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Browns and Stassen committed to success of issue
HNB hopes to raise over Rs. 1 bn. on non-voting shares

The Hatton National Bank Ltd. (HNB), one of the country’s biggest and most prosperous privately owned commercial banks, will this week seek members’ authority to raise Rs. 1.05 billion cash by way of a rights linked non-voting share issue.

While present shareholders will have the first call on the new shares on a 3 for 10 basis, HNB is concurrently offering unsubscribed shares to the public at the same Rs. 70 issue price that present shareholders will pay. Analysts said this indicates that the bank expects a substantial volume of the shares to be available for public subscription.

This is because two big shareholders, Brown and Co. Ltd. (26%) and the Stassen Group (35-36%) together have a controlling stake of the company and may have difficulties in increasing their holdings without exceeding the prescribed maximum a single entity can hold in a bank’s equity. There is a grey area in this matter as the Stassen shares are held by three different companies.

But HNB’s Managing Director/CEO Rienzie Wijetillake said that the two big shareholders are committed to the success of the issue and this would be expressed in the prospectus that will be issued before the new shares are floated.

In a circular to present shareholders, the HNB board has said that if no dividends are paid for three consecutive years after the new share issue, the non-voting shares will be automatically converted to voting shares.

The Commercial Bank of Ceylon too has voting and non-voting shares, with both categories entitled to the same rate of dividend. However the non-voting shares, issued in exchange for shares of the Commercial Development Co. Ltd. which owns the Commercial Bank’s headquarters building, have been consistently trading at a lower price than the voting shares.

On Wednesday, the Commercial Bank’s voting shares closed at Rs.105.50 while non voting shares were traded at Rs.80.

HNB has told its shareholders that the main objective of the new shares issue is to increase the bank’s capital base which will significantly improve its capital adequacy. Also, the issue will help finance the bank’s future expansion in the long term lending portfolio thereby reducing the mismatch in the maturity profile of the bank’s assets and liabilities.

HNB has said that approximately Rs.600 million of the total Rs.1.05 billion to be raised has been earmarked to fund the future expansion in its long term lending portfolio. The remaining funds of about Rs.430 million (after meeting share issue expenses estimated at Rs.20 million) will be invested in the bank’s fully owned subsidiary, Sithma Development (Pvt) Limited now building the bank’s new headquarters complex at T.B. Jayah Mawatha, Colombo 10.

Sithma is a BOI approved flagship company qualifying for a range of duty concessions and tax incentives including a 15-year tax holiday, import duty exemption on construction material during project implementation and exemption from exchange control regulations.

The HNB head office project undertaken through Sithma is expected to cost Rs.3.1 billion of which Rs.1.6 billion will be equity and Rs.1.5 billion debt.

The bank’s directors have told shareholders that building construction began on April 28 and the superstructure is expected to be completed by December 2001. The interior and finishes are expected to be completed by October 2002.

Rs.430 million equity capital is intended to be raised by the new issue while the balance equity funds of Rs.1.7 billion will come from retained earnings of HNB, shareholders have been told.

HNB has said that the new building will have 290,000 sq. ft. of useable area of which the bank plans to utilise 45% to 50% while the balance space will be available for rent. The proposed building is expected to meet the bank’s head office requirements for the next 15 to 20 years.

Analysts noted that the HNB circular had estimated Rs.5.25 million as brokerage fees for the new issue but said that this was the "maximum possible expense" and that they are confident that the actual expense will not exceed Rs.2.5 million. They said that this implied that the bank was confident that a substantial portion of the shares will be directly taken with no liability to brokerage.

CSE told 4 N’ Eliya directors need qualifying shares

Four directors of Nuwara Eliya Hotels Ltd., the owning company of the Grand Hotel, Nuwara Eliya, have vacated their seats on the board of directors of the company for want of qualifying shares, the Colombo Stock Exchange has been informed by the secretaries of the company.

Three of the directors represent the DFCC Bank, which owns 29% of Nuwara Eliya, on the board. They include DFCC Chairman Mahinda Wijenaike and CEO M.R. Prelis. The other two directors deemed to have vacated their positions are Messrs. T. Wijemanne of the DFCC and K. Gnanenthiran, a nominee of Mr. Cornel Perera, another major shareholder of Nuwara Eliya.

The dominant equity of the company is held by the Mercantile Investments Group (32%), DFCC (29%) and the Cornel Perera interests (22%). The hotel is managed by Mercantile Investments whose Chairman/MD George Ondaatjie is also Chairman/MD of Nuwara Eliya Hotels.

A spokesman for the managers said that they are very keen on the DFCC being represented on the board and look forward to their rejoining the board by conforming to the qualifying share requirements of the articles. Gnanenthiran has since acquired the necessary shares and is expected to be co-opted back to the board at the next meeting.

``The DFCC is a major shareholder of the company who has put up money to keep the company afloat when it was in deep trouble many years ago,’’ company sources said. ``Their representation on the board is most important.’’

Nuwara Eliya was summoned by the Securities and Exchange Commission (SEC) recently and certain shareholder complaints including the directors qualifying share question was gone into. The company was directed to make a full disclosure on the current position, which had led to the filing of a court action by a shareholder, to the shareholders.

The problem centers round two sets of articles of the company and which is binding. But there were indications that there is a strong desire among concerned interests to avoid any confrontation and reach an acceptable solution.

The Grand Hotel has been developed and expanded in recent years and has been turned around to profitability. The Nuwara Eliya share now commands the highest price of any hotel share quoted on the CSE.

Millennium raises $ 10 m. in private share placement

Millennium Information Technologies (MIT), the 3-year old IT company responsible for bringing the Colombo Stock Exchange (CSE) on par with the world’s most sophisticated exchanges has succeeded in raising US $ 10 million equity (about Rs. 720 million) by a private share placement, the company announced last week.

The Hongkong and Shanghai Bank Private Equity, City Corp Private Equity and GMO, a California based portfolio investor together with Ayojana Fund Management here has put up the cash. While Ayojana that had previously invested in MIT equity had put up an additional million dollars, the other three investors are bringing in about $ 3 million each.

Millennium has been promised land in Kotte plans to invest part of the capital raised in a development center where about a thousand programmers will be employed. It plans to have a campus atmosphere with pleasing surroundings that will encourage employees to think. The company’s CEO, Mr. Tony Weerasinghe, said that he did not anticipate a manpower shortage because "we already get about 50 inquiries a month on the web."

Millennium installed the world’s first Event Driven Digitial Trading Exchange (EDDTE) at the CSE making it one of the most technologically advanced stock exchanges in the world.

"Our company was responsible for setting up the Central Depository System (CDS) and the automatic screen-based trading implementation at the CSE. This technology provides increased efficiency," Millennium said.

In addition to their development center in Kotte, the company intends to invest the zero cost cash that is expected next week to open shop outside the country, primarily in California, where it considers a presence necessary in view of the volume of business available.

The company, whose management and staff owns 62% of the business, doubled turnover from Rs. 167.7 million in

1996/97 to Rs. 331 million a year later. The balance 38% of the equity is owned by the People’s Venture Investment Company, a fully owned subsidiary of the People’s Bank (25%) and Ayojana, a joint venture between the NDB and the Commonwealth Development Corporation of the UK (13%).

Employees holdings will be reduced to 41% with the issue of the new shares but Weerasinghe said that this will rise to 52% with the Employees Share Ownership Plan (ESOP)

Jonathan Bond, CEO of HSBC Equities India said that they were attracted to invest in Millennium as they regarded the company’s management team very highly and believes it to the best in South Asia in the IT sector.

"We think the two sectors that have significant potential are the financial services markets and telecom billing. Both are very attractive products and we believe that there are excellent prospects for both because they are world standard," Bond said. "I would hope that in the next three years Millennium would be regarded as one of the foremost IT companies in South Asia."

Tax write-back boosts bottom line
Tangerine thinks of herb garden as ayurveda hooks tourists

Resort hotel companies are taking note of the growing demand for ayurvedic services by tourists visiting Sri Lanka and at least one of them, Tangerine Beach Hotel Ltd., is offering an ayurvedic package as a supplement on charter contracts "in the near future," the company’s chairman, Mr. George Ondaatjie, has told shareholders.

He has also said that they were exploring the possibility of developing a herb garden within the hotel premises so that tourists can actually see the herbs used in their treatment on the ground and if necessary, gather them themselves.

Tangerine, a member of the Mercantile Investment Group, marginally increased occupancy by 2% during the year ending March 31, 1999, but saw a slight downturn in the operating profit despite an increased turnover. However a substantial tax write-back boosted the bottom line with net profit of Rs. 23.7 million for the year, up from Rs. 7.4 million a year earlier.

But there will be no dividend to shareholders. The company, however, is paying off a 50% dividend declared in October 1997 through redeemable hundred-rupee zero rated debentures. Two tranches totalling Rs. 20 have already been paid on redemption of these debentures, the second done in July this year before schedule on Nov. 30.

Ondaatjie has told shareholders that they have completed upgrading 11 rooms and overhauling the hot water and air conditioning system of the hotel. They have now embarked on a planned 3-year refurbishment program to aggressively market the property as a up-market resort.

"Work is nearing completion on phase I consisting of the foyer/reception and further eleven rooms overlooking the swimming pool. Considering the importance of family entertainment, a separate play area with child animators and a mini swimming pool is now in progress," he said.

"Designing the interior for a cosy bar overseeing the landscaping, upgrading the restaurant and coffee terrace furniture are also on the cards provided funds permit. It is our desire to utilise internally generated funds without being indebted to banks at high cost of borrowed funds."

Ondaatjie also said that procuring supplies for hotels had become more expensive following the imposition of the GST as most suppliers failed to pass on the tax benefit to the end user. The result was that the intention of avoiding the cascading effect of taxation had not been realised. Noting the GST extension on sale of hotel rooms ends on March 31, 2000, he said that it was vital that the authorities seriously consider the request made by the industry to consider to granting export status to tourism.

He said that summer bookings up to now (for the current year) have been most encouraging and if this trend continues with relatively stable economic conditions, the forthcoming winter season will be excellent at Tangerine.

The company increased turnover during the year under review to Rs.132.9 million from Rs.112.9 million a year earlier. Its profit from ordinary activities before tax was Rs.6.2 million, down from Rs.7.9 million a year earlier. But a tax write back of Rs.17.5 million boosted the bottom line to Rs.23.7 million.

The directors of the company are: Messrs. George Ondaatjie (Chairman), Naveen D. Rajapakse (M/D), Lucian V. Perera, Gerard Ondaatjie, Herbert Cooray, V. Balasubramaniam, W.E.de Silva (Alternate Ms. S.D. de Silva), G.V. Divitotawela, A.R. Peiris, S. Adhihetty, J.P. Van Twest, Travice Ondaatjie, Ms. C.A. Ondaatjie and Ms. Angeline Ondaatjie.

The rising price of oil

By Kanes
World’s proven oil reserves are about one trillion barrels and 64 per cent or almost two-thirds of them are in the Middle East. The shares of total oil reserves of other regions are Latin America 8.5 per cent, Europe 8.3 per cent, North America 8 per cent, Africa 7 per cent and Asia-Pacific 4.2 per cent.

At current production rates, the Middle East has about 88 years worth of proven reserves. Saudi Arabia has the largest oil reserves in the world - about 262 billion barrels - and its reserves are estimated to last 80 years. Iraq, the second largest, has 110 billion barrels and they are expected to remain for over 100 years. The United Arab Emirates, Kuwait and Iran each has nearly 100 billion barrels estimated to last over 100 years in the case of the first two and 65 years in the case of Iran. The OPEC as a whole consisting of the Middle Eastern as well as Latin American, African and Asian oil producers have 75 years of oil reserves while the non-OPEC countries have only 14 years. This means that OPEC will control a growing share of world oil reserves and the Middle East’s grip on oil supplies will intensify.

The largest consumer of oil is the USA. Its proven reserves of about 30 billion barrels are estimated to last only 10 years. The largest European oil producer, Norway will have its small reserves exhausted in nine years while USA’s neighbour, Canada’s reserves will also last for another nine years. Thus, it is clear that both North America and Europe will become almost wholly dependent on OPEC oil, particularly Middle East oil. Russia’s oil reserves will remain for about 22 yeas more and will therefore be not available in the world market at the end of that period. Further, among the OPEC countries, Asian and African producers have only small reserves which will remain for a relatively short period. In Asia, Indonesia’s reserves will last for only nine years while China’s will last a little longer - 21 years; in Africa, oil reserves of Nigeria and Angola are estimated to last 20 to 30 years. Latin America has one large producer - Venezuela - and a medium-size producer - Mexico; Venezuela’s reserves of 70 billion barrels will last for 61 years and Mexico’s reserves of 40 billion barrels will remain for 39 years. Thus, the Middle East mainly and Latin America to a smaller extent, will be the principal oil suppliers to the world; both the developed countries of North America and Europe and the developing countries of Asia and Africa will turn to these producers.

Oil Prices

Price of oil fell almost continuously for about three years. It was at a peak of $40 a barrel in the 1980s and then fell to $22.60 a barrel about three years ago and then declined further to $12.82 in September 1998 and to low as $9 in December 1998. The 1998 price was in real terms the lowest for 25 years. The low price was caused partly by the weak demand; oil consumption rose by only 0.1 per cent globally, the lowest in five years. In Asia, oil consumption fell by 2.7 per cent led by Japan’s sharp decline of 4.2 per cent. The other reason was rising supplies; global oil production rose by 1.4 per cent in 1998 led by OPEC’s output rise of 3.2 per cent.

Nearly all the OPEC members experienced financial difficulties on account of the low price of oil which prevailed for about two years. Their external reserves for instance fell to low levels, e.g. $7.2 billion in Saudi Arabia, $5.0 trillion in Iran, $4.1 billion in Nigeria and $2.4 billion in Russia as compared to $146.6 billion in China, $95.2 billion in Taiwan and $71.8 billion in Singapore. Iraq is perhaps the most adversely affected on account of UN trade sanctions which restrict her oil exports. Saudi Arabia spent $ 120 billion on the war against Iraq and was in serious trouble for some time. Her per capita income fell from $14,000 a year in 1982 to $6,410 now - on account of low oil prices - and thousands of university graduates are unemployed. Her welfare system has run out of cash; hospitals in Riyadh ask surgical patients to bring their own catheter tubes which the hospitals cannot afford to buy. The royal family number 15,000 and draw off about 5 to 8 per cent of the country’s GDP. Oil exports account for 90 per cent of the country’s export earnings and 75 per cent of government revenue. Iran’s economy has suffered most from the fall in oil prices as oil provides more than 80 per cent of its hard currency earnings and around half of government revenue. The government faced a revenue shortfall of $6 billion in 1998 or one-third of the state budget and was forced to suspend most of its development projects.

The OPEC decided in March 1999 to cut oil supplies by 4.3 million barrels a day in order to raise prices; and it appears to have succeeded in doing so. The price of oil which was as low as $9 a barrel in December and $11.10 in March 1999, rose to about $24.00 a barrel by late September 1999. The price of oil is to be kept high for another six months as the OPEC decided in September to maintain their cuts until at least March 2000. Analysts expect the $27 level to be breached before the end of 1999 and oil at $30 a barrel may not be as far fetched as it sounds.

Fear of Inflation

The rising oil prices have fueled fears of inflation in the West and even in some developing countries, particularly as demand for oil will increase in the coming winter in the West. The rising oil prices are not expected to have a big impact on most East and South East Asian economies as they are in a deflationary spiral anyway. Japan, China, Hong Kong, and to some extent Singapore are fighting deflation and consequently rising oil prices can be something of a boon. Oil producers such as Indonesia, Malaysia and Brunei will earn more from oil exports - Indonesia alone about an additional $3 billion but oil importers will have to pay more for their oil, for instance, South Korea, an additional $4 billion. Thailand may also face difficulties as the baht is also weakening against the US dollar and the Philippines may experience difficulties. If the oil prices stay high for a prolonged period, however, all oil importing countries will face difficulties. Many fear what effect high oil prices will have on the American economy. Crude oil at $27 to $30 a barrel may cause US Federal Reserve to raise interest rates again and a 0.5 per cent to 0.75 per cent increase over the next six months may puncture the US stock market. If the American economy then grinds down, the consequences on the global economy will be disastrous.

In Sri Lanka the cost and freight cost of crude oil was $13.35 or Rs. 871.04 a barrel in July 1998. By July 1999 the cost had gone up by 28.8 per cent in dollar terms to $17.19 a barrel and by 40.3 per cent in rupee terms to Rs. 1222.15. This is likely to rise further with the recent decision of OPEC to maintain their output cuts for another six months. The higher cost of transport in particular may push up prices all round and accelerate the current low rate of inflation. The situation may get worse if inflation in Western countries raise the prices of Sri Lanka’s imports of goods and services.

b
How good are the prospects for Foreign Portfolio Investment?

By Analyst
Last week saw the holding of a conference for foreign fund managers who had invested in the Colombo stock market. Over 20 Managers based in Hongkong, Singapore and Bangkok were present to listen to presentations by local experts on the economy and the well-known listed companies.

Disappointing Returns

We opened the stock market to foreign portfolio investors in 1990-91 by removing exchange controls which had previously made the purchase of shares prohibitively expensive on account of the 100% tax that had to be paid. Considerable liberalisation took place which made foreign capital invested in the local market to move in and out freely.

The local market developed and foreign investors contributed to 50-55% of the daily turnover. There was a boom and many local investors were drawn to the market. The story has changed since the crash of the South East Asian economies in the latter half of 1997.

Since then we have seen only depressed conditions. Although stock markets in East Asia and South East Asia have recovered, our own market continues to be depressed. So the conference for the fund managers was to understand why they were not coming back in a significant way.

A point made by the foreign fund managers at the conference was that no more country funds dedicated solely to investing in Sri Lanka were possible. Sri Lanka can expect the in-flow of capital only from Regional Funds, dedicated to investing in the whole region. Such regional funds allocate only a relatively small percentage of their funds to the Sri Lankan market owing to the relatively small size of our economy and its comparative unimportance.

We have no valuable raw material or mineral resources to be exploited. The growth of the Sri Lankan economy is very low. The Himalaya Fund had invested $700 million over the entire period and had obtained a return of 61% over 10 years which amounts to only 6%.

To foreign investors the growth that matters is growth in terms of the US dollar and not the usual rupee values depicted in our local market charts. The much lower growth in dollar terms is due to the continuous depreciation of the Sri Lankan rupee which averages 7.5 - 10% per year.

If we want foreign capital to come in we must stop this policy of continuous depreciation. Of course we are obliged to follow this policy because our governments don’t pursue macro-economic stability and they take the easy way out by depreciating the Rupee to counter the domestic inflation created mainly by fiscal deficits. So without reasonable stability in the rupee the foreign investors cannot expect even a reasonable return let alone getting a premium for the higher risk in an emerging market.

The funds flow out of USA and Europe only because interest rates and stock market returns in developed markets are low. They expect much higher returns from emerging markets. A 6% return is a poor return on equities.

Government officials addressing the conference tried to re-assure the fund managers stressing that the setback to budgetary discipline in 1998 was due to one-off factors and that the budget deficit this year would come down to 8% although it was 9.2% last year. But this is to reckon without the behaviour of our politicians in a pre-election year. Next year the deficit is likely to sky rocket if our politicians run true to form.

Global factors

Dr. Mark Faber, well-known personality in the investment business, pointed out at the conference how dependent the local stock market was on global factors. He labelled the local market a small ship battered by waves in a stormy sea. Global capital flows is a recent economic phenomenon which began in the late 1980’s. Foreign Portfolio funds now have trillions of dollars and are quite large. But these funds are driven by global factors.

There are the deeper economic fundamentals as well as the short term factors. All these factors, economic fundamentals, proximate causes, a pro-cyclical regard for predictions (Dr. Faber is one) play their part in driving stock markets. The turbulence in the financial markets could reflect turbulence in the real economy.

Between 1984-90 there was a genuine boom (stock market booms could be bubbles) in the US economy. US budget deficits declined while US private investment increased. After 1990, the US current account deficits increased, which meant huge increases in imports. The East Asian economies and the S.E. Asian economies were well poised to take advantage of this situation and it is this factor that drove the boom in the East Asian economies (subsequently the S.E. Asian economies followed).

Since interest rates in developed countries, in the USA, Europe and Japan, were low the vast sums of money mobilised by the Pension Funds and the Regional Funds in these countries began to flow to East Asian and South East Asian stock markets. These countries had already begun to enjoy rising trade and current account surpluses which also flowed into their financial markets and caused booms in the stock markets in Indonesia Malaysia, South Korea, Thailand and Taiwan. Soon these funds were attracted by the markets on the Indian subcontinent and these markets including Colombo rose thereby.

The China Factor

The emergence of China as a strong economic player is the new factor that affected the economic fundamentals. After the economic reforms introduced by Deng Tsio Peng, the Chinese economy surged. As wages rose in East Asia and South East Asia, Chinese exporters became very competitive.

In 1994 China abandoned the government controlled exchange rate regime, which led to a 55% free fall in the Chinese currency - the Yuan. To counter the consequential inflation, China introduced a 17% rebate on the Value Added Tax for exporters, in 1995. Thereafter the Chinese products became cheaper than those of its ASEAN neighbours.

Soon Chinese exports were squeezing out the ASEAN and East Asian exporters out of World Markets. So the ASEAN countries and South Korea, experienced rising trade deficits. But their governments continued with their policies of tying their local currencies to the US dollar at a fixed rate. China’s market share in US imports rose dramatically from 2% in 1980 to 26% in 1998.

Capital flows to developing countries which had risen dramatically after 1990, owing to the economic expansion in East Asia and South East Asia, reached a peak in 1995. Investors in USA and Europe had come to believe that East Asia and S.E. Asia were independent growth areas, not linked to the economic conditions in USA or Europe. Leaders in these countries boasted accordingly. Investors thus had formed false expectations.

Meanwhile ‘moral hazard’ had increased after the IMF and the World Bank bailed out Mexico in 1995. Investors formed the false expectation that in the event of any future economic collapse elsewhere, the Brelton Woods twins would act similarly and avert losses to investors. So foreign portfolio investors lulled themselves into a false sense of security and overlooked the fact that property markets and stock markets in the Asian economies were rising to dangerously high levels.

A few shrewd investors including George Soros, realised that the Thai Baht was over-stretched and suspected that the Thai Central Bank was not disclosing the whole truth about their foreign exchange reserves since much of them were committed to holding the Baht in the forward market. When these investors withdrew their funds the Baht collapsed in July 1997. The rest is now history.

The contagion effect of the crisis was a new surprise for the global investor community soon the crisis had spread to Russia, Eastern Europe and Later America, Dr. Faber’s point was the Asian economic boom based on US imports was unsustainable. Continued US import growth was not possible. Much excess capacity had been built up in USA and the appearance of China as a strong competitor meant that US industry could not produce without cutting wages and increasing productivity. Chinese wages were only about one tenth of US wages.

Global Integration

The world economy has become far more integrated in the past decade than it used to be. Trade is one yardstick. In USA the share of exports in national income has nearly doubled from 4% in the 1950’s to 7% in the 1990’s.

This rise is very impressive if we consider that USA is a huge transcontinental trade zone by itself. Another measure of the importance of foreign trade to American producers is the share of merchandise exports in the US output of manufactured goods. It has risen from 6% to 20% in this period (1950-90).

European producers are even more exposed to foreign competition. The ratio of exports to total output of manufactures has risen from 21% to 41% in Germany over the period 1963-65 (average) to 1993. In Britain it has risen from 18% to 43% over the same period. A single global market for tradable goods is still far off, for when this happens the prices of goods expressed in a common currency would be the same everywhere barring domestic tariff and taxes.

Integration through flows of capital has increased even faster than integration through trade in goods. The expansion of international finance is phenomenal. International transactions in bonds (debt securities) and equities and daily turnover on the foreign exchange market have increased at an astonoshing rate over the past 20 years.

The daily turnover in the currency markets exceeds the global stock of foreign exchange reserves, reducing the power of the Central Banks to regulate exchange rates. Flows of Foreign Direct Investment have also increased though not at anything like the currency and securities transactions. But there is still no single global market for capital.

The global capital market is integrated only in a narrow sense - in the sense that investors grab arbitrage opportunities to make a quick profit. This has come about by the removal of capital controls and the advances in IT as applied to financial markets. But integration at a deeper level is far off and there is no single world rate of interest.

In the last 100 years, globalisation has never been one long straight path. There have been reverses and the danger today is that inspite of WTO the process will be reversed by protectionism and capital controls.

Protectionist sentiment in the developed world is getting stronger while the arguments for capital controls are being canvassed in the developing Third World. The developed world has a problem facing competition from the developing countries. Their unskilled workers have no jobs. In USA when there are no minimum wage controls, the wages of unskilled workers are being squeezed to levels that make it difficult for them.

In Europe there is unemployment. Trade is blamed in USA for the downward pressure on wages. They would like to introduce labour standards ostensibly on social grounds and protect the rights of trade unions in the developing countries. They have a strong economic interest to do so.

Asian Recovery Fragile

There is a recovery in the Asian economies, a recovery which was led by South Korea but followed by Thailand, Malaysia, Singapore and the Philippines. Only Indonesia is still lagging behind. In South Korea industrial production was up 30% in June 99 and is expected to have a GDP growth rate of 5-8% this year. Thailand and Malaysia are also growing and their stock markets have revived. In Seoul and Singapore the stock markets have regained what they lost and are back at mid 1997 levels.

Export volumes have risen in all ASEAN economies including Indonesia. Dr. Mark Faber drew attention to the fact that export growth is confined to export volumes. Export prices have declined. These are import prices for the western countries and such falling import prices could lead their governments to resort to protection, never mind the WTO.

Recovery in Asia is likely to be shaky given the loss of wealth through the devaluations, the loss from the collapse of financial and property markets etc. So the recovery in Asian export growth is likely to be fragile unless there is strong continued economic growth in USA.

Prospects of the immediate future for international capital depends on demand in the US economy, the market of last resort. Meanwhile export industries in China suffer with surplus capacity. In television the capacity utilised is 78%, in washing machines 43%, refrigerators 40%, Air conditioners 33%.

Another lurking danger is that although the IMF has pumped over $240 billion to the Asian economies in East and S.E. Asia, their governments have not completed the re-structuring of their financial institutions. President Kim Dae Jung of South Korea has set about busting the "Chaebols". Hanjin is hauled up for tax evasion. Daewoo was forcibly broken up and executives of Hyundai securities arrested for share price manipulation.

But elsewhere re-structuring of the financial markets is still to be completed. Non-performing loans have risen to dizzy heights in Indonesia, Thailand, Malaysia, Philippines and Hongkong. China too has a huge problem with its government corporations.

The Chinese economy will have to be re-structured and any such re-structuring will cause massive unemployment, aggravating political and social tension. A devaluation of the Yuan could become inevitable and it would be another de-stabilizing factor to the global capital market.

Prospects for foreign capital Inflows

What are the prospects for foreign capital inflows to the Colombo stock market? A point made at the Fund Managers conference is that the local market has a very low, almost insignificant weightage in the Morgan Grenfell Emerging Markets Index, which is the bench mark used by investors in the developed countries to evaluate the performance of the foreign fund managers. The weightage is only 0.1%. Thus there is no incentive for foreign fund managers to invest in Colombo, since whatever its growth performance, its weightage in the Index is close to Zero.

Dr. Faber did sound optimistic on the commodity cycle. He thought commodity prices have fallen too much in the 1990’s and that they are now due for a rise. This of course includes not only primary commodities like tea, rubber, coconut, but also oil and wheat which are large imports for us. So any increase in oil prices is not good news although an increase in tea and rubber prices should boost our incomes.

But a part of such increased incomes would flow out to finance higher oil and wheat imports, reducing if not cutting out our over-all balance of payments surplus and bringing down our foreign reserves.

The politicians are likely to be pre-occupied with the elections to think of any counter action. In fact they are storing up trouble by allowing in more and more duty free vehicles and consumer durables. The import bill for petroleum imports is likely to go up considerably as a result of this irresponsible concession, as petrol and diesel prices rise in the world market. What a way to govern a country!

Asiri maintains 100% bed occupancy, boosts profits 39%

The roaring success of private hospitals in Sri Lanka is reflected in the results of Asiri Hospitals Limited, the country’s only private hospital quoted on the Colombo Stock Exchange.

Asiri had continued to be fully occupied year around during the financial year under review with bed occupancy of 103.4%. In the current financial year too, bed occupancy up to August has been over 100%.

The group had turned over Rs.360.6 million during the year, up 31% from the previous year. The net profit had grown 39% to Rs.72.2 million, the company’s Chairman, Mr. D.K. Subasinghe, has reported to shareholders.

Their subsidiary, Asiri Diagnostic Services (Pvt) Limited, had also performed well with a turnover of Rs.5.2 million and a profit of Rs.2.4 million before tax, Subasinghe said.

During the current financial year too, the hospital is doing well with turnover in the five months ending August 31, 1999 up 21% to Rs.171.9 million. The profit during this period too had grown 21% to Rs.48.4 million.

Subasinghe said that tests handled by their pathological laboratory averaged 3,281 per day against 2,746 a year earlier.

He said that due to new conditions laid by the Urban Development Authority regarding parking space requirements, they could not begin work on an additional floor for the hospital. But the directors were exploring an alternative solution to increase capacity.

Subasinghe said that the new services started in 1996 with the import of advanced medical equipment like the MRI (Magnetic Resonance Imaging), CT Scanner, Color Doppler and the Evis Videoendoscopy system had performed well and contributed to increased turnover and profits.

"Your directors look forward to another year of growth in 1999/2000,’’ he said.

The company which had paid an interim dividend of 15% in July 1999 said it will consider a final dividend later in the year.

The directors have also announced that Dr. J.W. Wickremasinghe who represented the Sri Lanka Insurance Corporation on the Asiri board had resigned in June on relinquishing office at the Insurance Corporation.

Asiri Hospitals has an issued capital of Rs.151.7 million. During the year under review, the highest price of a share was Rs.35 and the lowest Rs.25. On March 31, 1999, the market value per share was Rs.32.50.

Earnings per share of the group during the year under review was Rs.4.76, up from Rs.2.83 the previous year while a dividend level of 30% had been maintained against the previous year’s 25%.

The directors of the company are: Messrs. D.K. Subasinghe, G.H.A. Wimalasena, N.M. Buhardeen, P. Pitipanaarachchi, T. Weerasinghe, P.P. Subasinghe, H.N. Jayasinghe, Dr. (Mrs.) M.D. Wimalasena and Mrs. D. Wimalasundera.

To encourage proactive entrepreneurs of positive mindset
Lalith Kotelawala urges fewer curbs on finance companies

The head of the country’s oldest finance company has urged that "traditional restrictions" imposed on operations of finance houses be removed "to encourage pro-active entrepreneurs of positive mindset."

The Finance Company Ltd.’s Chairman Lalith Kotelawala has suggested this course in the annual report of the company for the year ended March 31, 1999, saying "the restoration of the right of self-determination at firm level will effectively eliminate the obstacles that prevent the finance companies being more competitive."

The pioneer finance company which is now 59-years old had seen an increase in turnover but diminished profits in the year ending March 31, 1999, the annual report now with shareholders said.

Turnover at Rs.2.47 billion was up from Rs.2 billion a year earlier while the operating profit was down to Rs.70.8 million from the previous year’s Rs.93.1 million. Profit after tax at Rs.51.2 million compared with an earning of Rs.72.6 million the previous year.

The company is maintaining its previous year’s dividend level of 20% costing Rs.22.7 million.

Kotelawala, said that the growth rate of finance companies had slowed down in proportion to the economic downturn during the year under review. Nevertheless, the industry maintained a growth potential above that of the commercial banks.

Noting that the company’s turnover during the year under review was up 23%, the chairman said that this was a 5-year high for The Finance which had also achieved another milestone by clearing the Rs.5 billion deposit base during this period.

However, Kotelawala said that "profits took a beating" partly due to conscious pruning of margins to maintain the quality of the investment portfolio. He said that the company was in the process of rebuilding a competitive edge over its competitors through a three-pronged strategy.

This involved the introduction of new products to meet changing needs of customers, an intensified thrust on improvement of information technology and the re-engineering of operations in-house to have much needed infrastructure in place.

Kotelawala was optimistic that the revived strategies employed and the company’s continuous capacity of building staff at all levels to meet new requirements would effectively restore margins to desirable levels from the second half of the current financial year.

The company has an issued share capital of Rs.113.4 million, a capital reserve of Rs.284 million, a reserve fund of Rs.117.3 million and revenue reserves of Rs.196.1 million. Its long term loans on the balance sheet was Rs.116.7 million and public deposits were Rs.5.1 billion, up from Rs.4 billion a year earlier.

The major shareholders of the company are Ceylinco Investments and Ceylinco Securities and Financial Services Ltd. and two companies of the late Mr. Cyril Gardiner, The Galle Face Hotel Co. Ltd. and Unionco Ltd.

The directors of the company are: Messrs. Lalith Kotelawala (Chairman/MD), S.R. Bandaranayake, L. Gunaratne, K.H.S. Jayatissa, A.D. Jegasothy, Y.B. Ratnayake, S.R. Wijesinghe, Mrs. S.P.C. Kotelawala (Deputy Chairman), Mrs. P.K. Karunanayeke (Deputy M/D), Mrs. V.W. Dissanayake, Mrs. C.A. Gunewardene and Ms. M. Sabaratnam.

Lanka safe for foreign investors -Kingsley

Beginning May 1997 the East Asian Region saw the sudden collapse of many of its once vibrant economies. Economists failed to predict the magnitude of this financial crisis. Speaking at the London School of Economics, Mr George Soros, the Financier did concede he is often wrong. "I foresaw the collapse in Asia"; he said "but not the extent of the collapse". The crisis affected most countries in the region and the world economy.

As you already know, the most affected was the Stock Exchange Market. Thailand devalued its currency and financial panic followed. The economic crisis in Thailand spread to many parts in the region. The economies of Malaysia, Philippines, Indonesia and South Korea were even disrupted and to a lesser degree, other countries in the region. Severe recessions took place in Japan, Malaysia and in Hong Kong. Thai currencies and exchange rates depreciated. The effects of the crisis spread far and wide and the stock market was caught in this crisis. Disappointed investors abandoned the stock market. The resulting lack of liquidity affected the entire economy disrupting economic activities in a vicious cycle of increasing unemployment, lowering of wages, lower demand and production of goods and services.

The crisis affected liquidity in the entire region. Stock market failure resulting in financial panic was felt by many buyers across the region. The devaluation of currencies against the dollar made it impossible for many customers of financial institutions to pay their debts. Their credit facilities were withheld. Sudden withdrawal of their loans resulted in nonpayment by borrowers and decline of liquidity in many enterprises and commercial banks. Financial institutions and companies went insolvent whilst some of them merged making Export Credit Agencies world-wide to pay heavy claims. The crisis in Russia and South Asia left exporters to look for different markets.

The International Monetary Fund (IMF) granted rescue packages totalling to a sum of US $ 110 million approximately and required the closure of uneconomic financial institutions, imposition of higher interest rates and tight financial regulation. Export Credit Agencies downgraded the countries in the region.

In South Korea, many terminally ill corporations such as Daewoo’s declared debt as high as the bail-out provided by the IMF to keep the entire Korean economy afloat in the late 1997. Hyundai, Samsung, CG and SK - altogether owe 175 trillion won.

Inflation accelerated deepening the economic crisis and resulting in retrenchment of employees.

From January 1999, currencies in the region appear to be regaining value.

The Japanese securitisation market has roared into action in the recent months, as non-bank financial institutions hunt for alternative & cheaper source of funds. Finance and Leasing Companies are becoming specially active in the Asset-Backed-Securities (ABS) Market.

A trend that is likely to continue as new deal structures and asset classes are introduced to both local and foreign Inventors.

Domestic inventors are becoming increasingly attracted to the yield pick-up Yen dominated ABS while Japanese issuers believe that local market now provides price competion for the off-shore market.

The crisis taught us bitter lessons. Investors will now be more cautious. It is interesting to note that Sri Lanka did not face a similar crisis although its competitiveness in the international markets would have been affected marginally in the short run. However, Sri Lanka’s export performance did not show a noteworthy slow down even though rubber, coconut and gem and jewellery sectors were somewhat affected due to drop in the prices for these products and demand in the South East Asian Region.

Sri Lanka has taken several measures to pre-empt the possible emergence of a financial crisis. Many export credit agencies and credit information providers are actively operational including the State Export Credit Agency, the Sri Lanka Export Credit Insurance Corporation who will underwrite exporters, overseas buyers and countries and importers of Sri Lanka and assist the country’s international trade and financial mechanism to be stronger. Now exporters in Sri Lanka are carefully assessing their credit exposures and dealing with their customers cautiously.

Thus, Sri Lanka has escaped from the immediate effects of the South East Asian crisis. It has proved to be a safer ground for foreign investment. Sri Lanka no doubt learnt from the South East Asian crisis and East Asia’s financial growth miracles. She should now concentrate on E-commerce and technology adaptation, human resource development, infrastructure development and accelerate export development which means more and more investors are most welcome to Sri Lanka. Development in the area of investment can be confidently foreseen and today’s high level Foreign Investors Forum in Colombo will provide its participants with an excellent opportunity of assessing Sri Lanka’s economic performance and potential and underscore our country’s hospitable environment for both overseas and domestic investors.

We can hopefully foresee the emergence of Sri Lanka as a focal point for financial activity in the region.

Globalisation of technology and the drive to freer trade is a very powerful force. I do not think any country can swim against the tide for long.

Look at Singapore, - Before the crisis, the Singapore policy elite realised it had to change and made revolutionary changes that preceded the crisis.

No one is arguing that the recovery is so strong that Asia is back where it was.

Indeed the Region is poorer than it was two years ago, in some countries drastically poor.

But the signs are that the process is beginning and that the resumption of growth will ultimately lead to the recovery in profit and income and this is part of the reason why that the stock market has done extremely well this year.

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