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Sri Lanka Newspapers Tuesday 20/03/2012

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1Sri Lanka Newspapers Tuesday 20/03/2012 Empty Sri Lanka Newspapers Tuesday 20/03/2012 Tue Mar 20, 2012 1:10 am

CSE.SAS

CSE.SAS
Global Moderator

Will the Renminbi Rule?
*The Chinese currency is on track to become more important globally, but is unlikely to challenge the dollar anytime soon
By Eswar Prasad and Lei Ye

THE Chinese economy is now the world’s second largest and a key driver of global growth. It amounts to between 10 percent and 15 percent of world GDP (depending on how it is measured) and, in 2011, accounted for about one-quarter of world GDP growth. But among the currencies of the six largest economies in the world, China’s renminbi is the only one that is not traded easily and accepted worldwide—that is, it is not a hard currency.

China’s government has taken steps recently to promote the international use of the renminbi, even though it has not been willing to open up its economy to the free flow of capital and allow its exchange rate to be flexible. Nevertheless, given the sheer size of China’s economy and its rising shares of global output and trade, these steps portend a rising role for the renminbi in international finance and trade. But a compelling question is whether the renminbi’s global stature will rise to match that of the Chinese economy—perhaps approaching the U.S. dollar.

The answer to that question depends on three related but distinct concepts about the currency:

• Internationalization: its use in denominating and settling cross-border trade and financial transactions—that is, as an international medium of exchange;

• Capital account convertibility: how much a country restricts inflows and outflows of financial capital—a fully open capital account has no restrictions; and

• Reserve currency: whether it is held by foreign central banks as protection against balance of payments crises.

A country’s currency can be used internationally even if its capital account is not fully open. And even in the absence of restrictions on capital flows, a country’s currency may be used little or not at all internationally. But both international use and an open capital account are necessary for a currency to become an international reserve currency.

This article evaluates the current state of and prospects for the renminbi in each of these three dimensions in terms of the balance and sustainability of China’s economic development and the associated implications for the global monetary system.

Becoming a reserve currency

Given China’s size and growth prospects, it is widely seen as inevitable that the renminbi will eventually become a reserve currency. To gauge the likelihood and timing, it is necessary to consider the typical attributes of a reserve currency and evaluate China’s progress in each of these dimensions. The factors that generally affect a currency’s reserve status include

• Economic size: A country’s GDP and its shares of global trade and finance are important, although not crucial, determinants of a country’s reserve currency status.

• Macroeconomic policies: Investors in a country’s sovereign assets must have faith in the ability of its economic policies, especially its commitment to low inflation and sustainable public debt, to protect the value of the currency from erosion.

• Flexible exchange rate: Reserve currencies are typically traded freely and their external value is market determined, although this does not entirely preclude central bank intervention in foreign exchange markets. An open capital account is not synonymous with a freely floating exchange rate.

• Open capital account: Reserves must be acceptable as payments to a country’s trade and financial partners, which requires that the currency be easily tradable in global financial markets. This is difficult if a country imposes restrictions on capital flows and if its foreign exchange markets are thin and subject to the government’s direct control.

• Financial market development: A country must have deep and liquid financial markets—that is, markets, especially in government bonds, with many buyers and sellers to provide "safe" assets that can be held by international investors and central banks from other countries. Turnover (trading volume) in these bond markets, which is a measure of liquidity, is also important.

There is no hard-and-fast rule that dictates which of these factors are important or even essential. For instance, the Swiss franc is a global reserve currency even though Switzerland’s shares of global GDP and trade are small. Moreover, many major reserve currency economies—the euro area, Japan, and the United States, for example—have large and rising public debt, which casts doubt on their macroeconomic stability but has not affected their currencies’ reserve status, at least so far. Some analysts have in fact extrapolated from the U.S. experience to argue that China will have to run large current account deficits if it wants to provide reserve assets to the rest of the world. But that is not the case. The currencies of Japan and Switzerland have achieved reserve status despite those countries’ consistent current account surpluses.

How the renminbi
fits in

China’s size and importance in world trade are well known. It now accounts for 10 percent of global trade in goods, up from 4 percent a decade ago, and is extensively connected with other economies through trade linkages. Whether China’s fiscal and monetary policies anchor long-run inflation expectations and foster macroeconomic stability is an open question. China has a moderate level of explicit public debt and a small government budget deficit relative to the major reserve currency economies. Moreover, despite its tightly managed exchange rate, which has compromised the independence of monetary policy, China has had a relatively stable inflation rate in the recent past.

The next question is whether China is opening up its capital account. Although China still has extensive capital controls in place, they are being selectively and cautiously dismantled. As a result, gross inflows have risen sharply over the past decade, reflecting China’s attractiveness as a destination for foreign investment. Outflows other than foreign exchange reserves, including investments abroad by Chinese corporations and institutional investors such as pension funds, have also grown substantially, albeit from a low base. In short, China’s capital account is becoming increasingly open in actual terms, although even by this measure it remains less open than those of the reserve currency economies—the euro area, Japan, Switzerland, the United Kingdom, and the United States.

Financial market development in the home country is a crucial determinant of a currency’s international status. Historically, each reserve currency has risen to prominence under unique circumstances and spurred by differing motivations, but one constant is that this process has always required strong financial markets. The relevant aspects of financial market development include

• Breadth: the availability of a broad range of financial instruments, including markets for hedging risk;

• Depth: a large volume of financial instruments in specific markets; and

• Liquidity: a high level of turnover (trading volume).

Without a sufficiently large debt market, the renminbi cannot be credibly used in international transactions. If there is insufficient liquidity in markets for renminbi-denominated debt, the currency will not be attractive to foreign businesses. Both importers and exporters may be concerned about greater exchange rate volatility from an open capital account if they don’t have access to derivatives markets to hedge foreign exchange risk.

Where do things stand? China’s financial system remains bank dominated, with the government directly controlling most of the banking system. Total domestic credit provided by the banking sector outweighs the size of the equity and bond markets combined. The banking system’s size and structure, which protect banks’ profits by limiting competition, and regulatory barriers have stifled broader financial market development.

Debt markets in China lag far behind those of major reserve currency economies in size and liquidity (see Chart 1). The government debt market is reasonably large in absolute terms but turnover is low. Turnover is relatively high in China’s corporate bond market, which is still small. Analyzing the shares of international debt securities according to the currencies of issuance reveals a similar picture. The existing reserve currencies dominate; only a paltry 0.1 percent of international debt is denominated in renminbi.

While the absolute size of the debt securities market in China is small from a cross-country perspective, it should not mask the rapid growth of these markets, which is consistent with the country’s intention to make the renminbi accepted as an international currency (see Chart 2). Nevertheless, reserve currency status for the renminbi is probably a much longer-term goal.

One area in which China has made significant progress is in the development of equity markets. Following reforms in 2005, market capitalization and turnover surged and have grown sixfold, while trading volume has climbed more than tenfold. However, Chinese stock markets are highly volatile and prone to concerns about corporate governance, so they may be of limited help in promoting the renminbi’s role as an international currency.

The pace of internationalization of China’s currency depends on its use in international financial transactions, not just trade. Foreign exchange market turnover is a good indicator of a currency’s potential as a vehicle currency for transactions involving cross-border trade in goods and financial assets. Currently, the renminbi accounts for less than 1 percent of all turnover in foreign exchange markets in 2010, but that understates reality. China uses Hong Kong SAR as an important financial center for settling foreign exchange transactions, and in 2010, Hong Kong SAR accounted for 5 percent of global foreign exchange market turnover. Hong Kong SAR provides a useful platform that puts the renminbi on a competitive footing relative to other emerging market currencies in terms of reaching international currency status.

Most derivatives markets in China are still nascent, but three of its commodity futures exchanges are among the top 20 derivatives exchanges in the world as measured by the number of futures and options contracts traded. From the perspective of promoting international use of a currency, however, a large commodity derivatives market is not as useful as more diverse and liquid financial derivatives markets.

To some extent, policies that direct activity toward Hong Kong SAR are playing a role generally carried out by vibrant domestic financial markets. Both the amount of renminbi deposits and the number of institutions authorized to conduct renminbi business in Hong Kong SAR have risen sharply over the past year.

Policies to increase offshore renminbi use have effectively promoted its global role without risking the potentially deleterious effects of capital account liberalization. But the full potential of the Chinese currency’s international use cannot be realized without more active onshore development. Ultimately, it will be difficult to fully develop foreign exchange and derivatives markets without substantial capital account liberalization.

To sum up, there has been modest development of the breadth, depth, and liquidity of China’s financial markets over the past decade. But China still comes up short when it comes to the key dimensions of financial market development, and financial system weaknesses are likely to impede its steps to heighten the currency’s international role.

A rising international presence

Despite the weak financial infrastructure supporting it, the renminbi is gaining an international presence (see Charts 3 and 4). China has been using Hong Kong SAR extensively as a testing ground for initiatives to promote the international use of the renminbi. Personal renminbi business was launched in Hong Kong SAR in 2004, when residents there were allowed to open deposit accounts denominated in renminbi. Other initiatives followed, such as cross-border settlement of trade transactions and renminbi bond issuance.

Given China’s rapidly expanding trade volume, promoting renminbi trade settlement is a logical first step toward the currency’s internationalization. Since it began in 2009, cross-border trade settlement in the Chinese currency has surged. In 2011, renminbi trade settlement amounted to about 8 percent of China’s total trade in goods and services. Monthly remittances of renminbi used for cross-border settlement in Hong Kong SAR rose to nearly $25 billion a month in 2011, more than double the 2010 average.

Issuance of renminbi-denominated bonds (known as dim sum bonds) in Hong Kong SAR is on the rise as well, tripling from 2007 to 2010 and hitting a high of about $10 billion in the second quarter of 2011. Fewer of these bonds were issued during the remainder of 2011, reflecting weaker global market conditions as the debt crisis in Europe continued to fester.

Another way to gauge offshore use of the renminbi is to look at transactions among banks. Such renminbi clearing transactions were virtually nonexistent until mid-2010, when financial institutions in Hong Kong SAR were allowed to open renminbi-denominated accounts. Since then, both the volume and value of transactions have increased dramatically. The total value of transactions hit a peak of more than $500 billion in August 2011.

Although still on a modest scale, the initiation and rapid expansion of various elements of the offshore renminbi market foretell the currency’s significant presence in trade and financial transactions in Asia. Some might argue, however, that dim sum bond issuance and cross-border settlement in renminbi are still narrow in scope, with most of the activity accounted for by Chinese mainland companies and their Hong Kong SAR subsidiaries. Some of this activity may also reflect attempts to circumvent capital controls. In short, even the influence of offshore renminbi use has some distance to go to reach its full potential.

On another front, China’s central bank is establishing and expanding local currency bilateral swap lines with other central banks around the world to facilitate and expand the use of the renminbi in international trade and financial transactions. The amounts of these bilateral agreements are small, but they indicate efforts to make other countries’ central banks comfortable and familiar with renminbi-denominated instruments and financial facilities.

The renminbi has also started to appear in a few central banks’ foreign exchange reserve portfolios. Malaysia and Nigeria first reported renminbi reserves in 2011. Chile’s central bank investment portfolio now has 0.3 percent of its assets in renminbi-denominated instruments. Other central banks are considering adding renminbi assets to their reserve portfolios. These holdings cannot in principle be counted as official reserves, given the renminbi’s lack of convertibility, but that does not seem to deter these central banks, which see renminbi-denominated assets—just like those of other major reserve currencies—as insurance against balance of payments pressures.

These moves are all modest in size but symbolically important in signaling the shift in perception about the renminbi’s stability and its future role in the international monetary system.

Taking on the dollar

Is the renminbi on a trajectory to usurp the U.S. dollar’s role as the dominant global reserve currency? Perhaps, but the day is a long way off. It is more likely that, over the next decade, the renminbi will evolve into a reserve currency that erodes but doesn’t end the dollar’s dominance.

About two-thirds of global foreign exchange reserves are now held in U.S. dollar–denominated financial instruments. Other indicators, such as the dollar’s shares of foreign exchange market turnover and cross-border foreign currency liabilities of non-U.S. banks, confirm the currency’s dominance in global finance. There are growing concerns about U.S. macroeconomic stability that might affect the dollar’s desirability. Although the U.S. central bank, the Federal Reserve, has strong worldwide credibility for its inflation-fighting credentials, rising public debt poses a serious concern. U.S. gross general government debt is about 90 percent of GDP, and IMF forecasts indicate that it could reach 110 percent of GDP, or nearly $21 trillion, by 2016. This is dangerous terrain for the world’s largest economy, but paradoxically—given the weaknesses in Japan and the euro area and emerging markets’ demand for so-called safe assets as they continue to accumulate foreign exchange reserves—rising U.S. debt may cement the dollar’s dominance in the global financial system.

Moreover, a gulf remains between China and the United States when it comes to the availability of safe and liquid assets such as government bonds. The depth, breadth, and liquidity of U.S. financial markets are unmatched. Rather than catching up to the United States by building up debt, the challenge for China is to develop its other financial markets and increase the availability of high-quality renminbi-denominated assets.

The renminbi is attaining more prominence in international trade and finance. While this importance is sure to grow, the renminbi is unlikely to become a prominent reserve currency—let alone challenge the dollar’s dominance—unless it can be freely converted and China adopts an open capital account. The challenge for the Chinese government is to back up its modest international policy actions with substantial domestic reforms. The renminbi’s prospects as a global currency will be shaped by a broader range of policies, especially those related to financial market development, exchange rate flexibility, and capital account liberalization. The path of China’s growth and the renminbi’s role in the global economy will depend on those policy choices.

Eswar Prasad is the Tolani Senior Professor of Trade Policy at Cornell University and New Century Chair in International Economics at the Brookings Institution. Lei Ye is a graduate student at Cornell University.

This article is based on a Brookings Institution study by the authors titled "The Renminbi’s Role in the Global Monetary System."

(Courtesy: Finance and Development, a periodical published by the IMF)
http://island.lk/index.php?page_cat=article-details&page=article-details&code_title=47813

CSE.SAS

CSE.SAS
Global Moderator

*20.5 m Spence shares sold to Aberdeen Fund for Rs. 2.3bn
*Says even willing to sell remainder if the offer was attractive


By Ravi Ladduwahetty

Hot on the heels of the Employees Provident Fund (EPF) selling its 8.4% stake amounting to 71 million shares in premier blue chip John Keells Holdings PLC to Malaysia’s Khazanah Fund worth Rs. 14.5 billion just last Friday for a capital gain of around Rs. 800 million, the pension provider followed suit yesterday by selling a 20.5 million share stake in the rival - diversified and leisure –rich blue chip Aitken Spence for Rs. 2.3 billion (Rs. 2,357.5 million) to a Foreign Fund Manager.

The EPF was the third largest shareholder of Aitken Spence as at December 31, 2011, where the pension provider had 29.836 million shares. With the sale of 20.6 million shares yesterday and with the sale of the earlier 1.2 million shares three weeks ago, the remaining EPF portfolio in Aiken Spence was 7.936 million as at end yesterday.

The 20.5 million shares sold yesterday was picked up by one of the six Aberdeen Funds operating in Colombo where all six Funds have injected funds into the Vauxhall Street blue chip and the Fund that picked up the stake yesterday was widely believed to be the Aberdeen Asia Pacific Fund. However, CT Smith Stockbrokers which clinched the deal for the lone buyers’ broker remained tight-lipped on the name of the buyer. Managing Director/CEO Rohan Fernando said that it was in the best interests of all concerned that the name of the buyer was withheld.

The reason for the decision of the EPF to sell a majority stake in the Vauxhall Street blue chip was the fear of a reprisal following the mandatory offer by the Harry Jayawardena - led Melstar Corp, where with the completion of the offer the shares of the diversified blue chip might be even delisted, frontline market sources told The Island Financial Review last night.

No one will know what the future will hold for Aitken Spence following the mandatory offer where the offer was made at Rs. 110, then increased to Rs. 112.83 and it increased to Rs. 115 and that was also the price that we sold it to Aberdeen. This decision has been made being fully aware and being acutely conscious of business tycoon Harry Jayawardena not known to pay dividends all this time when Aitken Spence was even listed and we do want to compromise the interests of the public whose savings over a life time were with the EPF, sources close to the deal said.

When contacted by The Island Financial Review, EPF Superintendent Kalyani Gunatilleke said that the Fund did not mind selling the remaining Spence shares if the offer price was attractive. She said that the EPF had not even met the buyer, but was aware of the transaction only when the brokers- CT Smith contacted her yesterday morning.

She also said that this was nothing new as there was a purchase of the Spence shares in EPF around two to three weeks ago by the same Aberdeen Fund where 1.2 million shares were purchased, also at Rs. 115. "The deal yesterday would also have been triggered by the John Keells Holdings transaction last Friday which is a booster for both the Colombo Stock Exchange and Sri Lanka as an investment destination," she said

Meanwhile, there was also a sale of 1.5 million shares of John Keells Holdings PLC yesterday where 1.5 million shares were sold at Rs. 200 The total turnover of the market was Rs. 3.1 billion where the net inflows was Rs. 2.7 billion, out of which Rs. 2.3 billion came from the sale of the EPF shares in Aitken Spence shares to the Aberdeen Fund while the remaining Rs. 400 million shares came from the sale of the JKH shares.
http://island.lk/index.php?page_cat=article-details&page=article-details&code_title=47835

3Sri Lanka Newspapers Tuesday 20/03/2012 Empty MF bullish on Sri Lanka Tue Mar 20, 2012 1:15 am

CSE.SAS

CSE.SAS
Global Moderator

International Monetary Fund (IMF) Sri Lanka Resident Representative Dr. Koshy Mathai reiterated the fund’s stance on the recent policy reversals of the Central Bank regarding the exchange rate and interest rates and the government’s decision to increase domestic fuel prices, saying the policy moves were encouraging and could help the economy.

Addressing a special forum convened by HSBC Sri Lanka yesterday morning, Dr. Mathai said that Sri Lanka’s economy was in strong position compared with many other economies in the world. "Right now there is not much to worry about and I have a lot of optimism. We remain bullish on Sri Lanka’s economic growth prospects. Inflation is low, the debt to GDP ratio is declining, and the government is committed to brining down the fiscal deficit."

The debt to GDP ratio which was over 108 percent several years ago had declined to 78 percent last year. The deficit which was at 9.9 percent of GDP in 2009 is expected to be brought down to 6.8 percent in 2011.

"The economy is at very credible position but it does not stand out compared to most other economies which have done much more, but nevertheless, the debt stock favours Sri Lanka, where the growth rate outstrips interest rates, so debt to GDP would eventually drop," Dr. Mathai said.

Dr. Mathai said the economy did face a problem on the external sector front which became manifest six to nine months ago. The Central Bank had sold nearly US$ 3 billion since July 2011 to keep the exchange rate stable in the face of severe import demand and also printed more than Rs. 300 billion to keep rupee interest rates stable. The IMF had not been too happy with these policy decisions and had delayed payment of a US$ 400 million tranche under the US$ 2.6 billion standby facility arrangement. However, early February 2012, the Central Bank made a U-turn, floating the exchange rate and curbing credit growth, which was extremely high and fuelling import demand, by increasing interest rates and slapping a ceiling on commercial bank credit growth.

"We are extremely happy these policy decisions were taken. It is a step in the right direction. But most importantly, we are encouraged by the fact that the Central Bank and the government implemented a comprehensive mix of policies with a commitment to remain flexible. And this is important because no single policy will bare the full burden of the necessary adjustments that would have to be made, and also if the external account does improve then the rupee would be allowed to appreciate, if it does not, then the rupee would be depreciated a little bit more and perhaps interest rates would also be further tightened," Dr. Mathai said, adding that no one could predict if and when things would improve.

But he did say that authorities shored up the foundation for strong, more sustainable, growth.
http://island.lk/index.php?page_cat=article-details&page=article-details&code_title=47836

sriranga

sriranga
Co-Admin

*Incidence of delinquencies to increase, asset quality to be pressured

The once troubled licensed finance company sector has seen profitability soar but rapid credit growth has seen the loans to deposits ratio expand to nearly 140 percent as at end December from 90.28 percent as at end March 2010 which would put pressure on asset quality and increase loan delinquencies going forward, a ratings agency said.

"In line with our expectations, the once-distressed licensed finance company (LFC), formerly known as the registered finance company (RFC) sector had revitalized in 2011. The industry’s credit assets posted robust growth, driven by rising credit demand amid a more conducive economic climate. In contrast to the previous financial year, the industry’ liquidity levels moderated in FYE 31 March 2011 (FY Mar 2011), fuelled by aggressive loan expansion of around 40%," RAM Ratings Lanka said in a special report yesterday titled ‘LFC Sector Update: Bracing for winds of change’.

"Generally, LFCs’ asset quality is weaker than banks’, given the higher risk levels of their targeted clients. Increased awareness and efforts in improving asset quality bore fruit in fiscal 2011, as reflected by the slower accretion of non-performing loans (NPLs) compared to previous years. Nonetheless, the industry’s loan portfolio has yet to be sufficiently seasoned given the aggressive loan growth in 2011; RAM Ratings Lanka remains concerned that incidences of delinquencies will increase as the portfolio seasons.

"Notwithstanding the robust credit growth, most LFCs had managed to maintain adequate capitalisation levels, underpinned by strong internal capital generation and capital infusions by way of initial public offerings (IPOs), to comply with the regulatory listing requirement by mid-2011. However, the industry’s funding mix had tilted towards borrowings, as deposit growth had not kept pace with credit expansion. Many industry players had increased their reliance on long-term borrowings due to the low interest rates, thereby reducing near-term maturity mismatches. This had also resulted in the worsening of the industry’s loans-to-deposits (LD) ratio to 139.13% as at end-December 2011 (end-March 2010: 90.28%)," the ratings agency said.

"Notably, LFCs generally provide long-term loans that target the high risk strata of borrowers, which in turn permit them to charge higher rates than licensed commercial banks (LCBs). The industry’s margins widened in fiscal 2011, largely supported by lower funding costs amid the faster downward re-pricing of deposits and also underpinned by the surge in loan assets concentrating on high-yielding products; this had helped the industry return to the black after the previous year’s losses.

"Going forward, the LFC industry’s asset quality is expected to be pressured, testing the strength of underwriting and collection procedures against the backdrop of rising interest rates and inflationary pressures. Despite the rising interest rates, the industry’s credit assets are anticipated to expand some 40%-50%, albeit at a slower pace than the previous year. The uptrend in credit demand for LFCs is also likely to be driven by the limits imposed on LCBs’ credit growth by the regulator, the Central Bank of Sri Lanka (CBSL).

"That said, the industry’s margins are expected to thin amid the anticipated escalation in funding costs given the environment of increasing interest rates. Although LFCs are expected to seek alternative funding options to fuel their rapid loan growth, we envisage deposits to gain prominence in an environment of rising interest rates. Despite the expected growth in deposits, we presume the LD ratio to remain elevated through the medium term – a level which we view with concern. However, the increased focus on subordinated debt and better internal capital generation are envisaged to preserve the industry’s overall capitalisation at adequate levels. In line with the anticipated loan expansion, the industry’s liquidity levels are expected to moderate, albeit maintained at adequate levels.

"On a separate note, the industry’s corporate governance and transparency have improved in line with the listing of most LFCs’ shares on the Colombo Stock Exchange (CSE), which in turn requires them to comply with the guidelines on corporate governance as well as more frequent quarterly financial reporting requirements. The newly implemented Finance Business Act has extended the supervisory powers of the CBSL and also tightened the regulatory criteria imposed on the senior management of LFCs; these efforts are viewed in a positive light. Although most LFCs are now publicly listed entities, many have only floated the minimum requirement of 10% of their capital; they are thus still closely held by the founding families.

"The LFC sector remains a small contributor to the Sri Lankan financial sector, accounting for only 3.49% of the sector’s total assets as at end-December 2011. Currently, 40 players operate in the LFC sector with 532 branches island-wide, catering to a perceived high risk clientele. The provision of hire-purchase (HP) and leasing facilities for vehicle financing remains this sector’s mainstay, complemented by its developmental role of promoting small and medium-sized enterprises ("SMEs") and the micro-financing industry.

"Although the loan products offered by LCBs and LFCs are rather homogeneous, the latter is expected to face more intense competition over the medium term as LCBs are encroaching into LFC’s space by offering products such as 3-wheeler financing and micro-financing, which target their segment of borrowers. Meanwhile, the recent devaluation of the Sri Lankan rupee and more costly fuel and electricity will drive up the prices of necessities. Given the high risk nature of these customers, their ability to cope with inflation will be limited without a corresponding rise in income; this may increase delinquencies over the short to medium term. Moreover, retain the industry’s asset quality would be further challenged over the medium-term, owing to the insufficiently seasoned loan books amid their aggressive growth as of late. Attempting to preserve margins amid rising interest rates will also represent a key immediate-term obstacle for the LFC sector.

"Despite these challenges, we opine that demand for lending within the LFC sector will be anchored by the ease with which loans can be obtained; their relatively less stringent underwriting criteria will continue to appeal to high-risk borrowers. Meanwhile, weakening asset quality will be mitigated by adequate capitalisation while liquidity is perceived to be able to adequately support loan expansion. All said, the outlook on the long-term financial institution ratings of LFCs rated by RAM Ratings Lanka will remain stable in 2012, as reflected by the stable outlook on the long-term ratings of the majority of the rated entities in our portfolio," RAM Ratings said.

"In line with our expectations, the industry’s performance indicators improved in fiscal 2011, followed by a better showing in 9M FY Mar 2012. We note that the sector’s profitability had soared, propelled by a healthier core performance and stronger non-interest income. As such, the industry’s pre-tax profit ascended to LKR 5.92 billion in fiscal 2011 (fiscal 2010: LKR 126.81 million), before climbing further to LKR 13.12 billion in 9M FY Mar 2012 – amid the rebound of troubled The Finance Company PLC (the industry’s fourth-largest LFC). This better performance translated into an improved return on assets (ROA) of 6.08% for 9M fiscal 2012 (FY Mar 2010: 0.07%). Although the industry’s top line is expected to grow robustly, we expect the sector’s overall profitability to moderate somewhat owing to thinning margins and fall in non-interest income. In addition, any deterioration in asset quality would pressure profitability given the need for more provisioning," it said.
http://island.lk/index.php?page_cat=article-details&page=article-details&code_title=47838

http://sharemarket-srilanka.blogspot.co.uk/

5Sri Lanka Newspapers Tuesday 20/03/2012 Empty Forex foxed? Tue Mar 20, 2012 1:35 am

Redbulls

Redbulls
Director - Equity Analytics
Director - Equity Analytics

The country’s forex market encompassing highly dependent importers and key source exporters was yesterday rocked by what analysts described as the sharpest day gain in the US dollar exchange rate.

Before mid-day the Rupee touched a new low of Rs. 127 and then on to Rs. 128 prompting many to assume the rate had bottomed out. However as panic spread within markets, the rate touched a record low of Rs. 131 dealers told the Daily FT.

The change of Rs. 6 or near 5% within a day was claimed as ‘extremely volatile.”


Last Friday the exchange rate was around Rs. 125. Since February, the rupee has seen a 15% devaluation.
The spike yesterday was despite repetitive assurance from Central Bank Governor Nivard Cabraal late last week that Rupee would and is getting stronger.

His confidence however stemmed from the estimation that at least $ 365 million of inflows are expected by end of this month, which is next week.

As reported in the Daily FT yesterday, Cabraal said: “We see the recovery as substantial. All these fellows buying 125 rupees for a dollar will be quite sad finally when they see what is happening.”

He apparent cynicism came after the Central Bank managed Rs. 1 trillion-asset rich Employees Provident Fund (EPF) racked in Rs. 13.7 billion in foreign portfolio inflow on Friday by selling 8.4% stake in premier blue chip JKH to Malaysia’s sovereign wealth fund Khazanah. Without being specific Cabraal also told Reuters that inflows are expected via investments in to hotel projects, banks raising foreign capital and to the share market. Lower imports were another cushioning factor for expected ease in pressure on the rupee.

However what happened yesterday would have been a rude shaking for Central Bank Chief. Analysts said that the inflows that Cabraal was talking about doesn’t come direct to the inter-bank market instead is retained with the monetary authority. Unless there is fresh infusion from exporters in the short-term, uncertainty will remain.

Dealers told the Daily FT that the forex crisis yesterday reached a level where in the spot market, the usually most liquid in a tighter environment, didn’t have quotes.

Analysts have pinned the blame of the crisis to multiple reasons. One was the recent Central Bank move of drastically cutting as much as 60 to 65% the commercial banks Net Open Positions (NOP), a leeway based on which banks can either keep or oversell dollars. This in turn has made even securing a small contract worth half a million or one million dollars tougher as banks resort to further cover. Inter-bank bid offer spread have ballooned as well as opposed to previous case of narrow spread boosting liquidity.

“At Rs. 131 there were many desperate buyers but no sellers,” a dealer said suggesting the latter’s expectation of further spikes on Tuesday.

Yesterday’s volatility also came midst Central Bank successfully concluding an enhanced Sri Lanka Development Bonds (SLDBs) issue of $ 84 million. (See box story).

Since it is to set off maturing SLDBs, yet again the inter-bank market won’t feel a major boost.

Some however partly attributed yesterday’s spike to the very SLDB issue as it had mopped remaining liquidity in the market as well as fuelling speculation based on at what cost will SLDBs will be raised. Others said that wasn’t the case as $ 84 million was a drop in the ocean.

Analysts also said despite recent policy measures import demand for dollars remains robust, especially eying the April Avurudu season. That apart some of the restrictive measures along with perhaps excessive speculation have constrained the forex market as well.

“The cycle appears vicious and volatility has made things worse,” analysts said adding that the bottom line was “supply is not sufficient enough to meet the demand.” The volatility in oil prices is a big threat to stability with some claiming unless aggressive conservation measures in place, demand and import cost despite upward price revisions, will rise.

“Exporters are happily keeping their dollars and awaiting to convert later when it further depreciates,” a currency dealer had told Reuters on condition of anonymity. Reuters which reported the rupee hitting the lowest of Rs. 131.60 before closing 130/131also said analysts expect the rupee to recover in April on declining dollar demand and expected exporter conversions.

However the development yesterday also exposes the fact that close scrutiny by the Central Bank even to the extent of visiting banks or raising questions about ordinary transactions have eroded market confidence.

Unlike in recent past, the market didn’t see intervention by the Central Bank via state banks yesterday. This may have given extra room for rupee to dip further as well as fuel speculation.

Central Bank via its previous announcements had expressed its intention to limit its intervention and rely more on demand and supply for the exchange rate to find its equilibrium, which appears elusive as of yesterday.

In its February 15 statement the Central Bank said: “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.”

That statement came after a bit of sharp volatility and CB assured that recent measures and actions (such as upward revision in fuel prices and policy rates as well as caps on domestically financed lending among others) would lead to a comfortable Balance of Payments in 2012 and such a surplus would serve to ease any pressure on the forex market.

“In that context, 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 in mid February. Judging by the position it took a month ago, the overshooting has aggravated and certainly not a temporary phenomenon.

Apart from $ 120 million inflow via equity market on Friday, a further $ 16 million came in yesterday as EPF sold its Aitken Spence stake to a foreign fund. Central Bank Governor also said both Commercial Bank of Ceylon and Sampath Bank are expected to bring in a total of around $125 million for capital requirements, while a Middle East bank will invest $50 million in treasury securities. Another $75 million for land acquisition by an Indian firm for a hotel project are also expected.

“All this money will come within two to three days,” he said.

“We know inside out and we know what is coming. Sometimes it may be two or three days later. We have cautioned the market and told them that the inflows will come in and the rupee will stabilise,” Cabraal said in his comments to Reuters on Friday.
http://www.ft.lk/2012/03/20/forex-foxed/

sriranga

sriranga
Co-Admin

Mar 19, 2012 (LBT) - Sri Lanka's financial market watchdog Central Bank recently warned in a statement adding that any business in Sri Lanka cannot use the terms or words ‘finance’, ‘financing’ or ‘financial’ in part of their names except a registered finance company under the Finance Business Act, No. 42 of 2011 was enacted on 09.11.2011 repealing and replacing the Finance Companies Act, No. 78 of 1988.

The following is the full statement.

Notice to entities using the word ‘finance,’ financing’ or ‘financial’ as part of its name or description

1. The Finance Business Act, No. 42 of 2011 was enacted on 09.11.2011 repealing and replacing the Finance Companies Act, No. 78 of 1988. In terms of section 10 of the Finance Business Act, no entity other than a licensed finance company shall use the words ‘finance’, ‘financing’ or ‘financial’ as part of its name or description.

2. Accordingly, any entity other than a licensed finance company which uses the words ‘finance’, financing’ or ‘financial’ or any of its derivatives or its transliterations or their equivalent in any other language as part of its name or description shall remove such words from its name and description on or before 09 May 2012. This

requirement is not applicable to the following entities:

a) a company which is required by the Monetary Board to have as part of its name the word ‘finance’, ‘financing’ or ‘financial’ or its transliterations, or their equivalent in any other language in its name;

b) an association of finance companies formed for the protection of their interests; Department of Supervision of Non-Bank Financial Institutions

c) a trade union registered under the Trade Union Ordinance (Chapter 138), which is an association or combination of workers who are employees of a finance company;

d) an institution in respect of which such usage is established or recognized by law or international agreement;

e) a body corporate which exclusively provides educational or consultancy services;

3. However, further to the above exemptions in paragraph 2(a)–(e), the Monetary Board has approved that any company/organization which has been carrying on micro-finance business and registered under the following statutes as at the effective date of the Finance Business Act, No. 42 of 2011 may continue to use the words ‘micro finance’ as part of its name or description until such time the proposed Micro Finance Act is enacted.

a) any company registered under the Companies Act, No.7 of 2007;

b) any non-governmental organization registered under the Companies Act, No.7 of 2007 and the Voluntary Social Service Organizations (Registration and Supervision) Act, No. 31 of 1980;

c) any society registered under the Societies Ordinance (Chapter 123).
http://lbt.lk/news/business/1474-financial-warning

http://sharemarket-srilanka.blogspot.co.uk/

K.Haputantri

K.Haputantri
Co-Admin

Thanks Shri.

traderathome

traderathome
Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics

IMF Bullish on Srilanka

International Monetary Fund (IMF) Sri Lanka Resident Representative Dr. Koshy Mathai reiterated the fund’s stance on the recent policy reversals of the Central Bank regarding the exchange rate and interest rates and the government’s decision to increase domestic fuel prices, saying the policy moves were encouraging and could help the economy.

Addressing a special forum convened by HSBC Sri Lanka yesterday morning, Dr. Mathai said that Sri Lanka’s economy was in strong position compared with many other economies in the world. "Right now there is not much to worry about and I have a lot of optimism. We remain bullish on Sri Lanka’s economic growth prospects. Inflation is low, the debt to GDP ratio is declining, and the government is committed to brining down the fiscal deficit."

The debt to GDP ratio which was over 108 percent several years ago had declined to 78 percent last year. The deficit which was at 9.9 percent of GDP in 2009 is expected to be brought down to 6.8 percent in 2011.

"The economy is at very credible position but it does not stand out compared to most other economies which have done much more, but nevertheless, the debt stock favours Sri Lanka, where the growth rate outstrips interest rates, so debt to GDP would eventually drop," Dr. Mathai said.

Dr. Mathai said the economy did face a problem on the external sector front which became manifest six to nine months ago. The Central Bank had sold nearly US$ 3 billion since July 2011 to keep the exchange rate stable in the face of severe import demand and also printed more than Rs. 300 billion to keep rupee interest rates stable. The IMF had not been too happy with these policy decisions and had delayed payment of a US$ 400 million tranche under the US$ 2.6 billion standby facility arrangement. However, early February 2012, the Central Bank made a U-turn, floating the exchange rate and curbing credit growth, which was extremely high and fuelling import demand, by increasing interest rates and slapping a ceiling on commercial bank credit growth.

"We are extremely happy these policy decisions were taken. It is a step in the right direction. But most importantly, we are encouraged by the fact that the Central Bank and the government implemented a comprehensive mix of policies with a commitment to remain flexible. And this is important because no single policy will bare the full burden of the necessary adjustments that would have to be made, and also if the external account does improve then the rupee would be allowed to appreciate, if it does not, then the rupee would be depreciated a little bit more and perhaps interest rates would also be further tightened," Dr. Mathai said, adding that no one could predict if and when things would improve.

But he did say that authorities shored up the foundation for strong, more sustainable, growth.

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