• Thumbs up for SRR removal from forex market
• LPG decision this month
• New laws to facilitate internet banking
• Delmege second largest stake in Richard Peiris Exports
• Markets
• News
• Advertorial
• Shipping and Aviation

Thumbs up for SRR removal from forex market

The scrapping of the Statutory Reserve Requirement (SRR) on commercial banks domestic foreign currency deposits has received a firm thumbs up from the forex market.

This should have come earlier, it was one of our major proposals to the Central Bank, forex dealers told the Sunday Times Business (STB) in one voice.

Last week, the Central Bank abolished the 11% SRR on domestic foreign currency deposits, fully opening up the forex market and making the cost of funds cheaper for forex dealings.

A historical review of the SRR on foreign currency deposits indicate that the Central Bank of course well within its powers, has tinkered with this requirement from time to time to either facilitate or control foreign currency liquidity.

Foreign currency deposits were brought under SRR for the first time in January 1993, when there were large inflows of short term capital and the Balance of Payments (BOP) showed a large surplus creating heavy inflationary pressures, a Central bank release says. In 1993 the overall BOP showed a US$ 375 million surplus.

In order to discourage heavy short term capital inflows and mitigate inflationary pressure, the Central Bank imposed SRR on foreign currency deposits making a distinction between demand deposits at a SRR of 10% and time (fixed) and savings deposits at a SRR of 6%.

As the bank release says several changes have been made since then.

At present foreign currency deposits held outside the country are not subject to SRR. Now with the removal of SRR on domestic deposits, there will not be a SRR on any foreign currency deposits held by commercial banks.

The Central Bank has released US$ 61 million into the system with the removal of the requirement, which would instantly improve the foreign currency liquidity situation.

Total foreign currency liabilities of all commercial banks stood at US$ 1.034 billion as at end June 2000. Of this US$ 484 million was held outside the country.

President Forex Association and Head of Treasury Standard Chartered Bank, a well known forex and debt expert, Mr. Mangala Boyagoda told the STB that using domestic foreign currency deposits for a banks FCBU funding requirements attract a 11% SRR.

Commercial banks used to place their foreign currency outside the country with other banks (not in their own network) to dodge the SRR and borrow dollars overseas for their FCBU operations, to save the 0.9% reserve cost , Boyagoda said. However, overall the country was losing money on the margin between the libid and libor, Boyagoda said.The depositors and borrowers will benefit due to this extra being passed onto them, he added.

This is the ideal time to develop forward markets and go into US$ rupee swaps, to add further liquidity into the market, Boyagoda added.

At present only the reverse repo is used to add liquidity, he added.

Central Bank can come into the swap market with spot and forward rates, he said. The US$61 million that has been released into the market can make an impact if used effectively. Banks can run short positions and use their excess dollars to fund their NOSTRO accounts, Boyagoda explained. Since the Central Bank has offered a cap to the dollar rupee exchange rate at 79.47 the new dollar inflow will stabilise the dollar rupee market, he said.

President Primary Dealers Association and AGM Treasury Commercial Bank Mr. Dula Weeratunga told the STB that with the dollar supply being improved with the additional inflow, exporters and importers could borrow more in dollars.

With the cost of funds coming down with the total removal of SRR on foreign currency better rates could be offered by commercial banks, he said. This could mean a higher rate for depositors or a lower rate for borrowers.

Either way the reduced cost of funds can be passed onto the customer, he said. With no hidden intermediary costs there will be an inflow of foreign deposits, which could help improve the out balance of payment situation, he added.

With the SRR on domestic deposits abolished there is no benefit in investing abroad and in fact some banks could even offer customers the interbank deposit rate or somewhere close to it on foreign currency deposits, he added.

The Bank of Ceylon the largest holder of NRFC deposits mainly from migrant ME workers is said to be the largest beneficiary of this move with about half the US$ 61 million being BOC SRR deposits.

On Friday the dollar closed at Rs. 78.47 and Rs. 78.50.

LPG decision this month

By Ruvini Jayasinghe

The government will make the tough decision of how to liberalise the CPC's 20% production of LPG gas by the end of this month, PERC DG, Mano Tittawela told the Sunday Times Business (STB). This will be closely followed by the key decision on liberalising CPC's monopoly on marine and aviation fuel.

With Shell's monopoly on LPG gas being lifted on November 24th, the government has to decide how they are going to let the other contenders who have already expressed interest into the fray.

Already Caltex, Mundo Gas of Hong Kong and a Russian company have expressed interest in getting into the LPG gas distribution, and avaition and marine fuel distribution, Tittawela said.

Both Caltex and Mundo Gas have been looking at the possibility of setting up terminals in Galle and Hambantota respectively. It is understood that local distributor LAUGHS (Lanka Auto Gas Co. Ltd.) who has teamed up with Mundo Gas is even willing to fund the Hambantota terminal by themselves, if Mundo pulls out. Galle and Hambantota are preferred locations because the sea is deep in the south and terminals can be set up very close to the shore, an industry expert said.

But it is just one of the many options they are considering, Caltex chief in Colombo, Shahid Ahamed told the STB. The key decision is the storage together with distribution and access to capacity, he added.

The CPC produces 18,000 metric tons of LPG monthly and the totality of the marine and aviation fuel.

The product is generic and depending on world market prices, if we could import LPG cheaper from lower priced distributors into the country, we could sell at lower prices, he said.

The government will also consider several options in liberalising the sector, Tittawela said. CPC could either set up a joint venture with one of the interested parties, or they could bid out the gas and sell at market prices.

CPC subsidiary, Lanka Marine Services Ltd's current monopoly on marine (bunkering) fuel will cease at the end of the year, according to the budget proposals of March 2000. We are now working out the strategy of opening out the sector. There will be no licences issued as in the case of lubricant distributors, Tittawela said.

Liberalisation of aviation fuel will follow marine fuel with CPC having to compete in the open market with other players.

Where there is a massive investment involved in manufacturing or refining, the government will not charge a licensing fee. If these new contenders set up terminals they will be BOI projects bringing in foreign exchange into the country. On the other hand these companies may use Shell's new terminal for storage which currently has excess capacity. This is practiced in other countries also. The cost of setting up a terminal could be in the region of US$ 15 to US$ 20 million an industry expert said. Terminals have been built within that range in Malaysia, he added. However Shell is reported to have spent US$90 million on their terminal. The price could vary according to the storage capacity also.

Once the LPG gas and fuel industry is fully liberalised it is imperative that a regulatory body be appointed.

LPG, a domestic commodity will be regulated under the new Consumer Protection Act, which is ready and lined up for the parliamentary nod, Tittawela said. But he had doubts if it will be taken up for debate before parliament dissolves on August 24th.

The new Act will scrap the Fair Trading Commission and bring all domestic commodities under one regulatory body, he said.

Meanwhile a separate body will regulate the power and energy sectors, once the two sectors are fully restructured and liberalised, he added.

New laws to facilitate internet banking

By Chanakya Dissanayake

The Judicial Reforms Commission will introduce new legislation to facilitate internet banking. The Sunday Times Business (STB) learns that a sub- committee of the Law Commission of Sri Lanka is also looking at the issues pertaining to secure on-line payment systems, recognition for scripless transactions and on-line defraud. New legislation will attempt to protect the interest of banks and speed up the progress in net based banking solutions.

The introduction of internet banking by two banks recently and the wide interest the financial sector in net based services has compelled national law making bodies to formulate new legislation. The new remedies are expected to protect both banks and clients.

A research lawyer engaged in the reforms told STB, "It should be kept in mind that laws will only facilitate on line transactions, it will not attempt to regulate. We are trying to bring laws on par with technology, our commercial law is still based on traditional legal presumptions such as direct human to human transactions, paper based documents which are signed by the parties to contract etc. The new advancements in IT has brought pressure on these presumptions. We need to introduce enabling legislation to provide recognition to ; electronic equivalent to paper based documents, on-line credit card transactions and many other related transactions".

Delmege second largest stake in Richard Peiris Exports

On July 28th a large parcel of Richard Peiris Exports changed hands making Delmege the second largest shareholder of Richard Peiris Exports.

While the market speculated on this sale which was earlier held by NDB, Delmege officials told the Sunday Times Business (STB) that the transaction was purely an investment, not an attempt aat a takeover.

Delmege bought more Richard Peiris shares this week bringing their current shareholding to 10.11% of the company. The main attraction of the purchase was the dividend yield of 9.09% on a Rs. 16.50 share, the official explained.

Richard Peiris Exports is a subsidiary of Richard Peiris and Company who holds 60% of the export company.

The company's turnover declined by 10% from Rs. 417 mn to Rs. 377 mn in their financial year ending March 2000.The main reason for this decline were the fall in sales of sealings rings to their long standing French buyer and declining mat sales in Europe.

The company's profits declined by 32% from Rs. 70 mn in 1998/99 to Rs. 48 million this year.

The main cause of the decline is the loss of revenue from sales from sealings rings the increased freight rates to the USA and the costs incurred in setting up of an independent marketing division for the group, their annual report says.

Export of rings to France was affected as a result of non-compliance of product to stringent French norms governing food contact regulations. sLately the French authorities have introduced several new requirements making the already stringent standards even more difficult to cater to. However the company's technologists have been able to find solution to most of the problems and are hopeful of manufacturing an acceptable product soon , the report adds.

Markets

Money Market Update First Capital Ltd.

The inter-bank call money market and the overnight repo market

Given the indecisive liquidity position that prevailed in the market, the inter-bank call money rate was volatile, during the week ended 3rd August.

The Central Bank Open Market Operations continued to bridge a larger portion of the liquidity shortfall through its reverse repo window, easing the pressure on the inter-bank call money market.

The inter-bank call money rate eased on Wednesday and Thursday, on the back of the excess liquidity that prevailed in the market. The inter-bank one-week term money rate too moved accordingly by approximately 50 basis points.

However, the change in the one-month term money rate was modest. During the week the call money rate fluctuated between 14.75% and 10.50%. The weekly call money average recorded a marginal decline of 4 basis points to close at 12.94%.

Central Bank open market operations

The Central Bank overnight repo rate and the reverse repo rate remained unchanged at 11% and 15% respectively. On Monday the Central Bank Open Market Operations released Rs. 10Bn to the market, most likely a renewal of the previous reverse repo released on July 17th. However, on Wednesday and Thursday Rs. 1Bn and Rs.1.8Bn was recorded in the repo window of the Central Bank. The market repo rates too followed the volatility in the inter-bank liquidity position. The market repo rate reached 14% on Monday and the week closed at 11.5%.

The treasury bill auction.

Rs. 3.08Bn worth of government debt was renewed in the treasury bill auction held during the month. The Central Bank reserved and bought Rs. 1Bn worth of bills. However, as there were Rs. 900Mn worth of other maturities, the net impact on the liquidity was very modest.

The rising momentum in the treasury bill yields persisted, as the real liquidity shortfall still remains high. During the week there was a special bill auction for Rs. 2Bn in the maturities of 7days, 14days and 21days. However, no bids were accepted from the public sector and the auction was fully taken up by the Central Bank of Sri Lanka.

Treasury bond auction

During the week two bond auctions were held in the maturities of 2-years and 3-years for Rs. 2Bn and Rs.1Bn respectively. The 2-year auction was under subscribed and the weighted average yield rose up by 17 basis points. The 3-year auction was fully subscribed, and the weighted average yield gained up by 1 basis point. Most of the secondary market activities were witnessed in the maturities of 2-3 years, while the long bonds were quoted with a wider two way price.

Maturity 01-08-02 01-06-03

Coupon 10.75% 11.00%

Amount offered

Rs.Mn 2000 1000

Amount

Accepted Rs.Mn 1410 750

Weighted

average 13.86 13.94

Change 0.17 0.01

Foreign Exchange - Dollar Spot Movement

The Central Bank middle rate remained unchanged at Rs. 77.535 per dollar. During the week the spot rate showed the signs of stability and was ranged bound within Rs. 78.58 and Rs. 78.48.

The removal of the Statutory Reserve Requirement on foreign currency denominated deposits will help easing the pressure on the rupee. Three months forward was quoted at Rs. 79.95 to Rs. 80.10.

Mind your business

Those gentle feelers

Senior executives of several leading private sector giants are a worried lot these days being at the receiving end of gentle feelers mostly from the blue camp- about what assistance will be forthcoming for the polls.

There have been no requests for donations to the campaign fund in cash, but help in the form of vehicles, printing posters and providing other services would be welcome, they have been made to understand.

The companies are worried for two reasons- how could they show these contributions in their own accounts? And, are they backing the right horse, after all?

Blue eyed boy

With the sudden demise of the much-loved bachelor boy, the hotel industry lost their representative in the Cabinet and until the time of writing, no replacement has been named.

There was however speculation that the one who earlier held the purse strings will be given the job, mostly as a reward for becoming blue after being green all these years.

The industry is disturbed at this news for they do not regard the ex-minister as their friend and hectic representations are being made to the highest authorities to give the job to someone else...

Look who is talking now

And the competition is finally telling on the cellular networks which now have to spend enormous amounts on advertising and on subsidizing promotional packages and therefore have to cut other costs to be viable.

One network has decided to scrap a program which rewarded subscriber loyalty with complimentary gifts. They say it is part of 'restructuring' but that is only an excuse.So, look who's talking now...!

Import bill high

Brokers expect the trade deficit to contract by a whopping 63% in 2001. John Keells Stock Brokers (JKSB) said that a 40% rise in imports had eclipsed the impressive 21% export growth in the first five months of this year.

While they expect exports to be buoyant through the rest of the year, they expect emergency defense expenditure and rising crude oil prices to overshadow exports.

"We see the trade deficit expanding from US$ 1.3 bn in 1999 to US$ 2.1 bn this year." However they believe the deficit would contract in 2000 since a bulk of the 1999 import bill was crude oil and wheat, which were one off or export generated.

The brokerage said that the import bill would decline by an estimated 12.2 along with the added bonus of a likely softening of crude oil prices leading to a 63% contraction of the trade deficit.

Meanwhile, apparels lead export growth along with a 17% rise in tea prices and a 4.7% growth in tea exports.

In addition to the high crude oil prices and defense expenditure, the two Airbus A 330 aircraft leased by SriLankan Airlines, contributed towards the dent in the trade deficit.

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