news bulletin - january 2014

8/13/2019 News Bulletin - January 2014

1/11

In Economic news:

In Business news: In Consumer news:

2013 records highest annual tea production,340.2mkgs (+7.5% YoY)breaks 2010 level

Vehicle registrations down 1.9% in Dec 13 with full year registrations fallingto 322,172 (-17.3% YoY).

Mobitel in talks to possibly buy Hutch

CEOs more con dent about 2014, MTIs CEO survey reveals

CBSL Road Map has speci c plans for the banking and nance industry

LMD-Nielsen Business Con dence Index drops to 130 in Dec 13 (down 8ptsMoM) on tax and in ation concerns

Monthly Bul le t in : January 2014

Central Bank unveils Road Map for 2014 with aggressive GDP targets to avertpotential middle income trap

Sri Lanka issues sixth sovereign bond, $1.0bn @ 6.00%, lower than initialprice guidance level of 6.25%

Apples to oranges tourist arrivals comparison make a mockery of industrydata

Crisis in Sri Lankas power generation reaches a new height as three powerplants experience technical failures and rains fails to come

50bps interest rate cut to stimulate growth

All Share Price Index closes at 6,248.08, up 5.7% MoM, as all sectors recordingpositive growth

In ation drops to 4.4% YoY in Jan 14 (-30bps MoM) a 22 month low

Rupee ended Jan 14 at 129.28/132.16 vs. USD (rupee stronger ~0.13% MoM)

140,000 smartphones imported duringthe third quarter of 2013, Samsung remainsnumber one choice

Spending on personal care products insigni cant rise as Neilsen advises targetingGeneration Y through digital media

Milk powder prices increase as Nestlbuys a record level of milk from localfarmers


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In Economic news:


Central Bank unveils Road Map for 2014. Mr. AjithCabraal, Governor of the Central Bank of Sri Lanka (CBSL) presented theRoad Map for 2014. The key objectives are realising a sound medium termmacroeconomic framework and sustained real economic growth of over8% to avoid the middle income trap. Key targets for 2014-16 were presentedwith Mr. Cabraal commenting;

On economic growth: GDP growth target for 2014 is 7.8% and a high 8.5%by 2016.

On in ation: In 2014 and going to the medium term the target would be mid-single digits.

On expansive monetary policy: Policy would be relaxed if ination and

ination expectations eased, aggregate demand is low, monetary and creditexpansion takes place at rates lower than projected and economic growth isbelow potential.

On restrictive monetary policy: Tightened if demand driven ination and expectations pick up, signs of economic overheating occur, aggregate demandexpands at a high rate and excessive monetary and credit expansion takes place.

Strategies to achieve Road Map targets are to be based on the 5+1 hub concept

Knowledge hub -Programmes to reduceresource disparitiesbetween rural and urbanschools through thetransformation of 1,000

secondary schools and5,000 primary schools.

Special focus on ITeducation in 1,000secondary schools and theintroduction of thetechnology stream at theGCE A/L examinations

Energy hub -Construction of500MWSampurcoal powerproject.

600MW fromNorochcholai coalpower plant to beadded to thenational grid inmid-2014

Maritime hub -Development to be onvessel trading, financialservices, legal servicesand crew training.

To promote domesticboat industry higherduties on boat imports,reduction in taxes onshipping lines, freightforwarders and logisticsindustry services toincentivise training oflocal professionals

Tourism hub -Commercialactivity,infrastructure,and health andeducation

facilities to boosttourist arrivals

Commercialhub -Hambantotaand ColomboSouth ports asfree ports to

attract privatesectorinvestments

Aviation hub -Development offlying schools andaerospaceengineering schools.

Promotinginvestmentopportunities in theproximity of Mattalaairport. Ratmalanato be developed asa city airport and toaccommodateinternational trafficof private jets

The above presentation was a mammoth 176 slide power point presentation with about half of it detailing positiveaspects of countrys performance to date. At the organised Road Map forum, panelist Anila Dias Bandaranaike provideda much need critical analysis of the Road Map stating;

It is an interesting and exciting time because so much has been achieved in Sri Lanka, but one of the immediate problems I seein the country is the complete lack of space for discussion and debate. You hardly see constructive criticism and responses.

A lot has been achieved, but no one wants to hear I did this, I did that. The development in the country is fabulous it doesnthave to be repeated over and over again. Lets see where we are short and see what the criticism is and be constructive. This iswhat I would like to see in the country.


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In Economic news:

Sri Lanka issued sixth sovereign bond, $1.0bnpriced at a 6.0%,lower than the initial price guidance level of6.25%. The ve year issue which was subscribed 3.2x is somewhat of asalute to countrys improving macroeconomic conditions and con denceplaced on the 2014 budget. The issuance being the rst among emergingmarkets in the year was also to have worked in its favour. CBSL notedthat US investors bought 62% of the issue, 26% by Europeans and 12%


Crisis in Sri Lankas power generation reaches anew height. It was revealed that as many as three powerplants hadexperienced technical failures and the current patch of dry weather hadcaused hydro power generation to drop to a low of 30% of total powergeneration. This meant Ceylon Electricity Board (CEB) relying more onthe expensive thermal power generation and purchasing power fromindependent power producers.

On 10th of Jan, Norochcholai coal powerplant was shut following a technical problem.Admittedly this is the 27th time the plant hadbroken down since 2009. According to Ms.Pavitra Wanniarachchi, Minister, Power andEnergy, since inception the power plant hasbeen out of commission for 136 days speci callydue to technical failures (operating for 1,086

days), losing an estimated Rs.3.0bn and 1,084 GwH. Trial runs of the secondphase of the Norochcholai power plant (costing $375m) commenced.Worryingly this was constructed by the very same China MechanicalEngineering Corporation who was involved in phase one.

Technical failures at power plants at Rantembe (52MW), Kelanitissa(55MW) and Randenigala (126MW) led to temporary curtailment in its

power generation. Moreover CEB reported that hydro reservoir storagehad dropped to 50% of capacity due to poor rainfall in catchment areas.

On a separate note the Petroleum Ministry stated that discussions with theUnited States, (US) on importing crude oil from Iran had failed. Restrictionson Iranian oil imports were imposed following its attempt to developnuclear energy, an action not favourably viewed by US. Iran was Sri Lankasmain source of oil and the re nery at Sapugaskanda is deemed moresuited to re ning Iranian oil.

Source: CBSLSource: CBSLSource: CBSL

Borrowing rates cut to stimulate growth.CBSL cutreverse repo (injecting cash into the banking system) rates by 50 bpsto 8.00% while leaving repo rates unchanged at 6.50%. The reductionin interest rate is to stimulate credit growth to private sector which hascontinued to trend lower (see below).

It appears that current interest rates would be held over short term withMr. Ajith Cabraal, Governor of the CBSL commenting that There may besome other adjustments that we may need to make in the economy as wemove on, but from the rates point of view, it seems appropriate in the currentcircumstances.

Credit to business andpersonal customerscontinued at a sluggishpace growing just7.3% YoY in Nov 13 toRs.2,519.0bn. Credit tostate enterprises in Nov13 was at its lowestlevel in eight months atRs.308.bn (+18.0% YoY).However credit to stategovernment continuedunabated closing the month at Rs.1,325.5bn (+25.6% YoY).

Issue date Tenure AmountCoupon

RateUS Treasuries

(similar time period)

Spread vs.benchmark (US

Trys)Jan-14 5 year $1.0bn 6.000% 3.000% 3.000%

Jul-12 10 year $1.0bn 5.875% 1.505% 4.370%

Jul-11 10 year $1.0bn 6.250% 2.930% 3.320%

Sep-10 10 year $1.0bn 6.250% 2.520% 3.730%

Oct-09 5 year $500m 7.400% 2.340% 5.060%

Oct-07 5 year $500m 8.250% 4.280% 3.970%Source: CBSL

by Asians. 89% of buyers were fund managers, 8% banks and 2% privatebanks. The o ering was rated B1 by Moodys, B+ by S&P and BB- by Fitch.


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5/115

In Economic news:


The rupee ended the month at 129.28/132.16vs. USD (rupee stronger ~0.13% MoM)

Ination drops to 4.4% YoY in Jan 14 (-30bpsMoM) a 22 month low. The annual average rate of in ationalso reduced to 6.5% from 6.9% in Dec 13.

CBSL reported that prices in the non-food category grew 1.7% MoMbut were o set by 0.9% decline in food prices. Prices of up-countryvegetables, big onions, red onions, potatoes, limes and fruits decreased.In the Non-Food category, prices rose in health (~8.0%), communication(~3.9%) and transport (~3.3%).

Department of Census and Statistics (DCS) in Sri Lanka is to restructurethe in ation index by changing the basket and cover the entire islandas the current index only covers Colombo. This would be third changein eight years (2006, 2008), and comes on the back of InternationalMonetary Fund (IMF) mentioning that Sri Lankas national accounts sufferfrom insufficient data sources and undeveloped statistical techniques,andthat the in ation index needs to cover All Sri Lanka.

According to Mr. D.C.A Gunawardena, Head of DCS,The current index does not reect the whole country. Itrepresents only 17% of the Sri Lankan population. Mr.Gunawardena also said that the basket of goodsmeasured will vary depending on the region.

In other news Millennium Housing Developers was the rst IPO of the year o ering32m shares at Rs.6.00 to raise Rs.192m. A subsidiary of Nation LankaPLC, the company intends to build houses in Ja-Ela, Seeduwa, Wattala,Piliyandala and Homagama, at a cost of Rs.800m.

The Securities and Exchange Commission (SEC) is looking to ensurefairness of the Initial Public O ering (IPO) o er price by seeking theservices of an independent institution. SEC notes overpricing as a keyreason for the failure of recent IPOs.

Several stock brokers are seeking permission from the CSE totemporarily stop their operations due to low activity levels at the stockexchange. Dr. Nalaka Godahewa, Chairman of SEC stated that I thinkthere are far too many brokers in our market. But like the Central Bank whohas told the nance companies to consolidate, we have not told brokers todo so. The industry has to decide on its own. We are not going to tell themhow to do business.

India Infoline Limited (IIFL) exited IIFL Securities Ceylon (Pvt.) Limitedby divesting its 76% stake to current CEO Ms. Priyani Ratna-Gopal

Frontier Capital Partners Ltd to divest its 75% stake in Global MediaNetworks Ltd. (GMNet) to Sierra Information Technologies Ltd.GMNetowns stock market simulation Game VstoX, online platform- Sri Lanka Equity Forum and business news portal Lanka Business

Today.

Malaysias RAM Holdings sold its stake in RAM Ratings (Lanka) Ltdto management led by Preethiraj Jayawardena and Adrian Perera. Thecompany is to be rebranded and a new logo would be unveiled.

Source: CBSL

Source: CBSL

Source: CBSL

The All Share Price Index closed at 6,248.08, up5.7% MoM. All sectors recorded positive growth. Best performingsectors in the month were healthcare (+18.8% MoM), power and energy(+12.5%) and information technology (+10.0%).

During January the stock index broke through the 6,000 mark after alapse of ve months, a psychological barrier considered by many traders.Strong performance was led by John Keells Holdings PLC and a lowinterest rate regime driving investors to risky assets.


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In Business news:


Apples to oranges tourist arrivals comparisonmake a mockery of industry data. The Sri Lanka TourismDevelopment Authority (SLTDA) changed its classi cation of a tourist,choosing to use data from the electronic visa system at the Sri LankaImmigration Department as opposed to SLTDAs manual method. Thisreclassi cation resulted in full year 2013 arrivals increasing to 1,274,593 asigni cant 26.7% increase from 2012.

SLTDA noted that The new validation was carried out based on the statistics provided by the computer data collection method of the Immigration andEmigration Department.

This follows the standards set by the UNWTO for dening a tourist .... a person who stays at least one night in a country and does not exceed hisstay period for more than 12 months.

However, SLTDA failed to undertake two important actions which wefeel are crucial to understanding industry performance;

a) Failed to restate 2012 monthly arrivals using new classi cation

criteria. Not doing so means analysis between 2013 and 2012 being asmeaningful as a comparison between apples and oranges

b) Failed to restate annual target. We assume the original touristarrivals target for 2013 of 1.25m to have been based on the previousclassi cation criteria.

To better analyse the e ect of the above two points and assuming thatthe same type of tourist arrived in 2012 as in 2013, we recalculatedmonthly arrivals for 2012 applying the same adjustment factor asSLTDA used on 2013 monthly numbers.

As per our calculations tourist arrivals in 2012 increases to 1,116,827from SLTDA stated 1,005,605 (+11.1%). This results in 2013 arrivals being just 14.1% higher than 2012 and not 26.7% as stated by the authority.

Moreover applying the adjustment factor of 1.11 to annual target of1.25m increases it to 1,387,746, meaning actual tourist arrivals fell shortof the target by 8.1% in 2013.

Source: Sri Lanka Tourism Development Authority and Gradient Analysis

Origina annua target or 2013 source SLTDA 1,250,000Adjustment factor 1.11

Adjusted annual target for 2013 1,387,746Actual arrivals in 2013 (based on SLTDAs new criteria) 1,274,683Shortfall (113,063), (8.1%)

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Source: Sri Lanka Tourism Development Authority and Gradient Analysis Source: Sri Lanka Tourism Development Authority and Gradient AnalysisNote: Dec 13 adjustment factor is the average of Jan- Mar 13 (peak season). Which was used to calculate Dec 13 tourist arivals unde the previous methodology


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In Business news:


Tea productionbreaks record.According to John Keells Tea Brokers tea productionin 2013 was 340.2mkgs (+7.5% from 2012),surpassing previous recordof 331.4m Kgs in 2010.

Moreover Forbes & Walker Tea Brokers reported that

tea exports from Sri Lanka in 2013 reached 319.7m kgs marginallylower than 319.9m kgs recorded in 2012. Tea exports by value reachedRs.199.4bn (~$1.6bn) signi cantly higher than the 180.1bn generated in2012 (+11.3% YoY). Higher values were due to drop in global supplies

and depreciation of the Sri Lankan rupee. According to Asia SiyakaCommodities export earnings relate to a FOB value per kg was Rs.623.91($4.87) above the 2012 record of Rs.563.94 per kg ($4.40).

Source: Forbes and Walker

Vehicle registrations down 1.9% in Dec 13 withfull year registrations falling to 322,172 (-17.3%YoY). According to JB Securities total vehicle registrations were only25,233 in Dec 13

Three wheeler registrations were down a signi cant 21.2% YoY to 5,768,lowest in 18 months. For the full year 2013 registrations were 82,967,down 13.4% YoY.

Motor cars registrations were 1,801 up 22.9% YoY. For the full year 2013registrations were 22,969, down 6.6%.

2-wheeler volumes at 13,831 (+15.3% YoY). For the full year 2013

registrations were 165,714, down 11.7%.

Source: JB Securities

CBSL removed the requirement to place a 100% cash margin againstletter of credit when importing motor vehicles to Sri Lanka. CBSL cited anappreciating local currency from improving external trade

Samsung continuesto dominatesmartphone marketin Sri Lanka.Accordingto Sri Lanka Mobile HandsetsMarkets Review 3Q 2013,about 140,000 smartphoneswere imported during thethird quarter of 2013 to SriLanka. The report published byCyber Media Research notes

Samsung accounted for 39.0% of the quarterly shipments, followed byHuawei 15.5% and Micromax 11.2%.

According to Tarun Pathak, analyst, Cyber Media Research The rst twomonths of the quarter witnessed a drop in overall Sri Lanka mobile handsetshipments, primarily due to the seasonal impact and shortage of inventoryon account of issues between retailers and distributors. However, the marketstarted picking up from the month of September with new launches fromTier-I vendors and a push from operators, as a part of their bundling offersand data pack schemes.

He further went to say The increase in shipments of smartphones can beattributed to signicant price drops by all vendors across the island nation,

resulting in a reduction in the ASP.

On the overall mobile handsets market in Sri Lanka it reported that interms of shipments Nokia was the leader with 27.2% of the shipmentsfollowed by Samsung (17.4%) and Micromax (16.1%).


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Mobitel to buy Hutch? SLT Mobitelis in talks with Hutchinson Asia Telecom totake over Hutchison TelecommunicationsLanka Ltd (Hutch). The announcement wasmade by Mobitels parent company Sri Lanka Telecom in a ling with the Colombo StockExchange. It noted that negotiations are at

CBSL Road Map has specic plans for thebanking and nance industry.As part CBSLs initiative toimprove nancial system stability through consolidation, the regulatorannounced its objectives of;

58 non-bank nancial institutions consolidated into 20 larger ones Multiple nance companies under one holding company and those ingroups with banks encouraged to merge At least ve Sri Lankan banks to have assets of Rs.1trn A large development bank to provide a substantial impetus todevelopment banking activities in the country

Speci c deadlines

By Jun 14 a group could operate only one non-bank nancialinstitution By Jun 14 directors who own controlling shares in more than one NBFIhave to arrange a merger between By Dec 14 investors or banks are expected to absorb non-banknancial institutions with negative net worth

Action targeting speci c banks

New foreign banks setting up in Sri Lanka will also have to be locallyincorporated. Currently foreign banks operate as branches of a parent

In Business news:

a preliminary stage with the nal decision contingent on completionof con rmatory due diligence, counterparty agreement and regulatoryapproval. An article published in the The Daily FT speculated the dealto be worth around $ 115 million. Hutch o ers customised post and pre-paid mobile packages to rural customers. Moreover the article reportedHutchs islandwide 3G broadband infrastructure and GSM 900 frequencyto have greater bene ts than Mobitels GSM 1800 frequency.

which are incorporated elsewhere DFCC Bank and National Development Bank to merge Bank of Ceylon and Peoples Bank to expand its international presence National Savings Bank to broaden its services

CBSL help

Investors bringing in funds to boost capital at nancial institutions willbe given matching funds from a deposit insurance fund CBSL to bear cost of consultancy fees for any merger Finance companies to receive a liquidity facility

Other banking news

UB Finance Co., previously a part of Union Bankof Colombo PLC commenced operations in Jan14. UB Finance is to o er xed deposits, savingaccounts, asset backed nancing etc.

After almost two years of waitingCargills (Ceylon) Plc received itsbanking license. The entity is calledCargills Bank will be the 13th localcommercial bank and 25th overall(including foreign banks). Mainshareholders: CT Holdings and

Cargills 15% each, Merrill J. FernandoGroup 10%, International FinanceCorporation (IFC) 10%, Germanysdevelopment nance arm DEG 10%.


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In Consumer news:


Uptick on 2014 at MTI CEO survey MTI Consulting inpartnership with CIMA Sri Lanka conducted a survey among CEOs of topcompanies in Sri Lanka. Key highlights;

Looking back to 2013- 53% consider year 2013 was below expectations in regards to thebusiness environment for their respective industries/domains (vs. 54%in 2012)- 39% felt their businesses met their expectations

MTI says We believe, challenges posed by the macro environmental factorssuch as high interest rate regime, high energy and commodity prices,volatility in the exchange rate, etc. would have severely hindered the bottomline of the companies,

In 2014 Macro economy- 62% expect countrys economy to stabilise in 2014 (vs. 56% in 2013)- 20% expect acceleration in the economy (vs. 17% in 2013)- 18% expect a sharp decline in the economy (vs. 27% in 2013)

MTI says Despite the economy being greatly challenged in 2013 due tounfavourable movements in local macro environmental factors and gloomyglobal growth, it is encouraging to see the improvement in condence levelamong the business community over countrys economic outlook which we

believe would have partially attributed by desirable actions taken by the CBSLand the recovery signs of world economy.

In 2014 Industry- 58% expect higher year over year growth in their businesses (vs. 52%in 2013)- 38% expect present challenges in the business environment to remain(vs. 38% in 2013)- 4% are pessimistic about the future (vs. 10% in 2013)

MTI says In spite of country failing to sustain the condence level in 2013that was witnessed immediately after post war era, ongoing developmentsin countrys economic environment namely reduction in key monetary policies, relatively stabilised exchange rates coupled with the improvementin external trade are expected to thrust towards a conducive environment forbusinesses.

LMD-Nielsen Business condence Index dropsto 130 in Dec 13 (-8 points MoM).Mr. Shaheen Cadernoted that there is an increase in the percentage of respondents that saybusiness has decreased. Yet, almost half the sample (45%) is of the view thatthe economy would improve in the next 12 months.

The most signi cant movement was in the share of respondentswho believe compared to last year their businesss sales volume haddecreased, rising to 39% from 29% Nov 13. Share of respondents whobelieve the economy will get better in the next 12 months increased to45% from 44% in Nov 13. Those who believe the economy will get worseover the same time period increased to 32% from 28% in Nov 13. Source: lmd.lk


10/1110

In Consumer news:


Spending on personal care products in signicantrise as Neilsen advises targeting Generation Ythrough digital media.Key ndings;

o Spending on household care down despite personal care products growingat double digits. Nielsen notes that recovery in the food and beverages andhousehold could result from a strong turnaround in the agriculture sector(employing 30%of the workforce)

o Fastest growing categories are lifestyle or personal care products such ashair dye, soya meat, sanitary napkins, creams and lotions, talcum powder,

perfumes and colognes, cooking aids, face wash and noodleso Magic price point for food and beverages was Rs.30, Rs.40-45 for personalcare and Rs.35 for household care

o Consumer group Generation Y (born in the 1980s and 1990s) are moreoptimistic than other groups and more likely to spend on themselves. As suchare best engaged via events, media habits, social media and even radio

Nestl buys a record level of milk from localfarmers. Nestl Lanka PLC announced that it had bought 62m litersof milk from local farmers in 2013 (+15.1% YoY). The company noted thatit currently purchases about 170,000 litres of fresh milk daily from 18,000Sri Lankan farmers. In its continuous bid to improve the livelihood inthe North and East regions the company recently opened a fresh milk

chilling centre in Pudukuduirippu.

According to Mr. Ganesan Ampalavanar, Managing Director of NestlLanka PLC We have made intense and determined efforts to procuremaximum quantities of fresh milk from the North and East to help developthese areas. We have established a milk collection network in the regions,made up of collection points to provide farmers living in distant, rural areaseasy access to sell their milk and milk chilling centres to help farmers keeptheir milk fresh.

According to the Ministry of Co-Operatives and Internal Trade pricesof powdered milk was increased. The controlled retail price of a 400g

Cost of Living allowance increased.Public sector workers enjoyed another handout with monthly cost of livingallowance increased to Rs.7,800 from Rs.6,600. The increase outlined in the Budget 2014 is to alone cost the tax payer Rs.17.3bnannually. Those employees serving on a daily wage on a casual basis would see their allowance increase by Rs.40 to Rs.260.

packet of milk powder will now be Rs.386 (up by Rs.61) and the price ofa one kilogramme packet will be Rs.962 (up by Rs.152).


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news bulletin - january 2014

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