeswill decrease further in the next 12 months up from 24% in Jun 13.


9/119

In Business news:


Laugfs Gas to establish terminal inHambantota. in spite of the governmentstating it will not reapply for the concession.Outgoing president of the Exporters Association,Mrs. Dawn Austin, urged the authorities tonegotiate export concessions as it could re-vitalisethe export sector like no incentive.

Cargills (Ceylon) Plc totransfer retail operationsto its fully ownedsubsidiary Cargills FoodsCompany (Pvt.) Ltd. Thecompany is planning to expandits geographic coverage with thedevelopment of several hospitals.The rst of these will be situated inNegombo, will have between 60-70 beds and provide all requireddiagnostic services. The project is

expected to cost Rs.575m and willbe wholly owned by NawalokaHospitals.

Sri Lankan Airlines to connect with LufthansaAirlines.The move is to establish maintenance and repair servicesat the Mattala International Airport. The service is expected to beoperational as early as Apr14 and would have four bays with the capacity

to service Airbus A320 and Boeing 737 aircraft.

Source:SLTDA

The strategy is part of Sri Lankan Airlines attempt to breakeven by2017 following signicant losses (Rs.20.6bn) in 2012. Other plansinclude the purchase of fuel ecient long haul aircraft and signicantimprovement in service and destination oering. SLA also intends tobegin direct ights to China in 2014 as passenger volumes to Sri Lanka

have been steadily increasing.

Sri Lankas exports have been continuously declining for almost 15months now. Although the removal of the GSP concession was notimmediately felt subsequent recessions and economic crises in Europehave had signicant impact on Sr i Lanka. Dr. P.B. Jayasundera earlier inthe month re-iterated the governments reluctance to apply for GSPas it would make the country a subsistent economy and encouragedexporters to develop and innovate.


10/1110

In Consumer news:

Airtel looks to exit Sri Lanka.There is speculation that Bharti Airtel is considering asale of its operations to Etisalat, Sri Lankas third largest mobile phone service provider. BhartiAirtel fourth largest player in Sri Lanka with 1.7 million subscribers entered the domesticmarket in 2007 but failed to gain headway with the market leaders. The company investedover $300m but it has proven hard to recover given the highly cost competitive local market.According to dailymirror.lk citing persons familiar with the development the company isvalued at between $110-130m.


Fonterra besieged on all fronts ascontamination scares lead to protestsFonterra Brands Lanka (Pvt.) Ltd (Fonterra) Sri Lankaslargest milk powder provider found itself under siege inSri Lanka as multiple tests of i ts products returned positivefor bacteria (botulin) as well as chemical contaminants(DCD). The company faced suspension of the sale of itsproducts, contempt of court charges and even largescale protests outside of its factory in Biyagama.

The temporary closure of its facilities to safeguard the755 sta is a measure of the extent to which the situationhad developed. The factory and oces were reopenedshortly. The gross withdrawal of products and banningof products sales and advertising led to signicant fear

amongst the general public.

Sri Lanka remains heavily dependent on Fonterra productsas the company holds more than 60% of the marketshare. Even though several forums have denounced themanufactured demand for milk powder in Sri Lanka thetruth remains that local farmers can only meet one thirdof the local demand. As such, the continued involvementof such multinationals is certainly a necessity.

Import taxes on big onions andpotatoes increased. The duty on a kilogram ofpotatoes was increased by Rs.15 to Rs.40 while the dutyon big onions was increased by Rs.5 to Rs.35. The latesttax revision is the second in three months. The Ministryof Finance and Planning stated that following a goodlocal harvest of these two vegetables the import hikewas necessary to ensure farmers receive a good price fortheir stocks.


11/11

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