Sri Lanka Telecom clinches biggest syndicated loan

Rs. 4.1 billion from local commercial banks

By Mel Gunasekera

Sri Lanka Telecom secured the biggest ever syndicated loan of Rs. 4.1 bn from the local banking sector last week. This will partly fund a massive infrastructure project starting with 200,000 telephone lines in 1999.

The entire project estimated at approximately Rs. 22 billion for 1 million telephones lines would have to be supported by offshore funding, market sources said.

This is the biggest ever syndicated loan structured in Sri Lanka for a development project.

This is a significant departure from SLT's previous practice of being dependent on concessionary foreign financing, sources said.

A battery of lending institutions including National Development Bank, National Savings Bank, Commercial Bank, DFCC, Seylan Bank, Citi Bank, Sampath Bank and Peoples Bank were involved in structuring the loan.

"Principally we have agreed to a consortium loan," GM People's Bank Chandra Sahabandu said.

At present most Sri Lankan banks are very liquid and DFCC Bank only recently raised US$ 65 bn overseas mainly to finance small and medium industries. Even the National Development Bank raised US$ 55 mn overseas in 1997 to mainly finance small industries.

SLT hopes to give 150,000 new connections in 1999.

NTT of Japan bought a 35 per cent stake and management of Sri Lanka Telecom for US $ 225 mn under the government's privatisation programme.

SLT is now seeking a hike in domestic call charges to compensate for a planned reduction in overseas call charges to international standard levels.

Officials said this was a part of a 'tariff re-balancing exercise', to reduce the cross subsidy to domestic consumers, whose charges have been kept low by charging high prices from overseas calls.

The government has allowed the company to increase call charges to a maximum 25 per cent a year, but all rate hikes have to be referred to the Telecommunication Regulatory Commission (TRC). Sri Lanka Telecom is spearheading a massive development project in the telecom sector closely followed by the wireless loop operators who are waging war with SLT over interconnection charges.

While the battle rages on SLT has their own inhouse difficulties with their recently removed chairman Mr. Hemasiri Fernando taking the Ministry to courts.

TA gets a buyer

The merchant banking arm of People's Bank, the Peoples' Merchant Bank has indicated a willingness to purchase the troubled broking firm TA Securities Lanka (Pvt.) Ltd.

The Colombo Stock Exchange (CSE) has already approved the buyer as a suitable investor to operate a broking house, a top company official said.

"But neither party has finalised any details yet," he added.

The broking firm has been up for sale since its Malaysian partner decided to dump his shares following the East Asian crisis and a weakening Malaysian currency.

The previous bidder for the broking firm was rejected by the CSE on the ground of a lack of experience in the financial field and in stock broking.

The Malaysian partners TA Enterprise Bhd bought a 40 per cent stake in TA Securities a few years ago from the then owners the Serendib Group. However,the controlling stake remained with the Serendib Group.

The CSE approved the application of two new brokers, DFCC Bank and Union Bank. Both are due to commence operations soon.

SasiaNet system for gilt securities

It was history in the making when the Primary Dealers Association (PDA) launched an on-line trade matching system for government securities last week.

"Our market has come of age," Central Bank Governor, A S Jayawardene said at the offical launch at SasiaNet office, in Navam Mawatha.

"This is a most welcome beginning and we hope to move towards a scripless system eventually," he said addressing the PDA.

At present, government securities are traded over the telephone, where one dealer calls another to secure a quote. Once the trade is matched, a courier delivers the certificates to the buyer.

The new on-line system developed by SasiaNet would enable the dealers to see all quotes on screen at any given time, saving the hassle of calling up another dealer for a quote.

The system would then automatically match the quotes, Managing Director SasiaNet, Eric Wickramanayake explained at the launch.

The dealers could also specify the time limit for each bid.

"With this on line system trading is made easier. To develop a secondary market, trading should be automated," President PDA, Ajith Devasurendra said.

At present, the primary dealers and the Central Bank's public debt department use a dial-up system which is expected to move towards a lease line soon.

SasiaNet's web based solution runs on a Netscape browser. "The system is capable of incorporating repos and reverse repos as well," Mr. Wickramanayake said. Primary dealers welcomed the move which would develop the government debt market in a small way. "This would improve the quotes and narrow the spreads," they said. But only scripless trading will promote the full growth of the market, they added.

The government debt securities market is still in its infancy with daily market turnover amounting to Rs. 4 bn. The development of the market has been hampered with only a few primary dealers actively participating in the secondary market and the absence of a scripless system. In order to promote the secondary market, the Central Bank is introducing regulations to form separate primary dealer companies that would solely concentrate on primary dealer activities.

Negative impacts of political violence

The ugly head of political violence has raised its head once again. Irrespective of who threw the first stone and who will throw the last, such violence is counter-productive for economic growth.

The widespread violence during the North Western Provincial Council elections has raised the issue whether the country could afford to have a provincial system of government. Apart from the extra expenditures involved in setting up the machinery for a provincial system of government, the election violence implies several negative impacts on the economy.

The violence has a very negative impact on foreign investment. Foreign investors perceive such violence as symptomatic of an unstable political system. They fear that such violence could affect their investments in the country, not merely in the NWP.

It is also viewed as an indicator of possible violence on a larger scale during a Presidential or Parliamentary election. The lack of a society where law and order prevails is a serious disincentive to foreign investors.

It is common knowledge that foreign investors and commentators tend to exaggerate the violence and its impact on economic activity. The current wave of violence may not have any serious impact on economic production. Yet, the perception of outsiders could be very different.

They adopt a more cautious view of such situations. It could deter new investors who perceive this spate of violence as a situation of instability and danger.

Another dimension to such violence is that foreign investors would not be inclined to expand industries outside Colombo. In addition to the disadvantage of poorer infrastructure in the regions, investors would view these areas as riskier.

Therefore, the objective of moving industry into the regions and ensuring more balanced geographical distribution of industry in the country could be defeated. Investors would prefer the relative safety of Colombo.

This is unfortunate as the extension of industry into the regions could confer significant benefits to less developed areas. Already about 80 per cent of the country's manufacturing is located in the Colombo and Gampaha districts.

Concentration of industry in the metropolis and surrounding areas would result in an unhealthy drift of population to Colombo and strain the infrastructure of the capital and create congestion and poor conditions of living for workers.

It is fairly clear that changes in government would not lead to drastic changes in economic policy. This assurance of a continuity in economic policies is a significant recent gain to the economy. Despite this, the violent election campaigns seem to project an image that the economy would be adversely affected by an election.

An election year is looked upon as one which would decelerate economic growth and disrupt economic activity. Election violence gives credibility to this view, which is otherwise not a realistic assessment as private economic enterprise in the country as a whole continues its activities with very little effect due to the elections.

The economy could be indirectly affected by the slower administration in government departments whose staff get involved in the elections. This effect is more than necessary as some public servants use the elections as an excuse for delay and some public servants get involved in the elections owing to their political loyalties.

Owing to these reasons a slow administrative system gets even slower and perhaps grinds to a halt for a while. However private enterprise is only too well aware of this tendency and fashion their own means of circumventing these difficulties. Due to these reasons, the elections may not have much of an impact on production.

While the direct impact of the election violence may be insignificant, the image of the country as a hospitable location for foreign investment is certainly tarnished. Projections of economic performance are also generally reduced owing to this account.

The Provincial Council elections and their attendant violence once again brings out the negative impacts of our politicisation on the economy. Politics is certainly one of the enemies of economic growth in this country.

Forex Market

Keeping the South Korean won down

Alarmed by the rapid rise of the won against the dollar, the Seoul government has decided to intervene in the foreign exchange market to prevent further appreciation of the Korean currency.

The won fell to the 1,100-won level against the greenback Dec. 21 for the first time this year, closing at 1,193 won, and traded at 1,208 won per dollar late afternoon Dec. 22 after opening at 1,199 won.

After judging that the won's appreciation will deal a serious blow to the domestic export industry and hamper next year's economic targets, the government decided to buy dollars in the domestic market to prevent a further rise, a senior official at the Ministry of Finance and Economy said.

The government will request the central bank purchase more dollars in the domestic foreign exchange market and expand its holdings of foreign currency, the official said under the condition of anonymity.

Instead of introducing foreign funds abroad, public corporations, including Korea Electric Power Corp. (KEPCO) and Pohang Iron and Steel Co. (POSCO), will be urged to purchase more dollars in the domestic market.

The Korea Asset Management Corp. will also be urged to buy $500 million worth of foreign exchange-denominated bad credit from domestic banks with dollars the state-run corporation has purchased in the domestic market.

At the same time, the government will ask commercial banks to refrain from attracting foreign loans for the time being and put off introducing such loans until Korea's sovereign credit rating is upgraded.

In a related development, Kim Wonkil, chief policy maker of the ruling National Congress of New Politics (NCNP), told reporters that the won-dollar exchange rate was falling so fast that it has become a burden on the Korean economy.

"At this point, it is desirable for the central bank to release the won to prevent a further fall in the won-dollar exchange rate," he said.

Commenting that the optimum won-dollar level for the Korean economy is 1,300 won, Kim said, "It is desirable for the exchange rate to go up to the 1,250 won-level before the end of the year."

In a separate move to deter the won's further appreciation, senior officials from the Ministry of Commerce, Industry and Energy and traders from Korea's top seven general trading companies, including Hyundai, Samsung, and Daewoo, held an emergency meeting Dec. 22.

Participants at the meeting expressed concern that they may be forced to revise their export targets for 1999 downward due to the deteriorated situation brought on by the won's surge.

They said that Korean traders will not be able to compete with Japan and Taiwan in major export markets if the won stays in the 1,100 won-range in the first half of next year.

Accordingly, the government should intervene in the foreign exchange market and stabilize the won currency at between 1,250 won to 1,300 won per dollar, they said.

As for their requests, the ministry said it is monitoring the won's movement against the dollar and will set up a package of programs to boost exports within the year.

The won's rise helps to reduce Korea's burden on the repayment of foreign loans and pull down import prices of raw materials, greatly contributing to the stabilization of domestic commodity prices.

However, for Korea, which has an economic structure heavily dependent on exports, losses stemming from the won's rapid appreciation are greater than the gains.

Meanwhile, most of the state-run economic research centres, including Korea Development Institute (KDI) and Korea Institute for Industrial Economics and Trade (KIET), anticipate that the won will maintain the 1,100 to 1,200-won level until the end of the year.

Courtesy: News Review

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