14th, December 1997

Christmas tidings for textiles

By Mel Gunasekera

Christmas may come soon to the textile manufacturers, if the government in agreement with the bankers, considers favourably an appeal from the manufacturers to write off their existing loans .

One third of the estimated Rs. 3.5 bn outstanding will be written off by the commercial banks, another 1/3rd met by the government and the balance 1/3 borne by the manufacturers at an interest rate of 8 per cent per annum, a top government official said.

The government is also looking at the possibility of requesting the Labour Department to make concessions towards textile manufacturers who have fallen back on their EPF/ETF payments. Even utility suppliers, like the Electricity Board have been asked to make concessions towards the manufacturers," monthly bills officials said.

"At the direction of the Deputy Finance Minister, the relevant officials are studying the possibility of assisting the affected companies," BOI officials said. While declining to comment on the possible 'Christmas hamper' offered to the weavers, the official said newspaper advertisements have been placed by the BOI requesting them to submit a report on their financial status. The banks have also been asked to submit a similar report. Once these reports are received, the government would draw up a strategy for the future of the industry, officials said.

"The documentation required by the BOI is of a certain format and there are many weavers who are scared to submit their reports, as they have fallen back on their EPF/ETF payments. They fear they may be hounded by the Labour Department for this lapse," textile sources said.

The delay in arriving at a solution has made some weavers think that the government is simply playing at finding a solution.

"They keep asking us to send in information, but meanwhile, we are slowly making our way to the grave," they said at a media conference last week.

While some of the manufacturers want to continue in business, others want to cut their losses and close down starting February next year.

Meanwhile Kabool Textiles who bought over Mattegama Textiles Mills on condition that they be permitted to sell 50 per cent of the mill's produce in the domestic market, are now having second thoughts about the deal. The recent abolition of textile duty has made their products less competitive textile sources said.

At present Kabool is permitted to sell only 10 per cent of their fabrics in the domestic market.

Manufactures who produce fabric to make garments for local sales say that importing the fabric would be much cheaper. General Manager Velona Group Ruwan Gallage said that they have to pay 10 per turnover tax on textile sales.

"We manufacture all our fabric requirements for our garments. The way things stand, it is much cheaper to import fabric to make our garments, rather than make the fabric locally and pay a 10 per cent tax," Mr. Gallage said.

"The government is forcing us to close our factories," Chairman, Ceylon Textile Manufacturers Association, A Y S Gnanam said. "The policy to abolish the duty was not any body's mistake. It is a continuation of bad policy coming from the previous government, despite ignoring representations made by us."

Industry sources say, the domestic textile wholesalers have already placed orders for fabrics overseas, anticipating the rush for textiles during the new year season.

One of the first victims to lose out on this move is Veyangoda Textile Mills. They may be forced to close down soon, sources said.

Observers say, most people do not wear clothes stitched from local fabrics, so it is obvious that the domestic industry should close down, if it is not run efficiently. Weavers argue otherwise. They say that they have been in the industry for the past 30 years and should be given a chance to survive.

"We have no proper industrial policy, particularly sectoral industrial policy," Mr. Gnanam said. "The government is arriving at decisions based the individual thinking of officials who have been wrongly advised by the apparel export sector. If such an important policy affecting a major domestic industrial sector is take on such an ad hoc basis, we are doubtful whether we could ever achieve a vibrant industrial growth."

Observers say the local textile manufacturers have been elbowed out of the local market by the recent budget, so it is right for the government to lend a helping hand to assist an industry that served the nation and saved foreign exchange when there was a ban on textile imports many years ago.

Trusting Funds to Unit Trusts

A seventh unit trust has appeared on the financial scene. Unit trusts are a means of mobilising small savings for investment primarily in the stock market and thereby providing capital for investment. Small savers who have neither large amounts of capital nor knowledge or skill to invest in the stock market are provided an opportunity of investment in the share market through unit trusts.

Unit trusts can therefore play a vital role in both mobilising savings as well as providing capital for development.

While recognising their potential roles, have unit trusts in fact played such a vital role so far? One cannot give a definite affirmative answer to this. The fact that six unit trusts have a buying price of between Rs 6 to Rs 10 is itself evidence that small investors may not have found investment in unit trusts very profitable.

The fact is that units cannot generally outperform the stock market. Units rise in price when the market experiences a bull rush and come down in price when the market slides down. This has to be recognised and appreciated by small investors in unit trusts.

Just as much as a host of investors burnt their fingers in the stock market when a bull rush turned bearish not so long ago, there must be disappointment among the investors in unit trusts currently too. Additionally when the performance of unit trusts is poor,it is difficult to popularise them and mobilise funds.

There are however several ways in which unit trusts could be made to perform better and be more acceptable to small investors. The first of this is the skill and expertise of the managers which can compensate to some extent for the lack of buoyancy and general profitability in the market.

Good financial analysis and prediction could enable unit trusts to provide better returns to holders than the share indices' performance. Shrewd management of investments in stocks which are likely to withstand bearish runs and good timing in exiting from declining shares could ensure higher returns.

The second reason why unit trusts may be expected to perform better is the favoured treatment of unit trusts in the sale of privatised shares. In the recent privatisation of plantation companies PERC allocated a larger proportion of these shares to unit trusts which in effect gave them a capital gain straight away.

Such favoured treatment is justified in order to encourage unit trusts to capture a larger share of small investor funds.

A third strategy to make unit trusts attractive is to offer the public, which understands little about unit trusts, options in the types of units; high risk - high return units, medium risk and moderate returns and little or no risk units with minimum returns. Once such an array of units is available there is a need to explain these different types of units to the public at large in order to make these investments attractive.

In the long run unit trusts are likely to perform a useful role in developing the capital market. Meanwhile the recent fluctuations in the share market as well as reversals in the yields of government securities are not likely to be helpful. Efforts to develop unit trusts must however continue for they are a means of increasing the mobilisation of domestic personal savings for development.

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Thai Economy to get worse before it gets better

Like a violent tornado, the financial crisis is sweeping throughout Asia, uprooting fragile businesses and forcing survivors to consolidate, merge or sell off assets to survive.

Weaknesses are exposed and nothing is spared. Even strong multinationals bend under gale force winds. Before the storm is over, Thailand's economy must go through gut-wrenching changes that will re-shape its corporate landscape for years to come. Only then, can it mount a gradual comeback, that will reflect whether the changes have been sufficient.

Signs of grave recession are not manifest. There is no ambiguity about dismal third, and early fourth quarter business results. Particularly worrying, are steep drops in performance and cut-backs in primary industries such as automobiles, construction equipment, retail and telecommunications.

Businesses are shutting down in record numbers and for many, the crushing weight of foreign debt is the final straw.

Apparent solutions which were anticipated would materialise, have lost their lustre. For instance, Japanese banks, which expected to provide significant support in rescuing the Thai economy, have experienced their own systemic problems related to bad debts, a sluggish economy and racketeer scandals. These problems have been compounded by economic turmoil and currency devaluation in neighbouring Korea, which will produce more bad loans and increase competitive pressures on products that both countries sell.

With all these concerns, it is unlikely thatJapanese banks can marshal enough aid to help Thailand out of its economic nightmare.

Others have put their faith in an export-driven economy. Unfortunately, this will provide only a limited solution. Currencies of other Asian countries where Thailand exports products and services have also been hard hit, thus reducing the advantages offered by the baht depreciation.

Planned exports to Thailand's biggest export customer, the United States, may not materialise, given September trade figures from Washington that have revealed an alarming trade deficit.

Advice offered to struggling companies is not always sound, analysts say. For instance, experts in the advertising industry keep reminding companies, of the importance of maintaining advertising spending during the economic downturn. They claim this is essential to prevent equity erosion.

The more prudent advice is to trim advertising expenditure and use what remains wisely, for over the next few years it will be important to work smart, especially with respect to how you spend limited resources.

The carnage in the upcoming months will be devastating.

Fourth quarter results will reveal the true extent of the damage, as well as emerging opportunities. Companies will be forced to choose between core and non-core businesses and to downsize, without sacrificing profit generating activities.

Immediate survival depends on focusing resources on selected opportunities. Long gone is the executive who can boast of being Chairman of five different companies.

Visitors walking through Bangkok's Don Muang Airport, are greeted with banners announcing, 'Amazing Thailand Grand Sale.' While this message is aimed at tourists seeking discounts on merchandise and sight-seeing attractions, the biggest shoppers next year will be international investors hunting for bargain priced assets.

At first, they will adopt a cautious wait-and-see attitude, but as prices continue to sink, the opportunities to buy below market value will be too good to resist.

With invigorated purchasing power, thanks to the floating baht, these investors will gravitate to Thailand in the days to come. Armed with spreadsheets and probing questions, they will assess risk and net present values.

Accounting records and balance sheets will be scrutinised for irregularities and undisclosed losses. Sales forecasts and market growth projections will be meticulously reviewed, to avoid past mistakes which led to over-capacity. If there is in-adequate transparency in the book-keeping or financial statements, no deals will be made.

For foreigners seeking partnerships with Thai ventures, the most crucial evaluation will concern the quality of management. Accountability for past performance, mutual trust, degree of control and decision-making issues will all need to be resolved. Failure to do so will result in early partnership divorces.

And international investors will not be the only ones searching for deals. Local tycoons and conglomerates will also gobble up under-valued assets, adding them to their portfolios.

When all the buying, trading and consolidating is over, the strong assets will be culled and merged and weak ones liquidated. The rationalisation of businesses will be complete as the laws of supply and demand and survival of the fittest help eliminate excess and pave the way for a new beginning.

There will be many victims of this corporate re-shuffle. Aside from strong local companies, select multi-nationals and niche export businesses, most companies will be forced to shed portions of their workforce to survive. Others not so lucky will be forced to shut down, adding thousands to the list of unemployed.

All levels of management and staff will be affected, but especially hard hit will be white-collar middle managers, who over the past decade, made a living in industries such as finance and real estate now plagued by over-capacity.

These displaced workers will discover that in order to assimilate back into the workforce they have to change. Many will be forced to switch professions, take pay cuts, learn new skills and adapt a new personal growth.

The task to re-train the unemployed will be enormous. The challenge for the government and revamped corporations is to help prepare these individuals for re-entry into the workforce with a fresh perspective and the requisite skills to excel.

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