Banks’ NPLs to increase due to falling gold prices

It’s sentiment and not fundamentals that’s driving the market, a market source said, referring to the gains made by the bourse at Thursday’s and Friday’s trading, after falling in the first two days of trading last week, and being flat on the third.
The gains made by the bourse on Thursday and Friday come in the backdrop of net foreign inflows (NFI) being virtually flat on Thursday, with the only significant foreign driver on that day being a ‘foreign to foreign’ transaction of Aitken Spence shares.
However, on Friday it was Com Bank and HNB that drove the market due to foreign interest in the same, he said. That is despite the fact that the pawning market is falling (see box).
But these two banks exposure to the pawning market is relatively small.
The fall in European markets has had made foreign funds to look at markets such as Sri Lanka after exhausting other options, that is what is boosting the bourse, the source said.
But on the flip side, the signals emanating from the local economy is not good, with retailers, such as those operating supermarket chains reporting a decline in sales due to the impact the cost of living is having on consumer purchasing power, he said.
Sales since last month have been poor, the source said.
It may not be wrong to say that it was foreigners who have been driving the market so far for the year, investing in selective blue chips such as JKH and also in the shares of certain blue chip banks, due to the Spartan choice of blue chips available for them to invest which figure is not more than the five fingers in one’s hand, he said.
Last week there had also been investments made into the equities of an importer of brand new vehicles, on rumours that the government is going to bring down vehicle import taxes in order to revive this flagging industry, crushed by various enhanced import duties and levies, instituted last year, in order to dissuade imports and thereby to avert a balance of payments crisis that had been threatening the economy.
But this threat is far from being over, with the island in the first quarter of this year experiencing a trade deficit of US$ 2.3 billion.
Thursday’s and Friday’s gains have also been made in the backdrop of poor first quarterly earnings by corporates, including that of banks, which are expected to become worse in the current quarter due to the impact caused to their top lines on account of increased in electricity prices (not least the fall in the pawning market), coupled with the belief that this electricity hike is going to further constrict consumer purchasing power.
“It’s not the 50 basis point policy rate cut made earlier during the month that has boosted the bourse, but sentiment,” the source emphasized. The theory is that a low yielding fixed income market would wean away investors from that sphere of operations to the bourse.
“We shall see these cycles, the bourse going up then comes down, with the next downturn expected this week due to profit taking,” he said.
The bourse at Thursday’s trading witnessed a NFI of Rs 85.08 million, thereby bringing in total NFI from 1.1.13. to 16.5. 13. to Rs 10.8 billion. Foreign inflows on Friday were not immediately available.
Europe’s negative bank returns have been given as the reason for increased foreign investments in markets such as Sri Lanka, where the local stocks in which such foreign investments have been made, having been identified as being good dividend paymasters as well.

Gold Loses Its Shine
The pawning market has been impacted due to the fall in gold prices, a market source said.
Eighteen to 19% of banks’ loan portfolio comprising some Rs 500 billion is in the pawning market, with over 50% of those being held by the two State banks, People’s Bank and Bank of Ceylon, he said. A 10% default amounts to Rs 50 billion which is no small sum, the source said. The price of gold in international markets has had fallen from US$ 1,700 a troy ounce to $ 1,370 in the last 10 months, he said.
The fall is expedited by investors shifting their interest from gold to the US equities market which is going through the roof, the source said. He further alleged that Sea Street jewellers are telling them that sales are not taking place as the market expects prices to come down further.
The value of gold held in local banks’ loan portfolio has declined by 30%.
But the law precludes banks from selling this collateral and recovering their monies until the expiry of 365 days, though the tenure of the pawning period may be 2-3 months, he said.

The pros and cons of splitting the insurance business cropped up at a seminar in Colombo last week.
This was in the context of the insurance regulator mandating the splitting of composite insurance companies separately to that of general insurance and life respectively, to be executed by 2015.
Another development is that it is mandated that all insurers will have to list by 2016.
The majority of Sri Lanka’s 22 insurers are composite insurers.
Splitting is expected to enhance greater transparency, some insurer representatives said, while the argument against it was that splitting would increase insurers’ costs. It may however be a one off thing, those for splitting said.
They also said that splitting will prevent leakages, such as the excess from the Life Fund being used to prop up the General Insurance business or when it comes to promotional work where the money earned from one line of insurance business, say General, is used to prop up its Life Insurance work.
But Surekha Alles, CEO Allianz Lanka, a composite insurer and a subsidiary of Allianz Germany, said such abuse could be checked by maintaining separate accounts for both Life and General Insurance.
She also said that the mandatory requirement to list by 2016, at least from a monetary perspective, will not make sense to a multinational subsidiary such as theirs.
They were talking to the regulator in this regard.
Prakash Schaffter, Managing Director of Janashakthi Insurance and President Insurance Association of Sri Lanka (IASL) speaking at this forum said that splitting may result in the insurer’s costs doubling.
Qualifying his speech by saying that these were his personal views and not that of either IASL’s or Janashakthi’s, he said that splitting may result in having to double the insurer’s branch network. It may also lead to having to further invest in IT, having to pay enhanced utility bills, one off stamp duty and VAT payments on account of this split, the possible reluctance of staff not wanting to be subjected to transfers from their present ‘comfort’ zones to new areas after the split, the additional cost of identity communication and a question mark in regard to the availability of skilled insurance staff, which number may have to be necessarily increased once the split is enforced.
Johan Richters, a director at Asian Alliance Insurance (AAI), another speaker at this event said that these may be circumvented by having a least cost holding company headed by a chairman, with managing directors (MDs) to run the Life and General entities of the parent company. He further said in certain countries General Insurance is further split into Medical and Non Medical General Insurance, with each of these departments too headed by an MD.
He also said with the value of Sri Lanka’s insurance industry at 1.2% of GDP as opposed to 4% of GDP of that of India’s, it showed that there was tremendous potential for the island’s insurance industry to grow.
According to Central Bank of Sri Lanka Governor Ajith Nivard Cabraal, another speaker at this event, in Asia, the average value of insurance penetration was 5.8% of GDP.
Stewart Langdon of Leapfrog Investments, a company which buys minority stakes in insurance companies in emerging markets, said they were on the lookout for such opportunities in Sri Lanka.
Taxation however may be an issue in splitting the insurance business, he said.
It was also said at this seminar that of the 22 insurers in the island, five of those controlled over 80% of the market. With the requirement of the current Rs 100 million capital commitment for existing insurers to be uplifted to Rs 500 million in 2015 coinciding with the other mandatory requirement, i.e., the splitting of the insurance business, it was said that this may lead to mergers and acquisitions of the smaller insurers with the larger ones.
But Richters’ advise to the smaller insurers was to be patient for another five years, by which time the local industry would have picked up, he said.
It was also said at this seminar that in India, Life and General business operate as separate entities, In Europe, new insurer entities will have to offer Life and General insurance as separate businesses, in Thailand, the industry has been split, while in the UAE splitting has been postponed.
The seminar was sponsored by AAI.
- Paneetha Ameresekere

Business activities are likely to be severely disrupted owing to the strike that is to take place on May 21. The proposed nationwide strike called for this Tuesday (21) by the Coordinating Committee of a Joint Trade Union Alliance comprising the main opposition UNP and JVP trade unions is to extend to the private and estate sectors along with the public sector.
The Committee comprising of over 600 trade unions called for a nationwide strike on the 21st after giving an ultimatum of May 20th to the government to withdraw the electricity tariff hike.
Head of the Inter Company Employees’ Union (ICEU), Wasantha Samarasinghe said that a large number of private sector trade unions have extended their support to the strike action scheduled for next Tuesday, the 21st.
He explained that apart from the trade unions affiliated to the ICEU, trade unions like the Ceylon Mercantile Union and the Ceylon Federation of Trade Unions have also said they would participate in the strike.
“The production process in the private sector would be affected by the strike action, but the workers have no other option,” Samarasinghe said.
He noted that the government has to take the responsibility for the negative impact the strike action would have on the country’s production process on the 21st.
“The government has unfairly burdened the people and the only option for the working masses is to protest and strike,” Samarasinghe observed.
Meanwhile, Anton Marcus from the Free Trade Zone (FTZ) and General Workers’ Union noted that the unions expected the participation of over 40,000 employees from the FTZs in the strike on the 21st.
“There were 40,000 FTZ employees who took to the streets against the private sector pension bill and since the electricity issues is also a national issue, we expect more workers to participate in the strike,” he said.
He explained that companies in the FTZ have already been informed of the strike action on the 21st and arrangements are being made to secure the participation of workers in companies that do not have any trade union representation as well.
According to Marcus, the unions have been informed by some FTZ employees of their employers being pressured by governing party politicians to prevent workers from joining the strike.
Also, Coordinator of the UNP’s Jathika Sevaka Sangamaya (JSS), Parliamentarian Ravi Karunanayake said that the strike action on the 21st would be a starting point for the continuous agitation campaign calling for the withdrawal of the electricity tariff hike.
He observed that the people have to express their displeasure at the government’s actions and its actions to burden the people for its failures. “The public, private and estate sectors will strike on the 21st and the government will have to take stock of it,” Karunanayake said.

By Camelia Nathaniel

The Bangladesh apparel industry is facing a severe crisis following the collapse of the garment factory building which killed over a thousand people. Workers at other apparel factories have gone on strike demanding safety guarantees and even buyers and retailers are under pressure to extract guarantees on workers’ safety. With production likely to fall as a result of the situation, it is an opportunity for Sri Lanka’s apparel trade to capitalize on. However, the issue at hand is, is Sri Lanka ready to take up the challenge.
Expressing his views on this, Convener and General Secretary of the Free Trade Zones and General Services Employees’ Union (FTZ&GSEU), Anton Marcus pointed out that the main problem facing the local apparel industry is the shortage of skilled workers. “The Apparel Exporters Association says that they have no problem with orders and have enough orders, but the problem is finding workers. So even if there is a good opportunity for Sri Lanka as a result of the issues in Bangladesh we are not in a position to take advantage.
The biggest issue is that even if we get more orders we would not be able to cope due to the lack of staff. Without addressing this issue I don’t think there is any possibility of taking advantage of any opportunity.”
Though repeated attempts were made to contact officials of the Joint Apparel Exporters Association, no one was available for comment up to the time of going to print.
When Marcus was asked if the local garment industry would consider bringing down Bangladeshi workers to work in the apparel sector, he said that Minister Lakshman Yapa Abewardena had given an assurance that the government would not bring down workers from Bangladesh.
However, when asked what the alternative is to the labour shortage, he said that the only solution is to try to improve the terms and conditions of the workers in the apparel industry and this would attract more workers. “The conditions of the factories and living conditions of the workers and also the wages need to be improved in order to attract more people into this sector. I personally know certain apparel industry workers who have gone to Jordan for salaries of just Rs 15,000 per month. Therefore, if the factories here can increase the wages at least to this level, they could retain these workers in our country and encourage them to work in the local factories. That is the only alternative,” he said.
Meanwhile, the Rana Plaza disaster has given Bangladesh’s garment industry a massive jolt. The industry earns about 80% of country’s export income. Bangladesh has about 4,000 garment factories where over four million workers, mostly women, are employed. The country earns over US dollar 20 billion annually by exporting garments mostly to European countries, the USA, Canada and Australia.
However, a Bangladeshi apparel industry worker earns only around US dollars 40 a month.
These workers are also deprived of trade union rights.
Meanwhile, leading European retailers including H&M, Inditex and Zara have come forward to ensure better working conditions in the garment industry in Bangladesh, especially better fire and building safety standards in the apparel industry in the country.
Meanwhile, the Bangladesh Government last week approved a draft new labour law that would enable trade union activities.
The new labour law would provide more rights and facilities for industrial workers and it would also pave the way for trade union rights for the garment industry workers.

By Rohantha  Athukorala

World Bank ratings of the Doing Business index of 2012 revealed that Sri Lanka has pegged up to number 81 ahead of the BRIC countries and South Asia. To be specific China is at 91, Russia 112, India 132 and Brazil trailing at 140. Hence, post-war the overall ratings picking on Sri Lanka on many fronts is commendable given that almost two thirds of the economy is the responsibility of the private sector. It certainly tells the world about the positives of the Peace Dividend, though many countries yet fail to believe the Sri Lankan growth agenda.

Key Challenges
Whilst the numbers look impressive there are many challenges that Sri Lanka is up against in 2013, the first being the increased electricity tariff. The argument by the professionals is that given that policy reforms are not taking off in the CEB, it has resulted in this increase. Whilst the argument can continue at many fora and the media, the impact to the SME sector due to the increasing cost base can have detrimental results to business and trade. Let’s not forget that that almost 80% of the economy is driven by the SME sector.
Another challenge that we are up against is the increasing wage bill. The tourism industry took a 30% increase whilst the tea sector has done the same which is adding pressure to the selling price of the product as already we have out priced our self in the global market place. This applies to both the tourism product and the tea industry. This can have severe ramifications both from supply and demand sides, in my view.
If I take the tea industry to explain the ramifications, according to the latest Central Bank report, the cost of production of a kilo of tea in Sri Lanka stood at Rs 391 in 2012. With the latest plantation worker wage increase the daily wage package of a plantation worker was increased by 20% from Rs 515 to Rs 620 which gives us an idea of the strain on the financial viability of the Industry.

What’s going well
Going back to the Doing Business Index and diving deep in to the numbers we see that on the attributes of ‘Starting a Business,’ Sri Lanka is well ahead of the rest of the 185 countries with a performance of 33. On the area of Getting Credit at number 70, protecting investors at 49 and trading across borders at a strong rank of 56. Whilst some can say that this performance is very strong, the fact of the matter is that these are not hard factors that drive a business. This is the challenge that we must address in 2013.

Issues

The hard aspects that need serious attention in the Doing Business Index on Sri Lanka are; registering property at a low rank of 143, Getting Credit 103, Paying Taxes at a questionable rank of 169 given that in the last two-years the overall national budget has been focused on the tax reforms whilst dealing with construction permits at 112. The logic of me stating that these are hard attributes is because each of the above needs structural changes to the working systems in the public sector. Hence, to move up the rank on the above will require serious effort and radical reforms. For instance on the attributes of protecting contracts ranked at 133 means that the support of the judiciary will be crucial.
If one goes deeper, the above attributes are the ones that will drive private sector FDIs and the slow performance on this front can be attributed to these hard facts that have not been addressed. This is the challenge we are up against this year.

Key Issue:

Whilst looking at the Doing Business index positively a point that must be noted is that, many key critical areas of performance are not taken into account in the index. They are aspects like governance, country’s proximity to large markets, macroeconomic conditions and transparency in government procurement. Hence, if one takes the above factors which are essentially the nation’s competitiveness, we can see that Sri Lanka is challenged crazy on these aspects.
The sad story is that we continue to take an aggressive stance even after the Geneva debacle, and this continues to amaze the right thinking Sri Lankan.

Next Steps

The question now is how practical is the target of making Sri Lanka a top 30 country? The actions are very clear and specific. The challenge is the timely delivery and consistency of performance in a political economy like Sri Lanka.

Conclusion

Whilst we can continue to focus on Sri Lanka’s performance in global indexes, we must also look beneath the surface and do the correction of the key strategies. Given the unfolding developments in the economic landscape of higher electricity tariff and increased wage rates given the projected slowing down of the economy this year and exports once again declining by almost 8% in the 1st quarter of 2013.
Whilst we justify the export revenue decline to the slowing down of the western economies, the fact of the matter is that we account for just 1-2% of global trade. Hence, technically the impact on Sri Lanka should be marginal. Whilst the impact can be on the basket of goods, we export the key point to note is that Sri Lanka must move away from just highlighting statistics to driving business and trade from a qualitative perspective.
The author is an award winning marketer and business personality who has a double degree in Marketing, MBA. He is an alumnus of Harvard University (Boston). The thoughts are his personal views.

The Exchange Rate (ER) which gained by 80 Sri Lanka cents (SLc) on the back of forward sales and conversions on Wednesday and Thursday, fell sharply by 60 SLc to Rs 126.30 to the US dollar ($) in interbank spot trading the following day Friday (May 17), due to pressure caused by the market and the state once more returning as buyers, a market source told this newspaper.
In other developments, it may be construed that the strengthening of the ER by 50 SLc to Rs 125/90/126/10 in two way quotes previously on Wednesday (May 15) was artificial due to the various acts of omission and commission committed by the Government of Sri Lanka (GoSL) in conjunction with the Central Bank of Sri Lanka (CBSL) in the money market.
It’s generally the middle rate in two way quotes which is considered as the rate at which trades are done.
Meanwhile, the ER further strengthened to the Rs 125/70 level the following day Thursday due to inflows, with investors probably being fooled by what happened the previous day (Wednesday), before sharply declining on Friday.
Wednesday’s appreciation of the ER has to be looked at in the context of submarket operations indulged to by the GoSL in the money market on that day, aided by CBSL.
The genesis of this adventure had its beginnings when Wednesday’s data showed that the market was short by Rs 4,944 million on that day, after enjoying a surplus of Rs 6,278 million the previous day Tuesday.
The reason for this shortfall is due to excess liquidity being swallowed up by CBSL on account of GoSL having had to meet an external commitment such as the settlement of an oil import bill or foreign debt servicing or due to the importation of defence supplies or because of a mix of two or all of these three reasons.
In such circumstances though GoSL obtains the necessary liquidity from the market to make the required foreign exchange (forex) purchase to settle such dues, it however refrains from buying the necessary forex from the market due to fears that such a demand may cause the ER to depreciate.
As such it buys the needed forex from CBSL’s external reserves by paying it the equivalent rupee liquidity it had borrowed from the market.
The question is if this required forex of GoSL to meet this external commitment was procured from the market, instead of from CBSL’s external reserves, would the ER have still strengthened as it did on Wednesday or would it have remained unchanged or would it have actually weakened?
The answer to this is that it would have weakened, that’s the reason why GoSL/CBSL refrained from obtaining the necessary forex borrowings from the market, but instead opted to procure the same from GoSL’sforex reserves.
Protecting the ER this way however may cause balance of payments problems in the country’s external accounts.
Meanwhile, at the beginning of last week on Monday (May 13), the market returned an excess liquidity figure of Rs 4,662 million, after being short by Rs 4,744 million the previous market day (Friday, May 10).
The excess experienced by the market on Monday is due to inflows received by the market, which in turn would have been sold to the CBSL and rupees obtained in lieu, hence the reason for the market’s excess liquidity. The following day, Tuesday, this excess liquidity was further enhanced to Rs. 6,278 million, before ending up in the red on Wednesday and continuing in the same vein the following day, Thursday, and finally ending up short with a figure of Rs 10,750 million on net basis by the weekend, which shortfall was met by CBSL’s various reverse repo window.
In other developments, the value of CBSL’s T bill holdings at the beginning of last week on Monday, on a gross basis fell to Rs 97,587.61 million; from the previous day’s figure of Rs 108,690.35 million, the decline being as a result of the retiring of maturing T Bills which previously were in CBSL’s holdings, i.e., a sum of Rs 11,102.74 million.
The following day, Tuesday, this figure marginally increased to Rs 99,203.61 million; the cause of the increase being CBSL’s subscription of T Bills to help meet a commitment of GoSL’s. CBSL subscribing to T Bills is that it and not the market which is lending money to the state to help it to meet a commitment.
The danger however of new money being released to the economy this way is that it may cause demand side inflationary pressure. However, the following day, Tuesday, this figure remained hardly unchanged at Rs 99,203.61 million, whilst following in the same vein on Wednesday, with a Rs 99,202 million number and virtually holding on to those levels with a figure of Rs 99,202.58 million on Thursday, before succumbing to money printing (by investing in T Bills) on Friday, thereby ending up with a Rs 103,657.34 million T Bill holding (net of security of T Bills provided by banks on account of their reverse repo borrowings from CBSL) by the weekend.