Telecom sector to face
trend might lead to telecom oligopoly in Sri Lanka- Analyst
By Santhush Fernando
Sri Lanka’s telecommunications industry which was the leading
sector during the last few years, will not see such a growth
momentum in 2009.
“From an investors’ perspective, the telecom industry outlook in
the short term especially in the next six months, is not very
good. Profitability of all operators has been affected due to
heavy competition in prices. However the sector has a lot of
potential in the long run. The sector has not peaked, so there’s
room for growth.” CT Smith Stockbrokers Senior Analyst, Talaal
Maruzuk told The Nation Economist.
“The last two years saw rates coming down by 40 percent. This in
turn resulted in the reduction of revenue in avenues of
postpaid, pre-paid and fixed lines. Fixed line subscribers will
continue to switch to mobile phones due to high fixed line
costs.” Maruzuk said.
“There won’t be any substantial reduction in price in future.
Competition will not impact price. Price decreases in the past
have caused profit margins of telecom operators to come down.
This is clearly shown by Dialog results which record over Rs. 3
bn loss. In the long term, Lanka Bell profits are likely to come
down. Hutch which has less than 10% of the market share, will
find it difficult to go forward,”he said
“Airtel is anyway expected to make losses as it’s very new, but
its parent company is there to pump in money. There’s a
possibility of this situation leading to an oligopoly of 4 big
players in the long run. Operators who have a big market share
will turnaround with further consolidation in the market.”
“The last quarters saw the highest number of new subscribers
joining, in the history of the industry. From October to
December 2008, over 1.25 mn new subscribers entered the mobile
sector due to drastic price reductions and giveaway of free SIMs.
However in the third quarter (July to September) the sector grew
only by 440,000 new connections as Hutch churned out 333,000
from its subscriber base. So there has been no slowdown in
growth during the past.”
“The telecom industry saw too much of competition so the sector
needs to consolidate. Capital expenditure discipline is also
required. Government should not impose excessive tariffs to the
sector as the operators will find it hard to absorb rising
costs.” Murtaza Jafferjee, Managing Director of JB Securities
“Growth momentum of telecom industry will slow down compared
with 2005-07 period. Market has reached some sort of maturity
which has cause saturation, so the profitability of all
operators will come under severe pressure. During the next two
to three years telecom sector will not out perform other sectors
the way it happened in the last few years” Telecom Analyst of
Acuity Partners, Geeth Balasooriya told The Nation Economist.
Telecom gets Rs 2.2 TDC refund
Sri Lanka Telecom has been refunded Rs. 2.2 bn by
Telecommunications Regulatory Commission (TRC) of Sri Lanka for
rural expansion work.
“Sri Lanka Telecom was able to record over Rs 7 bn profits with
the Rs. 2.2 bn TDC Refund they got from the TRC which is utilsed
for rural network roll out” CT Smith Stockbrokers Senior
Analyst, Talaal Maruzuk told The Nation Economist.
Telecom Development Charge also known as the international
telecom operator’s levy is charged by the telecom watchdog of a
country, for the development of the telecom sector in the
underdeveloped areas of a country.
It is learnt that SLT has been refunded 2/3 of TDC amounting to
Rs 2, 183 million. TRC has refunded charges paid up to 2005.
From 2005 onwards Sri Lanka Telecom has paid Rs. 6 bn as TDC.
Implementing laws can
prevent corporate collapses
CCC Chief Chandra Jayaratne was seen closely
listening to the speakers who spoke at the TISL
Forum on recent corporate collapses in the country (Pic
by Ravindra Dharmathilake)
By Azhar Razak
A recent group discussion on corporate collapses organised by
Transparency International Sri Lanka (TISL,) has highlighted the
issue of Sri Lankan regulators not taking adequate and prompt
action against lawbreakers. The majority of the participants at
the discussion said that they felt that although Sri Lanka had
the necessary rules and regulations in place, their
implementation was the main concern.
‘Most of the corporate collapses unfolding in Sri Lankan
companies, are due to the regulators not taking enough action,
even though they had every authority to do so. They always play
a laid back approach when influential people are involved,’ said
Sujeewa Mudalige, a Partner at PriceWaterhouseCoopers who
presented a comparative analysis of recent corporate collapses
in Sri Lanka and India.
The regulators involved were the Central Bank of Sri Lanka,
Securities and Exchange Commission, Inland Revenue and the
Colombo Stock Exchange, who he says could not use their powers
when the issues unfolded.
‘The Central Bank escapes involvement by simply saying that
Golden Key was not a registered institution. This is a very
irresponsible statement, given the fact that even registered
firms such as Pramuka had collapsed in the past,’ Mudalige said.
He said that other factors like poor quality audits, capacity of
auditors, expectations gap, inadequate analysis by rating
agencies and lack of media coverage, were some other issues that
had led to these collapses.
‘The electronic media in Sri Lanka does not do enough to
highlight these fraudulent scams, while in other countries
television and radio channels are running 24 hour coverage on
these issues,’ he said.
He also questioned the skills of the investigating authorities
in Golden Key case, which involved a financial mismanagement.
‘I don’t think the Criminal Investigations Department or the
Attorney Generals Office, which are investigating the Golden
Key, have the necessary skills needed to investigate a fraud of
this nature,’ he said.
Another official who chaired the discussion panel, said that the
lack of disclosures by companies also complicated the problem.
‘Asian countries are mostly run by family owned businesses, and
therefore this gives the need for a proper account of Related
Party Transactions and Intra-group ones. For example the Indian
Satyam, had little separation in ownership and control,’ a Chief
Executive Officer at a Fund Management Company who wised to be
Other views expressed at the discussion as possible measures to
prevent such failures in future, were to run deposit insurance
schemes where deposits could be protected, a new banking
commission to look into the unregistered firms, a new method
where investors could put their money without paying taxes, and
educating the public to avoid depositing at unauthorised ‘high
interest’ paying institutions.
‘In the absence of a critical media we should also look to
debate these issues at least on a web based forum,’ another
official who joined the discussion commented.
‘The changing corporate climate with the global financial
crisis, and both local and international corporate collapses,
has led to an escalated need for implementation of collective
initiatives for business integrity, and that Sri Lanka’s
Corporate collapses and scams lay special significance in that
the impact is borne by the public, whose awareness is limited,
in their role as external investors’ TISL, the global coalition
fighting corruption, said in a statement.
The discussion was a part of a new emphasis on corporate
governance, ethics and values which has been prompted by the
collapses and scandals that have rocked the corporate world,
both locally and internationally.
‘Sri Lanka’s recent Supreme Court Judgments, highlight the need
for enhanced collective strategic action by multi stakeholders
groups. Further, the recently introduced Companies Act and
Central bank interventions, have made it less likely that
directors and officers can turn a blind eye to corrupt
practices, and more likely that they will have to put in place
strengthened risk management processes and compliant systems,’
Sri Lanka’s outlook to negative from stable
Ratings has Friday revised the Outlook on Sri Lanka’s Long-term
foreign and local currency Issuer Default Ratings (IDRs) to
negative from stable. At the same time, the agency has affirmed
the Long-term foreign and local currency IDRs and the Country
Ceiling at ‘B+’, and the Short-term IDR at ‘B’.
“The revision to Sri Lanka’s Outlook reflects heightened concern
regarding the sovereign’s external financial position in light
of the marked decline in official foreign exchange reserves,”
notes James McCormack, Head of Asia Sovereign ratings. At
end-December 2008, Sri Lankan official reserves were USD1.75bn,
down sharply from their peak of USD3.56bn in July 2008.
Fitch estimates Sri Lanka’s current account deficit widened to
USD3.6bn in 2008 (8.8% of GDP) from USD1.5bn in 2007, with most
of the deterioration in the trade deficit, which grew to an
estimated USD4.4bn from USD2.4bn. As a net oil importer, higher
international oil prices raised Sri Lanka’s oil import bill
substantially last year. International oil prices have declined
in recent months, and so too has Sri Lanka’s trade deficit, but
this has not prevented a steady drawdown in official reserves,
as improvements in the trade balance have been more than offset
by external debt repayments and other net capital outflows.
In 2009, Fitch forecasts the trade deficit will fall to USD3.5bn
and the current account will decline to USD2.1bn, equivalent to
4.9% of forecast GDP. “In Fitch’s view, without a sharp
contraction in domestic demand to curtail imports, or a
significant depreciation of the exchange rate to otherwise
correct the trade imbalance, Sri Lanka may not have access to
sufficient international funding to cover the current account
shortfall and its international debt repayments, resulting in
ongoing pressures on official reserves,” adds McCormack. At
end-2008, Sri Lanka’s reserves covered just 1.3 months of
current external payments (including all debit items in the
current account of the balance of payments), one of the lowest
coverage ratios of any emerging market.
Fitch notes that the Central Bank of Sri Lanka has initiated
various measures to bolster capital inflows and official
reserves, including bilateral swaps with other central banks, a
further opening of the domestic Treasury market for non-resident
investors, and higher interest rates on foreign-currency
deposits in Sri Lankan banks. The agency suggests that these
measures, together with international donor funding that could
materialise if Sri Lanka’s civil conflict ends, might provide
critical support to the country’s external finances, but timing
is uncertain, as is the willingness of non-resident investors
and depositors to take advantage of whatever incentives may be
on offer. Fitch believes there is an increasing likelihood that
international financial support may be necessary.
In addition to the stresses on Sri Lanka’s balance of payments,
the country’s fiscal position remains strained. Fitch forecasts
a fiscal deficit of 6.7% of GDP in 2009, up from the
government’s 6.2% of GDP revised estimate for the 2008 deficit,
and higher than the 2009 budget projection of 5.9% (Fitch
adjusts official data to include grants as revenue, not
financing). The agency expects GDP growth to slow to only 3% in
2009, consistent with recessionary conditions in advanced
economies and other emerging markets.
Of equal concern to the large fiscal deficit is the government’s
increased reliance on foreign-currency borrowing in recent
years. Fitch estimates that domestic debt accounted for 57% of
total government debt at end-2008, but the share of
local-currency denominated debt was lower, at 50%. The
government thus faces heightened exchange rate risk, as an
exchange rate depreciation would have implications even for some
portion of debt issued domestically.
Will Sri Lanka be forced to seek
In view of the newest attack on Sri Lanka’s economy by Fitch
Rating revising the country’s outlook from stable to negative,
financial analysts and economists are of the view that the
country might have to seek the assistance of International
Monetary Fund (IMF) though Central Bank has vehemently refused
to do so.
A financial analyst on the grounds of anonymity told The Nation
Economist that securing financing from other countries in the
region or elsewhere, would be very challenging, with a low
credit rating and now with the negative outlook given by Fitch.
“Though the Central Bank has gone for bi-lateral currency swaps
with regional central banks and various other source of funding,
the poor rating of the country by various globally accepted
rating agencies may negatively impact these initiatives,” the
In December 2008, Standard & Poors cut Sri Lanka’s sovereign
rating by one notch from B+ to B, pointing out the country’s
declining foreign reserves situation and high fiscal deficit.
This is the lowest rating besides those of Bolivia, Pakistan,
Grenada, Argentina and Lebanon.
According to the Colombo University’s Professor of Economics,
Dr. Sirimal Abeyratne, the negative outlook forecasted by Fitch
will add up to the country’s current crisis situation of Balance
of Payment and the Trade Balance.
“Things seem to be getting out of control. If the Central Bank
cannot beef up external reserves, the country would have to
resort to IMF assistance whether we like it or not” Abeyratna
Sri Lanka kept its exchange rate at about 108 rupees per dollar
between January and October 2008, to slow inflation at the
expense of its external reserves, even as the currencies of
neighboring countries like India and Pakistan were allowed to
depreciate. The Sri Lankan rupee has since dropped to 114.95.
Though there were calls from economists, exporters and various
other interest groups urging Central Bank to allow the rupee to
depreciate, the country’s high rate of foreign borrowings have
not allowed the Central Bank to do so.
Dr. Saman Kelegama of the Institute of Policy Studies, in a
recent presentation pointed out that undertaking depreciation
was not an easy task given the large external debt of 38 percent
of the country’s GDP.
In its Monetary Road Map for 2009 Central Bank proposed currency
swaps and patriotic Treasury bills and bonds. A high ranking
Central Bank official last week said that a bi-lateral currency
swap worth of $ 200 has been agreed upon with the Malaysian
Results in brief
BOC profits steady- thanks to FOREX
Bank of Ceylon has recorded a NPAT of Rs.3.1 bn for the 2H ended
Dec 08’, a 43% increase YOY. The profits for six months were
boosted by a sharp rise in foreign exchange income which rose by
8725% to Rs. 2.28 bn. NPAT for the year ended Dec 08,.’
increased only by 24% to Rs. 3.7 bn YOY. Debt to Equity ratio
increased to 5.39 while specific provision for non performing
advances rose by 127% to Rs.0.97 bn.
SLT profits bloated by TDC
Sri Lanka Telecom has posted a NPAT of Rs. 7.4 bn for the year
ended Dec 08’, a 31% growth YOY. The profits were boosted by the
TDC refund of Rs. 2.18 bn for the year despite an 807% increase
in VRS cost to Rs. 390 mn YOY. SLT said that the subscriber base
in Mobitel had increased by 92% YOY to 2.68 million.
Richard Pieris suffers further loss
Richard Pieris recorded a loss of Rs.339.6 mn for the 3Q ended
Dec 08’, a 288% slump YOY. However, the profits for the 9 months
ended Dec 08’ shot up by 387% to Rs. 228 mn. The company’s gross
profit for 3Q dropped by 41% to Rs. 743 mn while the book value
per share stands at Rs.28.6.
UML profits nearly halved in 3Q
United Motors Lanka has recorded a 99.6% drop in PAT to mere Rs.
0.9 mn for the 3Q ended 08’. UML was hit by a dip in revenue by
18% to Rs. 1.8 bn YoY. Finance expense rose by 53% to Rs. 233.7
mn, amidst increased and relatively high net gearing. The Book
Value per Share now stands at Rs. 70.7.
Maskeliya Plantations negative twist
Maskeliya Plantations has recorded a loss of Rs. 96.6 mn for 3Q
ended Dec 08’ from a profit of Rs. 42.9 mn YoY. Revenue fell by
33% to Rs. 492.5 mn while administration expense increased by
20% to Rs. 11.6 mn. The steep decline in Tea prices had a
negative impact in revenue while management fees virtually
remained unchanged at Rs 94 mn.
Renuka Hotels positive turnaround
Renuka City Hotels Plc has posted a PAT of Rs. 31.8 mn for 3Q
ended Dec 08’, a positive turnaround from a loss of Rs. 9.1 mn
YOY. The profits were boosted by its other operating income, a
396% increase to Rs. 30 mn YOY despite a drop in revenue by 10%
to Rs. 18.8 mn. Other operating income included primarily
interest income, dividend income and share trading capital
Milk Foods profits slashed
Lanka Milk Foods recorded a 93% drop in PAT to Rs. 12.8 mn for
the 3Q ended Dec 08’. The group was affected by a sharp decline
in Gross profit margins and steep erosion in net interest
income. The company recorded a net finance expense of Rs. 39.6
mn compared to a net finance income of Rs. 49.2 mn YOY.