Sri Lanka Newspapers Sunday 19/02/2012

State banks face cash crunch
Govt. steps up local bank borrowings
By Bandula Sirimanna

Sri Lanka's two state banks are bracing for a possible financial crisis after being directed by the cash-strapped government to lend more than Rs 180 billion to cushion steep losses of state enterprises including the Ceylon Petroleum Corporation (CPC) and the Ceylon Electricity Board (CEB). Losses have been mounting in these two institutions owing to high crude oil prices in the world market and the depreciation of the rupee, official sources said.

About $800 million is needed in the next three months for oil bill interventions alone while more is required for other costs, they said. The sources said the maximum loans that state enterprises could get is about Rs 100 billion a year from the Bank of Ceylon (BoC) and the People's Bank (PB). But under current plans, domestic bank borrowings is seen rising to over Rs. 180 billion from the budgeted amount of Rs.64 billion in 2012.

However even these new targets would be difficult to maintain if crude remains at $115 to $120 a barrel this year. The CPC would lose Rs. 63.68 billion even after the increase in tariff, a senior Finance Ministry official said. "If we did not increase tariffs the CPC would have lost 188.46 billion rupees in 2012," he revealed.

Local bank borrowings have increased by a staggering 280% to Rs. 160 billion in 2011 from a budgeted Rs 42 billion, the official said. The Finance Ministry expects an increase in market interest rates over the next 12 months due to the slowdown in deposit mobilisation in the banking sector and depreciation of the rupee, he said.

The BoC is targetting a bank balance of Rs 1 trillion by the end of 2012. Its total asset base is Rs.779 billion, deposit base - Rs. 563 billion and net loans given - Rs. 440 billion. People's Bank's total assets are Rs. 547 billion, total loans and advances have swelled to Rs. 372 billion while the deposit base is Rs, 462 billion.

Explaining the crisis if the banks are to lend this huge amount to the government, the official said bad loans will damage the banks' balance sheet and then depositors will want to withdraw their deposits. The government that is borrowing from the banking system at this rate is not only adding to intense inflationary pressures, keeping the interest rates high, crowding out the private sector, and mortgaging the economic future of the next generation but also getting itself into a domestic debt trap; a situation in which it will get in a spiral of ever-increasing bank borrowing to service and repay the previous debt, economic analysts said.
http://sundaytimes.lk/120219/BusinessTimes/bt01.html

By Duruthu Edirimuni Chandrasekera
The Securities and Exchange Commission (SEC) met a group of stockbrokers on Wednesday and agreed to some of their eight demands and was considering others, SEC officials and brokers said.

They said that amongst the demands was the removal of the price band and an adjustment to the credit concessions, while the SEC agreed to consider relaxing regulations on warrants and private placements.

The introduction of short selling and appointing foreign agents by stockbrokers to canvass business was agreed to by the regulator. The sources added that it was a cordial meeting and the two parties agreed to meet at least once a month.

"This was the first time that we met the new chairman at SEC. It was a good meeting," Sriyan Gurusinghe, President Colombo Stock Brokers Association. (CSBA) told the Business Times. He said that the Commission gave positive responses to all eight points that they presented. He added that what transpired at this meeting will be communicated to the CSBA membership this week.

He said that prior to the meeting with the SEC, the CSBA had a discussion on who should represent the CSBA and what points should be discussed with the SEC. "More than 20 CEOs were present at the CSBA meeting and it was a unanimous decision (on the representatives)," Mr. Gurusinghe added. SEC sources said that they only wanted some five representatives at the meeting. "We felt it will be a more productive meeting, which it was," an SEC source told the Business Times.

On Thursday, with notable price appreciations in several counters- a day after the country's regulator agreed to ease some of the rules seen stifling trading, Colombo shares recovered sharply.
http://sundaytimes.lk/120219/BusinessTimes/bt05.html

Poor Mahindananda Aluthgamage. When the compere at the Trinidad-born Billy Ocean music concert on Tuesday, announced the attendance of the Sports Minister as the chief guest, there was a long hoot before everyone joined in the ‘chorus’ of catcalls.

Whether the embarrassed minister was ridiculed for his ‘unsporting’ decisions; whether it was city folks’ general distain towards any politicians or a general reflection of public anger over rising fuel prices and cost of living, one would never know.

The economic woes of the government vis-à-vis a disenchanted public are mounting and the bus strike followed by angry protests by fishermen resulting in the death of one protestor in police shooting this week is a reflection of this anger.

The mandarins at the Treasury and the Central Bank appear to have woken up at last to a major economic crisis fuelled by weakening foreign reserves, rising oil prices and runaway state spending.
From all accounts, as two polls (the Ceylon Chamber of Commerce and BT-RCB survey) have shown over the past two weeks, the country is heading towards an economic debacle by mid-2012 with a last ditch effort by the government to avert the crisis.

The twin blows of rising global fuel prices and the ‘free float’ of the dollar has not only affected the people but also the government budget planners. According to one of our reports, the government’s local bank borrowing plans have been torpedoed by the crisis and just two months after the budget, the borrowings needs have apparently shot up by nearly 200 % to over Rs 180 billion from a budget estimate of Rs 64 billion in 2012. Some sources said it could be as high as Rs 300 billion by the end of 2012 given the exposure to rising fuel prices and a galloping US dollar.

However this jump is nothing new. In calendar 2011, total bank borrowings rose to Rs 160 billion from budgeted Rs 42 billion. Nevertheless what cannot fathom why the Treasury mandarins chose to provide a (small) double digit figure as the estimated bank borrowing needs when it was known by November 2011 (at least) that actual borrowings had been overstepped by more than 300 times the budgeted figure.

One of the explanations trotted out is that budgeted figures are just estimates and doesn’t take into account any external factors like fuel prices, currency fluctuations or additional spending, and that this has been the practice in the past.

Using the same argument, budget planners are most likely to continue to resort to a low double digit (borrowing) estimate (maybe Rs 80 billion) even in the 2013 budget, to be presented next November, knowing very well – and at least nine months in advance – that the 2012 actual has overrun the estimate by again 300% +.

In 2009, the estimated bank borrowings was Rs 49 billion which came down to Rs 45 billion in 2010, though the actual borrowing was much higher. A national budget is where the people are informed about the government's expected income and expenditure for that year. Is this what happens?

Very rarely, in the Sri Lankan case, have governments’ (present and past) stuck to the estimates and often the actual expenditure (revealed in the following year’s budget) is much higher.
However to have a budget overrun by several billions of rupees for just one item and ending up much more for the total budget is in some ways cheating the people.

If an Rs 1 trillion + budget is going to be increased by several billions of rupees, what’s the purpose of a budget at all? “The actual budget has been rising sharply against the estimates over the years that I have given up analyzing the budget. How do you examine a budget that is not the actual figures?” said an economist attached to a broking house.

The budget, in recent years, has become a big bluff couched in technical terms and economic jargon aimed at foxing the man on the street. Inflation measured by the Colombo Consumer Price Index is also seen as a measure to juggle figures and give a distorted version of actual consumer costs. It would be interesting to see the March index as to whether it would realistically reflect rising fuel and LPG prices and the chain (price) reaction of other essential commodities.

Apart from sharply rising bank borrowings at a time when interest rates have risen, the two state banks – Bank of Ceylon and People’s Bank – are also under pressure to use their deposits to lend huge sums to the government.

Economic difficulties owing to external situations cannot be blamed on a government unless the prescription ignores realities like large-scale corruption, unlimited spending and lack of austerity shown by cabinet ministers and powerful government politicians with a devil-may-care attitude towards spending public money for their personal use.

The honeymoon is over. Euphoria over the end of the war is also over while the economic war is mounting. Extracting itself from a difficult economic situation is not going to be easy for the government with a slight advantage however – no real political opposition.
http://sundaytimes.lk/120219/BusinessTimes/bt08.html

By Duruthu Edirimuni Chandrasekera
The Colombo Stock Exchange (CSE) has sent stockbrokers the new stockbroker rules (now adopted by the CSE) on Tuesday, industry sources said. "These are now regulations and the stockbrokers have to abide by them," an industry source told the Business Times. Areas covering trading practices, clients' money, minimum standards for stockbrokering firms, capital requirements, operational requirements, etc are comprehensive in the rules.

Under operational requirements, a section on client agreement in writing stipulates that stockbroker firms shall enter into a written agreement (client agreement) with each client before services are provided to the client. "Stockbroker firms shall provide a copy of the client agreement to the client and draw the client's specific attention to the risks that are described in the appropriate risk disclosure statements. The type of client agreement may vary depending on the services provided," the rules say.

Written risk acknowledgement
They also say that this agreement shall include a 'written risk acknowledgement statement' to the effect that the client is aware of the risk associated with trading of securities. The trading practices and conduct section says that when acting on behalf of clients, a stockbroker firm and their employees who deal with clients will observe the highest standards of professional conduct and integrity, act fairly, and avoid any conflict of interest which may arise. "If a conflict of interest arises, a stockbroker firm shall ensure equal and fair treatment to its clients by disclosing such conflict of interest or by declining to act or by taking any other appropriate measures," the rules say.

Under disclosure of client orders, the rules say that a stockbroker firm and their staff who deal with clients shall not disclose a client's order to any third party unless the prior written consent of the client is obtained for the disclosure of the information or the disclosure is required under any applicable law.

Recording orders
Trading practices and conduct section has an area on 'recording orders' which stipulate the broking houses to use a telephone recording system by August this year to record clients' order instructions and maintain these records for at least six years. They also have the option to obtain written instructions from clients and maintain these records for at least six years.

The rules also say that a stockbroker firm shall not effect transactions in a discretionary account unless the client has given prior written authorization to the stockbroker firm to effect transactions for the client without the client's specific instructions and that such written authorization given by the client shall clearly state the investment objectives of the client. "The Chief Executive Officer of the stockbroker firm shall approve any arrangement to operate a discretionary account," the rules further stipulate.

Unauthorized trading
Unauthorized trading rules section says that a stockbroker firm and its employees who deal with clients shall not execute a buy/sell transaction in a client account without the authority of the client; execute trades contrary to the instructions received from the client, execute its/their personal trades in the account of the client and use the client's account for third party trading.

On market manipulation and creating a 'false market', the rules stipulate that stockbroker firms and their staff dealing with clients shall not execute or cause to be executed purchases of any share at successively higher prices, or sales of any such share at successively lower prices to create or inducing of false, misleading or artificial appearance of activity in such a share. The rules also prohibit unduly or improperly influencing the market price of a share, or establishing a price which does not reflect the true state of the market in such a share.

They also say that stockbroker firms and their employees are prohibited from creating or inducing a false or misleading appearance of activity in a share or creating or inducing a false or misleading appearance with respect to the market in such a share.

Excessive trading (churning)
The brokers are prohibited from executing buy and sell transactions in a client account without the authority of the client, with the intention of generating commission for their company or themselves.
There's a section on 'front running' and use of non-public price sensitive information for trading which stipulates that stockbroker firms have procedures in place to ensure that its employees do not deal (for the benefit of the stockbroker firms any employee of the stockbroker firms or a client) in shares where the employee concerned effects the dealing in order to 'front-run" pending orders/transactions for or with clients. The rules also specify some minimum standards for stockbroker firms pertaining to their human resources and also the organizational structure with clearly defined responsibilities and authority for each category of employees. The rules also require the stockbroker firms to maintain a duly updated Systems & Procedures Manual covering trading, financial management, information systems, research (if applicable) and human resource management.

The rules also want these firms to have a documented Disaster Recovery Plan (Eg. Daily back-up of all accounting and other records maintained off-site). In supplying information to the CSE where the CSE may require a stockbroker firm to provide information or records which may be relevant to an investigation in order to discharge the CSE's duties, a stockbroker firm shall be bound by such requirement and that the broker firm shall ensure that such information and records are accurate and complete. "A Stockbroker Firm shall not willfully make, furnish or permit the making or furnishing of any false or misleading information, statement or report to the CSE," the rules further say.
http://sundaytimes.lk/120219/BusinessTimes/bt39.html

The sharp depreciation of the Rupee in the past two weeks is due to foreign exchange dealers adjusting to a market-driven policy on exchange rate fluctuations, the Central Bank (CB) said. “…the recent depreciation of the Sri Lanka Rupee, which seems to be a reaction of forex dealers adjusting to the more vibrant market driven policy framework, would appear to be a temporary overshooting of the realistic level,” the CB said as the dollar rose to Rs 120 on Tuesday.

In a statement trying to explain the sharp fluctuation of the dollar, the CB said the Central Bank has been intervening in the domestic foreign exchange market in recent years to build up foreign reserves and to smooth out any undue fluctuations in the exchange rate.

Such interventions resulted in the buildup of foreign reserves to a historically high level of $8.2 billion by August 2011, thereby preventing an excessive appreciation of the rupee. However, during the second half of 2011, the widened trade deficit underpinned mainly by the sharp increase in import expenditure necessitated the Central Bank to supply foreign exchange to meet a part of such increased demand, despite increased receipts on account of remittances, tourism and inflows to the capital and financial Account.

Although the Central Bank expected this import demand to decelerate towards the latter part of 2011 due to the uncertain global conditions, such a moderation did not take place and therefore, on 3rd February 2012, the following policy measures were introduced to strengthen the external sector of the economy, and to contain the high growth in bank credit: first, an increase in the policy interest rates by 50 basis points with effect from 3rd February 2012, so that the resultant increase in borrowing cost would restrain credit growth leading to the reduction of import demand; and second, a Central Bank direction to commercial banks to limit their credit expansion in 2012 to 18 %.

At the same time, in view of increased oil prices in the international market, the government has also decided to increase the domestic prices of petroleum products with effect from 12th February 2012, the CB said. Such policy action would encourage energy conservation and help reduce the use of oil products, thereby reducing the expenditure of imports further.

In this background, with effect from 10th February 2012, the Central Bank decided to limit its intervention in the forex market, so as to limit the supply of foreign exchange to the extent needed to settle the bulk of petroleum import bills, and to absorb surplus forex liquidity that would flow into the market from various sources including the issue of Tier-2 capital by banks, inflows to equity and bond markets etc., that may otherwise lead to the undue appreciation of the rupee.

“In light of the above measures and actions, the Central Bank has projected that the Balance of Payments in 2012 would record a comfortable surplus and such a surplus would serve to ease any pressure on the forex market,” the statement said.
http://sundaytimes.lk/120219/BusinessTimes/bt10.html

Stockmarket Review
By Elton P Ebert
After a prolonged spell of desperation and despair, a welcome change on Wednesday and Thursday brought fresh hope to many investors, although a few Fund Managers and brokers would have liked the market to shrink further with the earnings multiple falling below 10 times, to bait fresh foreign funds.

The ASI was on top gear on Thursday when it jumped 255 points due to widespread activity not seen this year. It continued the next day at a steady pace, with a massive turnover of Rs. 2 billion, but slipped back due to some players resorting to the safety valve of quick profit taking.

Those who risked their capital when the ASI was very much in discomfort around the 5000 mark were afforded the opportunity of booking ample profit just before the extended weekend. Rights issues were announced by Pegasus, Hayleys MGT and Softlogic Capital, and a few more are to follow. AgStar Fertilizers Voting & Non-voting shares commenced trading on Thursday. Voting shares ended the day at Rs 17.90, but shrank to Rs.17.40 the next day.

The company made a private placement of 125 million shares of Rs.8 each collecting a billion rupees last July. Foreign interest was emphatic in the very lucrative Commercial Bank where over 11 million shares were transacted on Tuesday providing a boost to the days' turnover of Rs. 2.4 billion. A further 10.7 million shares were dealt on Friday. Besides the widespread activity by the retail segment, institutions were also active in stocks like JKH, SLT and the high priced but very profitable Ceylon Tobacco. Over a million shares in the highly diversified Aitken Spence were transacted on Thursday. Free Lanka Capital Holdings which sank to its lowest level of Rs.1.70 this week was unusually active on Wednesday when over 6 million shares were transacted.

The usual group of Panasian Power, Renuka Agri Foods, Blue Diamonds and Environmental Resources remained in the same vein this week too. Sampath in which a dividend and a share scrip is accruing was up at Rs.180 but ended the week at Rs.178.10. Swarnamahal Financial Services was at Rs.177 while Acme Printing & Packaging which was under the price band until Thursday moved up on Friday to Rs.26.50. Regnis Lanka dipped to Rs.312, as did E B Creasy to Rs.1015. A price band was removed from Acme Printing & Packaging on 17th February.

Changes in directorates: Onally Holdings PLC - P.A.I. Sirinimal Perera was appointed independent director and Chairman on 31st January; Mercantile Investments PLC - Viraj Perera and Sanjaya Bandara were appointed independent Non-Executive Directors on 9th February; Softlogic Capital Ltd - S.Deleted. Palihena was appointed an independent director on 1st February; Aviva NDB Insurance PLC - Anura Siriwardena was appointed Director on 8th February; People’s Merchant PLC - Sarath Rajapakse was appointed a Director on 14th February.

The turnover for the week was encouraging at Rs. 8.2 billion as against Rs. 3 billion for the earlier 3-day week. Both indices were lower, the All Share Index dropping 31.82 points or 0.2% to end at 5285.17 while the Milanka ended 79.71 or 0.5% lower at 4549.43.
http://sundaytimes.lk/120219/BusinessTimes/bt25.html

Many challenges affected exchange rate management in Sri Lanka, along with widening trade deficit but factors such as the IMF’s loan of US$ 2.6 billion brought about a catch-22 situation, analysts say.

"Balancing strong growth without the luxury of deep pockets proved to be an uphill task which adversely put pressure on the rupee," an analyst pointed out. Many analysts noted that the post war Sri Lankan economy recorded 8% GDP growth for two consecutive years and was projected to record similar growth in 2012 as well.

However financing this strong growth proved to be difficult given the shortfall in FDI’s (which was some US$ 700 million in 2011 while economists believe it should have been around US$1.6 billion which is approximately 3% of GDP in order to drive healthy economic expansion) and outflow of foreign portfolio money given the market correction and global economic implications.

Iranian embargo
Danushka Samarasinghe, Director Research TKS Securities noted that external pressure was inserted on the domestic economy, following the trade embargo on Iran, which was the cheapest supplier of crude oil to Sri Lanka while also providing a six months revolving credit facility.

"Cheap Iranian oil is not available and Sri Lanka has to purchase oil from other suppliers at open market prices which could dwindle the foreign reserves," he pointed out. Having drawn US$1.8 billion of the IMF loan facility, the domestic economy is subject to certain conditions with regard to macro-economic health, and therefore not in an ideal position to raise fresh debt from international markets in order to maintain the debt-to-GDP level at the current 82% or lower.

“This is why last week the Central Bank had to withdraw from its currency defense policy (which was done in order to create an artificial currency peg) and allow the currency to float (albeit having mentioned that they would provide quantitative intervention with regard to oil bills) in an attempt to safeguard the foreign reserves which we believe is sufficient to service four months’ worth of imports," the analyst noted.

Inconsistent policies
Having upped the interest rates and floated the currency within a period of 10 days, the government increased the retail fuel prices on 11th February 2012."This same government in 2007 initiated the move away from subsidized fuel and made price adjustmens according to world market prices.
However till February 2012, Sri Lanka adopted a cross-subsidy scenario for its fuel sales where petrol was heavily taxed and sold at higher prices when compared to international markets while diesel was sold at a discount to international prices,” the analyst added.

He also said that lower pricing of diesel was a policy adopted by many governments since diesel was the main fuel used in transportation, distribution and power generation in Sri Lanka, hence holding back the fuel price enabled the capping of both consumer and industrial inflation. With the recent most fuel price revision the price of the most basic diesel fuel was increased by 37% to Rs 115/litre and 90 octane petrol by 9% to Rs 149/litre.

Analysts said that the retail fuel price revision by the government is a bold move in the correct direction to safeguard broad economic health albeit being an unpopular action which has sent shockwaves amongst the masses. “Also the increase in interest rates and the floating of the rupee went against the policies and forecasts put forward by the Central Bank during the past few months, and created a negative sentiment within the business and investing community," an economist noted.

He said that the sharp upward revision in retail fuel prices would trigger a chain of events which would create inflationary pressure (since all goods and services would increase in price) and curtail GDP growth.
http://sundaytimes.lk/120219/BusinessTimes/bt32.html

“Also the increase in interest rates and the floating of the rupee went against the policies and forecasts put forward by the Central Bank during the past few months, and created a negative sentiment within the business and investing community," an economist noted.

Thanks CSE.SAS as usual posting earlier.
Keep it up.

Volatile week on Colombo bourse

The Colombo Stock Exchange remained volatile last week with the All Share Price Index falling to a new low since January 2011 on Valentines Day - February 14, brokers and analysts said.

They commented that this was in stark contrast to the index hitting an all-time high on Valentines Day exactly one year previously.

Acuity Stockbrokers in a market report attributed Tuesday’s downturn to margin calls, foreign exchange volatility and fuel price hike and inflationary fears dulling sentiment.

"Foreign inputs and local institutional buying however propped up turnover levels with foreigners remaining net buyers for five consecutive days," the report said.

Acuity expected speculative counters to dominate trading this week but anticipated interest in fundamental counters gathering steam

The report noted that corporate earnings that are coming so far were "robust" with approximately 50% of the companies reporting earnings last week recording year-on-year growth.

"We expect retail sentiment too to be positive in the week ahead," Acuity said.

The market report noted that both indices had closed the week negatively although the market surged on Thursday and held its gains on Friday. The All Share Price Index lost 31.82 points (0.60%) from the previous week while the Milanka lost 77.71 points (1.68%) from the previous week.

However, the daily average turnover value for the week was up 68.66% from a week earlier with Commercial Bank, JKH and Lanka Milk Foods contributing over 39.9% of the aggregate turnover value for the week.

"The market capitalization however, declined marginally by 0.45% during the week to Rs.1,937.72 billion," the report said.

Foreign participation last week saw a net inflow of Rs.1.17 billion with sales running at Rs.285.6 million. Foreign purchases had increased 200% to Rs.2.78 billion last week from Rs.918.6 million the pervious week.

John Keells Stockbrokers reported that the indices had rebounded last week partially offsetting substantial losses the previous week with activity dominated by foreign play on the Commercial Bank which accounted for over 70% of the week’s turnover and helped the net foreign inflow of Rs.1.17 billion.
http://island.lk/index.php?page_cat=article-details&page=article-details&code_title=45551

SATURDAY, 18 FEBRUARY 2012 05:56
In the wake of the huge increase in fuel prices and electricity bills, people are likely to be burdened further if the government approves a request from milk powder companies to increase the price of a 400 gram packet of milk powder by Rs.15.

The Consumers Affairs Authority said yesterday the distributors of brands such as Anchor, Nespray, Maliban and Diamond have citied the high cost of importing, manufacturing and distributing milk powder as a reason for their request.

The companies have warned that their industries would be jeopardized unless an upward revision of prices was allowed without delay and have sought an appointment with Internal Trade Minister Johnston Fernando to discuss the crisis situation.

Company officials said the devaluation of the rupee by three per cent in the 2012 Budget, had a negative impact on milk powder importers, and the situation took a turn for the worse with the rupee depreciating to about Rs.120 against the dollar.

“We have to pay at the latest exchange rates when clearing shipments. It is a cost factor. Our distributors and agents are demanding a price increase because of the rise in fuel prices. The transport cost is the most serious cost factor at the moment,” a leading milk powder importer said and added that the fuel adjustment charge would also add to the production cost.

“Given these reasons, we asked for a price revision. We sent a letter to the Consumer Affairs Authority a few days ago in this regard. We are waiting for the reply,” the importer said.

In Sri Lanka, only 20 to 50 per cent of country’s milk requirement is produced locally. The rest is imported mainly from New Zealand.

Meanwhile the milk powder companies had brought to the Minister’s notice that the global milk powder prices had not decreased but remained at US$3,900 for a tonne of milk powder.

However, Consumer Affairs Authority (CAA) Chairman Rumy Marzook said the price evaluation committee has not met yet to decide on these matters. (Kelum Bandara)
http://www.dailymirror.lk/news/16914-price-of-milk-powder-likely-to-rise.html