The Sunday Times Business Section

2nd April 2000

Polishing up a rough industry

Contents

Rs. 55 bn in government debt this year

The government will tap the domestic debt market for an additional Rs. 55 bn this year, beginning this month.

In a circular to primary dealers, Central Bank's Public Debt department has said that Rs. 55 bn in treasury bonds will be auctioned between April and December.

In addition, the government will also issue Rs. 12 bn in treasury bonds to the Bank of Ceylon, to retire the Bank's outstanding liabilities.

The government may buy back tranches of this issue if necessary to intervene and stabilise rates.

Central Bank officials said that the new programme is tentative, and will be finalised within the coming weeks.

During the first quarter of this year, the Central Bank issued Rs. 24 bn in new treasury bonds and Rs. 13 bn re-issued in rupee loans.

Primary dealers do not expect the additional domestic borrowings to add much pressure on interest rates (around 12%-12.5%), due to the much awaited Sri Lanka Telecom's (SLT) public offering later this year.

SLT's sale of 30 percent stake is expected to net in Rs. 30 bn, is earmarked to retire further government debt and ease inflationary pressures on interest rates.

In 1997, privatisation proceeds from SLT (US$ 225 mn) helped the government to retire Rs. 10 bn in treasury bills. In addition to SLT, proceeds are expected from Emirates (the balance proceeds from the sale of Air Lanka) US$ 25 mn by December 31, 39 percent sale of National Insurance Corporation, the management stake of the remaining plantation companies and proceeds from a few farms are expected to swell government coffers this year.

But primary dealers say that the interest rates would depend on whether the Central Bank would stick to their original estimates. Last year, the Bank issued Rs. 73.9 bn in treasury bonds.

Repaying high borrowings also create a dent in the budget deficit. The recent budget announced that nearly 70 percent of the deficit is on account of interest payments on public debt.

The budget estimated an additional Rs. 71 bn (5.6 percent GDP) to be paid for borrowed funds this year.

This year's Rs. 95.9 bn (7.6 percent GDP) deficit will be funded by Rs. 46.3 bn via concessional foreign loans and Rs. 122.7 bn from domestic sources.

However, new borrowings will amount to only Rs. 14.2 bn (foreign loans) and Rs. 43.7 bn (domestic loans).

Treasury bond programme 2000

Month

April
May
June
July
August
September
October
November
December

Total

Rs. mn

6,000
5,000
7,000
8,000
7,000
8,000
8,000
4,000
2,000

55,000

Polishing up a rough industry

Men have killed and died for the 'girl's best friend' from its first recorded finding way back in 500 BC. But, the land of the coloured gems is helplessly watching as the worlds export market for its purest form (diamonds) is taken away.

The government's liberalisation of the gem and jewellery industry, where the import of rough gemstones for processing and re-export are duty free seems to have been of little assistance to make the industry shine brighter.

On the other hand, our giant neighbour India is poised to polish us out of contention if the local industry fails to spruce up its act. The Indian industry has grown in leaps and bounds in recent years, gaining a reputation for its polished stones and in the process creating a huge demand for diamonds among its growing middle class.

Sri Lanka even with its reputation for its coloured gems has failed to exploit the full potential of cutting, polishing and jewellery making. If only this could be achieved, the gem and jewellery export industry would be the country's next huge money spinner.

Prashant Khatri, a Graduate Gemmologist and a lecturer at the Gemmological Institute of India said at a recent symposium organised by the Diamond Cutters Limited that local jewellers should use diamonds to attract the avid and growing world diamond loving population.

Officials said that the girl's best friend is increasingly becoming every ones best friend. China and India in particular have been identified as growing markets.

Local officials believe that there is tremendous potential for the increased usage of diamonds in jewellery manufactured locally. In addition, officials say that it is only logical to climb higher in the diamond exporting ladder in the light of a US$ 230 million marketing budget allocated by DeBeers' to promote the stones in India and China.

As a first step local jewellery makers need to be well versed in dealing with diamonds. Sri Lanka has the pride of producing some of the best coloured stones, but not diamonds. Sri Lankan's have always had to learn from abroad the finer points of diamonds. Identifying fakes, quality and appreciating the cut, the clarity, the number of carats and other details that speak of fine diamonds are some of the skills the local industry lacks.

Sri Lanka's cut diamond exports seem to have lost its lustre in 1998 along with gem exports. This drop was attributed to the Asian economic crisis, when the tiger economies just could not afford luxury. The government's duty waiver on gold and rough gem imports for re exports a few years ago did little to help the industry. Diamond exports in 1998 dropped to Rs. 3.8 million from the Rs. 7.4 million in the previous year. Gem exports dropped from Rs. 4.8 million in 1997 to Rs. 3.6 million in 1998.

In addition, Sri Lanka has failed to keep up with modern trends and will be left behind if they do not catch up soon. Officials said that Sri Lanka lacked cutters trained in modern methods. Sri Lanka's 12 diamond cutting companies concentrate mostly on exports. Officials said that Sri Lanka did not have an appetite for diamonds and hence the concentration overseas. This loss of appetite boils down to the fact that most Sri Lankan's cannot afford diamonds. However, officials said that it was an ideal time for Sri Lanka to get on the bandwagon and regain its lost lustre.

Ports alliance necessary for hub status

A Ports Promotion Council said the Colombo port should seek to establish strategic alliances with other ports if it is to be a hub port. Speaking at an Apparel Exporters forum last week, Mr. Parakrama Dissanayake of the Ports Promotion Council said there was a need for ports alliances to counter shipping alliances.

Dissanayake pointed out that 50 per cent of shipping capacity was controlled by six shipping alliances. Sri Lanka's containerized export cargo base is 145,000 TEU's per annum while individual global shippers ship more than 200,000 TEU's per annum.

A Lloyds study into future trends forecasts that there will be only four mega hubs in 2010. Dissanayake explains that vessels with large hauls of 15,000 TEU's will limit operations to a few major ports and ports not falling into the category of hub ports would be relegated to being sub hubs.

Meanwhile the port of Colombo has seen a drop in transhipment volumes. The number of container ships arriving at the port in January 2000 fell by 9.4 per cent to 251 vessels compared to the same period last year. The total number of ships arriving at the port fell by 7.1 per cent YOY to 328 vessels in January 2000. The British publication Containerisation International ranked Colombo 24th in its port rating for the second consecutive year. However Colombo has seen a 6 per cent drop in handling whilst throughput in the Asian region has increased.d your business

Mind your business

by Business Bug

Next on the hit list

So, the sudden announcement of the ban on cigarette advertising caught everyone by surprise.

As a face saving measure for the monopoly manufacturer however, the blow was softened in the announcement, saying the decision was not a ban but a step taken by the company in the interest of consumers.

This however has now raised a hornet's nest in the liquor industry which feels it will be next on the hit list. Policymakers say that this is indeed the case and requests have already been made that advertising must be phased out. They too will be asked to withdraw their ads on their own, or else face a ban...

Giant directory

The splitting of the good old telephone directory into sections has caused a lot of complaints already. Moreover, this book contains only the numbers of the state network when their rivals are constantly expanding.

One entrepreneur has come up with the novel idea that all numbers should be brought together in one book-the city and the outstations, businesses and homes and state and private networks.

There are sponsors willing to back the project but royalties will have to be paid to the networks and the watchdog must sanction the proposal...

Walking away with it

The home appliances market is a very competitive one which is why there are so many easy payment schemes and buy-something, get-something-else-for free offers.

Faced with this competition, one previously very popular brand is down in the dumps and the principals in Japan are worried about the performance of their agents in Colombo.

They want to aggressively promote their products again and the chances are that someone else will walk away with the agency shortly...

Customs to connect exporting companies

The customs department will connect twenty five exporting companies to its computer system by June. The connection will facilitate Direct Trader Input (DTI) into the customs system and is presently being tested by four companies , customs officials said. The system is expected to serve all exporters who transport goods by sea by October this year.

Initially the twenty five companies being linked to the system are expected to export more than 50 per cent of exports based on customs declarations being processed. The customs will provide the necessary software to exporters free of charge upon request but will evaluate their track record based on customs violations when connecting them to the system. This measure is expected to establish the credibility of traders and deter hackers. Exporters will also be expected to maintain prepayment accounts so that their dues will be automatically reduced.

The DTI system will reduce lead times for exporters and save manpower. Approximately sixty customs officers employed in keying exporters data will be released for other customs work.

The wide area network (WAN) for the DTI is being supplied by the Sri Lanka Telecom at a cost of Rs. 9 mn but the current ASYCUDA system in place ensures that a new system need not be purchased.

The success of this system will dictate whether exporters and importers by sea and air will be connected online to the customs, officials said. However this would necessitate Electronic Data Interchange for which there is no service provider in Sri Lanka at present.

Forbes deal through

Forbes & Walker Ltd changed hands last week to a consortium led by the Forbes & Walker Ltd management and the MJF Group.

The Rs. 130 mn deal includes Forbes & Walker Tea Brokers, Forbes & Walker Commodity Brokers and Forbes Services Ltd.

Under the new management, the existing management of F&W will take a 40% stake in their company and the MJF Group will come in as a passive investor with 60%.

F&W will continue under the present management to offer a high level of service and expertise to its customers. With management ownership of the business, commitment to customer satisfaction will be enhanced, a release said.

Although the tea broking business is unlikely to experience substantial growth, the vast majority of teas are still sold by auction and present levels of strong tea prices allied with potential for new value added services should ensure a reasonable return to the new investors.

A nose dive in the Colombo stock market

Once again the Colombo Stock Market has dipped to low levels. At the end of trading on March 31, the All Share Price Index was 494.5 Index points, a sharp decline from the levels in November -December last year. The cause of the decline was undoubtedly the selling of foreign held shares. In the single week of March 20 to 24th the outflow of foreign funds was as much as Rs.206 million. The causes for foreign investor move out could be a multiplicity of reasons. It is not our intent to discuss these.

Instead we prefer to dwell on the brighter side of the opportunities that exist for local investors. We all know the Colombo stock market has been a foreign dominated one. Foreign sentiments have governed the movement of the indices at most times. Now that blue chips are available at bargain prices it is an opportunity for local investors to buy into them.When foreigners come back and the market rises, as it will, then that is the time for the local investors to sell out and make their money.

The problem is that the kind of money required to absorb the sale offoreign shares would require institutional investors. They have to increase their purchases. These institutional investors should not buy or be asked to buy in order to maintain the market.Instead they should buy shares in companies because such investment would bring in high returns compared to investments in the money market. They would then strengthen their own institutions' finances.

This scenario is never played fully as the institutional investors haveto comply with certain restrictions placed on them regarding the proportion of their assets which could be invested in the share market.This is indeed a pity from both the point of view of benefits to these institutions as well as the health of the market.Also buying low from foreigners and selling to foreigners later at a higher price is a national gain.Foreigners have often sold shares at enormous profits and quit. They have a right to do this. That is the nature of the share market game. Our large institutions should play it their way,buying into blue chips when prices are down and gaining both a reasonable dividend and a possibility of a capital gain.

There has been some relaxation about the amount these public bodies like the ETF,EPF,NSB and the insurance companies could invest, yet there hasn't been an adequately liberal permission to invest in shares. This is a matter that must be looked into. In considering the extent to which these institutions should be allowed to invest,at least one consideration should not be allowed to influence and determine the rules and guidelines for suchinvestment. That is the resort to these captive sources for cheaper funding of the budget deficit.If the extent to which they invest in the market is determined by the need of the government to find cheap funds to bridge the deficit,then we cannot expect much in the way of liberalising the rules of investment.On the other hand, it is vital that the rules should have uppermost in their minds regulations which would ensure prudential management of funds.

It will also be necessary for the large local institutional investors to have expert adivice on the management of their portfolios.This could be either in house or obtained from outside. The institutions must themselves have guidelines for their investments,in terms of sector exposure, group exposure and similar prudential rules for their investments.

If Sri Lanka's stock market is to thrive we need more institutional investments in the Colombo bourse. There must be a more liberal approach to the amounts these institutions should be allowed to invest. The institutional investors themselves should arm themselves with the expertise and the prudential guidelines which would ensure that their investments are reasonably safe and profitable.It is time to look into these issues.

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