'Stock market conference ends on a happy note 

"It was a nice meeting in the sense of meeting representatives from other stock exchanges in the South Asian region but to us on the ground, we are still struggling to survive with further uncertainty being brought on by the free float of the US dollar," one broker, who declined to be named, told the Sunday Times Business.

Senior officials of regional stock exchanges at a press conference at the end of the two-day meeting in Colombo, showered praise over the conference, the country and its assets as a tourist destination and the new technology that was discussed.

CEOs or non-executive heads of particularly smaller exchanges spoke of the enormous value of the South Asian Federation of Stock Exchanges which they said would help smaller bourses and ensure some degree of a level-playing field.

"That was one of the successes of the federation - that it would be an enormous boost to smaller exchanges in terms of learning about new technology and being offered advise and lessons from the bigger exchanges," one small regional broker said. 

The conference was opened by Treasury Secretary Dr. P.B. Jayasundara who gave a lengthy discourse on the country's economy, the benefits, flaws and difficulties - like the cost of the war and the crisis that flow out of it. He said Sri Lanka had suffered a loss of US$ 600 million in foreign exchange during a 17-month period since oil prices began rising in August 1999 and was still recovering from the oil crisis. Dr Jayasundara told the meeting hosted by the Colombo Stock Exchange (CSE) that the foreign exchange suffered by the country since August 1999 was entirely due to high oil prices, which have also hit many other countries.

"I recently learnt that India's petroleum agency also suffered losses in the region of 24 billion (Indian rupees) due to escalating oil prices," he said.

Overseas oil prices - which have doubled in the past two years - led to a near 50 percent increase in local fuel rates last year, triggering a series of prices hikes in essential goods. 

The Treasury secretary said that rising oil prices plus increasing war costs - close to six percent of gross domestic product last year (or more than 80 billion rupees) - had badly affected the economy.

The economy was further hampered by two consecutive monsoon failures and unfavourable weather forcing authorities to resort to thermal power generation at a time when fuel prices are high, he said.

Representatives of more than 14 stock exchanges across South Asia including Sri Lanka, India, Pakistan, Bangladesh, Nepal, and Bhutan took part in the meeting focussing on globalisation and deregulation issues and challenges for local bourses. Among the key issues under discussion are cross-border investments in regional exchanges and the creation of a South Asian Mutual Fund to help investors invest outside their home base.

Dr. Jayasundara said that while tourism had suffered from the country's ethnic conflict, the high-growth garments industry was also facing quota restrictions and competition from newly emerging labour intensive economies like China, Indonesia, Vietnam and Cambodia among others.

He said Sri Lanka, despite its war-affected economy, was unique in the region because though it was small in terms of size it had the highest per capita income in the region.

"This nation despite being small and very badly underestimated enjoys twice the per capita income of India and four times that of Pakistan and Bangladesh. That is the strength that Sri Lankan market developers must take into account in attracting foreign investors as the spending capacity here is much more than any other country in the region," he added.

The Treasury secretary noted that despite the uncertainties of the war, which has resulted in the deaths of more than 65,000 people since 1983, Sri Lanka has been able to attract foreign investments in crucial sectors like the Colombo port, telecommunications, the petroleum industry and the national airline SriLankan Airlines. 

He said he believed there were too many market regulators governing particularly areas that were once run by the state but now have moved into private hands. 

Cement, steel, hardware, ceramics and other state firms launched as state enterprises in the 1950s and the 1960s during an inward-looking economic environment have been privatised and sold off to the private sector.

"One of the issues the Finance Ministry is looking at is whether we need so many regulators. If we can temporarily suspend regulatory processes and start building markets, start promoting markets and expand capital market participants, the government is ready to move ahead in this direction," he said.

Malaysian firm eyes India via Colombo

Malaysia's Merbok Hilier Berhad (MHB), Asia's biggest manufacturer of medium density fibre commonly known as the MDF, is setting up a US$20 million factory in Sri Lanka with an eye on the Indian market, a state agency announced last week.

The Board of Investment (BOI) said the investment would make the Malaysian firm the largest company in the country in the wood sector, once it takes off.

The Merbok group has two plants in Malaysia with a total annual turnover of US$ 100 million and 800 employees. The company pioneered the world's first production of rubberwood MDF in 1989, soon finding an export market and then expanding exports.

Merbok currently exports to 40 countries including Sri Lanka. The BOI statement said that Merbok's production facility in Sri Lanka would primarily be for export with access to the Indian market, through mainly a recent Sri Lanka-India free trade agreement.

Under the deal, the Malaysian investor can export to the Indian market via Sri Lanka at nil import duty rates.

"The company plans to further capitalise on Sri Lanka's strategic location and logistical infrastructure, to expand its market presence in South Asia," the BOI said.

It said Merbok will also focus on the Sri Lankan market and its demand. Sri Lanka is a big importer of MDF wood which is now widely used by furniture manufacturers in the country.

Dollar cools tea prices

All Low Grown leafy varieties were discounted this week, and the teas in the best category recorded the sharpest decline, which were in the region of Rs. 8 to Rs. 10 per kg and more. Semi leaf however, sold at firm to dearer rates. Tippy teas were well sought after and sold at high prices. Most factories in the Low Grown Planting districts recorded low crop intakes during the last five to ten days and this trend is expected to continue for sometime. The large weight on offer in the Ex-estate catalogue negated all gains possible on the depreciated rupee. 

The result was a much weaker market which had price levels dropping steadily as the sale progressed. In fact, towards the close many buyers had filled their orders and remained silent spectators and many lines remained unsold for want of a sufficient bid. 

Select best Westerns attracted special inquiry and a cross section of BOPs and BOPFs held last week's level of price. Following depreciation of the rupee however these teas were effectively cheaper. The greater weight of below Western and plainer types opened Rs. 4 cheaper in many instances, lost a further Rs. 10 at the close. The prime cause for this collapse in the market for liquoring teas was the artificially inflated quantity of 1.6million kg offered at this week's Ex-estate sale. The catalogue for this auction closed on 3 January, whilst catalogues for last week's auction closed on 20 December. Good cropping conditions during that period caused a drop in the high quality segment and a corresponding increase in the percentage of below best and plainer teas on offer. Auction quantities have reverted to under a million kilos weekly in the weeks ahead. This and the rupee factor should see the market firming up once again. Source: Asia Siyaka Commodities Pvt Ltd.

Royal Fernwood awarded ISO 9001 certificate

RFPL, incorporated in 1994 with a huge investment of over Rs. 1,000 million invested in the most modern technology available for the production of high quality porcelain tableware for export markets. 

State-of-the-art machinery from U.K., Germany and Japan has been purchased to ensure high productivity. Raw materials from local and foreign sources are blended in order to obtain the best properties of porcelain. 

RFPL has its own fully owned subsidiary named Lanka Decals (Pvt) Ltd which is the only plant of its kind in Asia to produce the highest quality ceramic decorations (decals) for not only for porcelain but for other ceramic products such as bone china, stoneware and earthenware. 

This facility has allowed RFPL to be very flexible in creating new designs and during a short period of 3 years the company has developed more than 300 designs which have been marketed worldwide. 

The company markets its products in 20 countries, which include U.S.A.,U.K, France, Spain, Netherlands, Belgium, Germany, Italy, Portugal and Japan. The customers are mainly prestigious department stores in developed countries as well as established importers who are specialized in up market products. Some of the prestigious customers of the company are Abril Imports, Amato, Casino,Cora, Dansk, Debenhams, De Santis, House of Fraser, Jane Asher, Marks and Spencer, Montenaro, Printemps, Poristal, Rou Bill and Verolli. The factory is situated 45 km South East of Colombo in a village named Kosgama and employes 650 employees mainly from the area. Currently the factory produces 500,000 pcs of porcelain tableware every month 90% of which are exported. In order to cater to increased market demand from the expoot market the company recently embarked on an expansion programme, which would increase its production capacity by 35%.

With the increased production capacity, the Company is confident that the lead time required to execute orders could be brought down to six weeks from the current eight weeks.

The company also sells in the local market approximately 10% of its production.

Caltex's eco program

A company statement said Caltex started its environment protection programme in association with the Wild Life Conservational Foundation, which recently was renamed under the acronym (FWLCF).

The FWLCF carried out a national awareness campaign at grass root level to protect the environment last year, aimed at educating the public to minimise harmful acts and preserve the natural habitat. The project covered areas such as Kurunegala, Kandy, Nuwara Eliya, Anuradhapura, Polonnaruwa and other suburban areas in Colombo and the outstations and led to Caltex being awarded the National Environment Award last year. 

Ambuja hits 100

Ambuja Cement is the only cement company to have conducted over 100 Mason Conferences during the year 2000, all of which have proved to be very educational he said.

SLIM: the judges

The main panel is chaired by M&E Ltd's Managing Director Eardley Perera and comprises LDB Lintas Managing Director Tagore Berry, Nestle Lanka's Director, Marketing, Rajive Deraniyagala, Creative Services Managing Director Herman Gunasekara, Grant McCann-Erickson Creative Director Russell Miranda, Aitken Spence Group Marketing Consultant Godwin Perera, Eagle Insurance Group Planning Manager Deepal Sooriyaarachchi while the two foreign members are Chlorophyll Brand and Communications Consultancy's Anand Bhaskar Halve and Managing Director of Alok Nanda and Associates of Mumbai, Alok Nanda. The special panel comprises Hayleys Ltd's Group Executive Director Richard Ebell and Suntel's Director Marketing R. Balachandran.

Confusion… confounded

The money markets have been speculating this for many months - forming the basis of a Sunday Times Business story last December - but last week's move caught the business community and every other sector connected to the US foreign currency "with their pants down" - according to one analyst. Confused markets reacted in the best way they could - create more confusion. Banks quoted wildly fluctuating rates with the dollar moving like the New York skyline in the range of 80 rupees plus to around 99 rupees. One bank even quoted 101 rupees but rowed back to a moderate 90-rupee level at the day's end on Thursday.

The consensus in the marketplace and the lower end of the market - the consumer - was that while freeing of exchange rates are inevitable, the manner in which it was done was questionable and triggered panic and uncertainty.

An International Monetary Fund (IMF) team, in Colombo for what officials pegged as routine consultation with Sri Lankan authorities including President Chandrika Kumaratunga as finance minister, added fuel to the speculation that the free float decision was as a result of pressure from donor agencies.

Central Bank officials attempted to cushion the uncertainty by issuing a statement on Friday saying the free float move would stabilise the market. The bank also announced some "feel good" news - that the economy had grown by six percent last year compared to 4.3 percent in 1999 and 4.7 percent in 1998 and that the overall balance of payments this year would end with a surplus of US $ 100 million from a deficit of US $ 516 million in 2000.

While the Central Bank's "shock treatment" has been put to the test by the markets and the media in the past week with the Sunday's newspapers joining the chorus of views, the Sunday Times Business would like to urge the Central Bank to call a meeting this week of bankers and other affected sectors and look at ways of jointly calming the markets and wiping out uncertainty. It is still not too late to take the business community into their (Central Bank's) confidence.

In this article, Sunday Times Business journalists Chanakya Dissanayake and Akhry Ameer interviewed and spoke to a cross section of people on the impact of the free float of the dollar and what it meant to them.

-Business Editor

This is what they have to say…

"We are very confused and have stopped all imports. The Central Bank is not monitoring the situation properly and it appears to be helpless."

"When we went to the bank today (Thursday), one bank quoted the US dollar rate at 93 rupees, another bank quoted 97 rupees while yet another (Union Bank) quoted 101 rupees. There are wild fluctuations of the dollar. We don't know what would happen tomorrow."

"The Central Bank appears to be short of foreign reserves. Otherwise why aren't they not intervening in the market? The little that I understand as a small importer is that the government should intervene and bring down the rates when it rises but this has not been done."

"Today (Thursday) importers in the Pettah did not open a single Letter of Credit (LC). Many importers even called their suppliers abroad and cancelled LCs. Some others were informing suppliers to cut down on consignments like to just two container loads of goods from an earlier contracted 10 containers."

"The Pettah market deals with a whole range of imports including dhal and rice amongst others. No one is booking dollars (on Friday) hoping that the dollar would come down next week. There are no forward bookings of the dollar either."

"We are in a crisis situation. We don't know what is going to happen next week and we don't know what the government is thinking on this issue. I wish they could say something."

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Ravi Kumaratne, chief executive officer (CEO) at Asia Siyaka Commodities (Pvt) Ltd, a tea and commodity broker:

"This should have had a positive effect but unfortunately it hasn't had the desired effect. This is always the case - good things don't work out the way it should."

"There is going to be a lot of confusion and chaos until the situation stabilises. There is a need for certain signals from government to ease the crisis."

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An economist working at a semi-government insitution, who declined to be named, said:

"There is an urgent need to strike a fiscal balance and also sort the balance of payments situation. The problem in this country is that the reserves are declining which I also believe is due to wide currency speculation."

"Those who generate foreign exchange are speculating on the rupee and keeping the money off the market and bringing it in when it suits them. "

"I believe donor agencies have not pumped in funds to Sri Lankan projects in the past two years because of poor government policies."

"The high oil prices have also impacted on the balance of payments. In this situation, no institution (like the Central Bank) can defend the currency We then reach a point where we have to make certain decisions. Some of the issues that we are confronted with are how to correct the imbalances if there is a fiscal deficit. When there is more money is in the economy as is the case now, the more there would be spending. "

"When you have more money the tendency is to show off more and flaunt your wealth. This has been the tragedy of this country particularly amongst the new rich. We live beyond our means ... so the high cost of imports does not make any difference to our purchasing power."

"We will buy at any price making a mockery of the age old theory that a rising dollar rate will curb imports especially luxury goods."

"In the budget, government spending revolves around welfare policies, pensions and also capital funds and the war. How do we prune this expenditure? When the gap widens how do we find the money? Either we increase taxes or borrow money. When this happens the public debt skyrockets."

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Nivard Cabraal, past president of the Sri Lanka Institute of Chartered Accountants and a UNP Provincial councillor said:

"This should be a positive move but not in a market driven by panic. There should have been discussions with banks and the industry. When a major policy decision is taken, you don't do it overnight."

"Had it been done properly and in a calmer atmosphere, there wouldn't have been panic and confusion. Fears of a escalating dollar value is creating chaos in the market. It is an extremely negative situation"

"The other problem is that the country does not have the infrastructure to absorb shocks like this. Take the Malaysian crisis for instance. That is a classic example of how the economy recovered faster from the East Asian financial meltdown than other regional economies because it had sound economic policies. This is something Sri Lanka does not have and I are not alone in saying it ... the IMF and World Bank have often criticised the policy structure and governance."

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Senerath Seneviratne, treasurer at HongKong and Shanghai Banking Corporation (HSBC), said:

"There is some uncertainty in the market. This was likely to happen when the exchange rate is freed. But I believe the dollar rate will stabilise to more realistic levels and plateau at 90-92 rupees in the next three months."

"I believe exporters will see an opportunity in the market in the next few weeks to bring back their dollars."

"One of the reasons for the Central Bank move was since some exporters were holding onto their proceeds creating a shortage of dollars in the market. I believe the Central Bank pumped in close to 200 milliion dollars in the June 2000 to January 2001 period due to the acute shortage and to reduce speculation."

"The dollar, due to speculation, had appreciated by 23 percent during this period".

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D.J. Abeyesekera, Chairman of the Import Section of the Ceylon Chamber of Commerce and a director at Singer Ltd, said:

"We are bit apprehensive over the move. If the dollar settles down to a realistic level then there is nothing to worry. But the confusion and chaos in the marketplace is a troublesome factor."

"Our biggest problem in the past has been the rapid devaluation of the dollar in the past year or two. We are still an economy heavily dependant on imports for our essentials and therefore the parity rate of the rupee versus the dollar and the other international currencies have a direct bearing on the cost of living."

"If the objective of the government is to curtail imports by this measure it is not likely to happen due to the essential nature of the import sectors. Most international economists believe that advance planned devaluation will help the private sector to plan their business activities. The thinking today is that shock treatment is a thing of the past and will contribute more to inflation and destabilisation of the economy."

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Suraj Fernando, vice president of the Import section of the Chamber of Commerce, said - in offering his personal views - that :

"The real question here is that when and how will the Central Bank intervene in the market? On the other hand when the commercial banks step over prescribed limits on maintaining daily dollar overnight positions, they would have to sell their dollars thereby lowering the exchange rate."

"Interest rates are greatly influenced by the quantum of government borrowings and will remain high until the government stops borrowing heavily in the Inter-Bank market or receives aid."

"Most import dollar bills on oil and defence expenditure are on differed terms. When bills mature, the two state banks borrow heavily in the inter-bank market or against their portfolio of government securities from the Central Bank. This will keep the rates high and uncertain."

"With the dollar on a free float, it is difficult to estimate landed cost and consequently selling price which determines the market demand if exchange rate fluctuations continue to be volatile as now."

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Ajith Colonne, a socio-economist and former Deputy Director (Research), National Intelligence Bureau (NIB):

Commenting on the short term effects of the free float of the US dollar on the cost of living, Colonne said, "social unrest in the urban sector can be a possibility due to the high cost of basic necessities. Poorest of the urban sector may have to compete with the cats and dogs for the garbage bins to survive".

He further said that many countries that have adopted freefloats have also liberalised their capital accounts to attract short and medium term capital inflows.

"If the capital account is liberalised, influx of foreign capital can occur because of the prevailing high interest rates. However the current free floating without liberalising the capital account has only increased the investor uncertainty," Colonne added.

On a long term perspective he said that the rupee should eventually stabilise at a higher scale and will remain steady.

Patrick Amarasinghe, President, National Chamber of Exporters:

"In the short to medium term the exporters will benefit. But in the medium to long term all costs like raw materials will go up. Then there will be wage demands and electricity increases. So exporters will not benefit.

But there is a thing like this ... foreign buyers have been pressing local exporters to depress their prices and to share the benefit. Because of this the margins will get upset."

Do you think that the exchange rate will go down? "The Central Bank move was done to bring back export dollar proceeds being held overseas. Banks and even some private companies are doing this. The government had to do this at some point."

"There are still so many other areas that will have to be corrected. Finally people will have to get used to market forces operating."

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Aloy Jayawardene, President of the Sri Lanka Chamber of Small Industries, said that the imports of raw materials will obviously go up and that would affect their industries.

However he was unable to give a broader view of the situation as he was in the process of receiving feedback or complaints from their members.

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Dr. Nimal Sanderatne, economist and senior fellow at the Post Graduate Institute of Agriculture at Peradeniya University said:

"The free float of the rupee will no doubt continue to depreciate the currency, as the economic fundamentals are currently very weak. I don't think the Central Bank had much of an option about free floating the rupee as the official foreign exchange reserves have come down and IMF support is essential."

"The free floating of the rupee would have been a pre-condition of the IMF for giving balance of payments support. As to the impact it would have, the most obvious and immediate impact is the increased costs of imports. That has in fact already happened even before the free float. And this will continue.

"It will affect not only imported items but locally produced items as well due to both the direct and indirect impacts of the devaluation— the import content of locally produced goods, transport costs and increased wages. The danger is that there could be an upward spiralling of prices, especially due to the speculation of further depreciation of the currency that a free float induces when the economic fundamentals are weak.

"We can only hope that the exchange value of the Rupee would stabilise soon. But this is too much to expect owing to the basic indicators in the economy being weak-large fiscal deficit, large trade gap, depletion of foreign exchange reserves and the prospect of high inflation this year. Things may change around once the IMF steps in. Let us hope so. 

"As to the corrective capacity of the depreciation for the balance of payments, I am very sceptical. The main items in the balance of payments which caused this situation will be largely unaffected by the depreciation. These are the large expenditure on crude oil imports and the expenditure on military hardware imports. 

"Exports will benefit, but here too I doubt the increased dollar earnings would be adequate to make a serious dent in the balance of payments in the short run. There may be longer run benefits to industry provided excessive inflationary pressures do not develop. Tourism may get a boost, provided the security situation is in check."

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Amal Sanderatne, Head of Research- Jardine Fleming Stock Brokers, said:

"The lack of confidence and the speculation arising from it has been the primary cause for the sharp depreciation of the rupee, seen recently. This has resulted in the rupee overshooting its' current fair value."

"Pressure on the rupee from the current account will be lower on account of a slowdown in the economy and higher costs leading to curtailment of imports."

"We expect the total depreciation from now onwards to end 2001 to be lower. For end 2001 we maintain a target of 96 rupees to the dollar."

Another stockmarket analyst who declined to be named said:

"In the short term the market will be subdued. All benefits from the free float will be long term. All investors are looking at the impending IMF loan package to assist the Balance of Payments situation and to face the external shocks."

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