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LMD Interview – Tourism Sector Update (March 2018)

 

Date – 15th March 2018

What is the tourist industry or Government doing to curb incidences such as Tuk-Tuk scams/ fake tour guides?

  • Tourists are increasingly becoming more aware of it as, unlike in the past where you would depend on brochures provided by official tour operators, they read blogs done by other tourists which highlight these issues more prominently
  • A related issue is with regard to unlicensed tour guides in the city.
  • This is an opportunity for Sri Lankan tourism to capitalize on, as in the absence of such tour guides, tourists themselves may get into it as a business. A Chinese tour group may have a Chinese tour guide who is also a tourist.
  • Similar to the licensed tour guides that operate in the cultural triangle, the government can introduce a similar system in Colombo

What can be done to improve the state of the National Carrier; Sri Lankan Airlines?

  • Given the financial woes facing Sri Lankan, it’s difficult to expect much in terms of improving the quality of service of the airlines
  • Instead the focus should be on opening it up to attract more airlines; particularly budget airlines.
  • The success of tourist destination such as Thailand, Indonesia can partly be explained by the effort made to attract budget airlines to the destinations in order to facilitate high tourist volumes.
  • Given that we are catering more to profile of tourists that prefer budget airlines, this would be a positive development in terms of achieving the tourist arrivals targets

How is the level of Environmental Sustainability of the tourism industry?

  • This is an area that needs to be paid attention to given recent incidences of over-crowding at National Parks and historic sites
  • Steps taken to limit the number of vehicles entering National parks would be a positive step
  • There is also a need to broad base the tourist hotspots. Ex: There are close to 30 National Parks in Sri Lanka but the lion share of tourists are concentrated in a few places
  • Part of the reason for this is because the tour itinerary followed by tour operators has not really changed in the past 20-30 years.
  • Broad basing tourism hotspots can help to ease the pressure on popular tourist locations while providing the space for other locations to develop.
  • You can also make incremental investments to reduce the overcrowding at popular tourist attractions. Ex: Issuing tickets with timed entry to Sigiriya

LMD Interview – Tourism Sector Update

 

Speaker: Travis Gomez

Date – Jan 2018

Video length – 4:01 mins

How did the tourism sector fair in 2017?

  • 2017 was a challenging year with the tourism arrivals target falling short of what was expected.
  • This was partly due to weather related disruptions such as Dengue and flooding
  • These weather related disruptions seem to be taking place more frequently and regularly and hence they are likely to continue to affect the tourism sector
  • Another reason for the underperformance was the slowdown in tourist arrivals from the traditional tourist destinations such as Western Europe as well as shifting demographics where many more younger tourists who are more interested in experiential tourism are being drawn to Sri Lanka
  • However, this is being compensated by a pickup in tourist arrivals from Asia and Eastern Europe

What are your expectations for tourism sector in 2018?

  • The sentiment for the tourism sector performance in 2018 is that it would fare better
  • However, this is provided that Hotel operators accept the shift that has taken place in the tourism sector in terms of the geographical and demographic changes in tourist arrivals
  • Hotel operators need to up their game if they are to keep up with the growth shown by the informal sector
  • They shouldn’t view it as a threat but rather as an opportunity

What can we do to improve the Brand Image of Sri Lankan tourism?

  • We need to focus on and identify a consistent message for tourism.
  • Should the branding be a traditional view of Sri Lanka of being a destination for Sun, Sand and Beach as advocated by many traditional tour operations or should the branding be of a more holistic tourist destination offering a variety of experiences ranging from Heritage, Wildlife, adventure sports etc.
  • We need to get the branding right and answer the question of ‘What is Sri Lanka going to be known for?”

What are your thoughts on the practice of refusing to serve local tourists at certain establishments

  • The authorities have to look into this and prevent such incidences from happening as the local tourists make a significant contribution to the sector, particularly in the establishments along the Southern coast during the off season.
  • Most of the incidences that have been reported have been mainly relating to informal sector establishments.
  • The Informal sector now accounts for nearly 50% of the room capacity in Sri Lanka and the Budget Proposals for 2018 have acknowledged the role of the Informal sector.
  • Hence, since the informal sector has reached a critical mass, it is important for the government to step in and play a role.
  • The budget proposal to register supplementary establishments is a step in the right direction.

Salient Features of the New Forex Act – Interview Transcript

 

Speaker: Travis Gomez

Date: 13th Jan 2018

Video length – 8:40 mins

What is government’s intention with regard to the new Forex Act (0.36 -1.52)

  • This represents a shift in the policy direction from one of restricting foreign exchange movement to one that is facilitating exchange rate movement
  • The change in the name from Exchange Control to Exchange Management emphasizes this point
  • This goes in line with some of the other policy changes the Government has been making such as the new Inland Revenue Act, changes to the immigration and emigration laws.
  • The shift is towards a more rules based approach, which has greater transparency and less political discretion

What are some of the broad features of the new Act (1.52 – 4.00)

  • Greater clarity with regard to some of the definitions.
    • Ex: Who counts as a resident and who is eligible  for opening up the different types  of accounts
  • Reducing the complexity and simplification.
    • The Act clubs 18 different accounts into 5 main accounts.
  • Greater competition and discretion for banks.
    • The banks would have more discretion in the approval of forex transactions.
    • This is done with the intention of streamlining and speeding up the approval process
    • The Act also opens up the market for greater competition as licensed brokers can open up certain accounts as well.

What are the implications of the Act for the broad economy? (4.00- 5:35)

  • The act signals a more open approach to forex which could encourage a greater flow of FDI’s in to the country
  • The Act broadens the type of investment opportunities non-residents can participate in. Apart from the typical stock & bond investments, foreigners can also invest in Unit trusts, Fixed deposits in banks etc.
  • Of particular interest is the fact that the Act states that non-residents can invest in immovable property i.e: Real estate
  • The Act also allows banks to provide loans in LKR or USD terms to non-residents for the purpose of constructing and buying real estate.
  • This would be a positive development for the real estate sector, as given the level of activity ongoing in the sector, foreign investor participation can absorb some of the new capacity that is rapidly coming on line.

At a firm level, what are the implications of the Act? (5:35 – 6:37)

  • The Act extends the limits to which companies can invest. The limit for listed companies has been increased from USD 500,000 per year to USD 2 mn per year.
  • Firms also have the opportunity to invest in sovereign bonds and Unit Trusts abroad
  • The limits for individuals has also been increased from USD 100,000 (life time investment) to USD 200,000.
  • This would be an opportunity for firms in Sri Lanka and individuals to diversify their risk by investing abroad

For an individual, what are the implications of the Act? (6:37 – 8:10)

  • The limits on how much LKR and foreign currency that can be taken in and out of the country has been changed. You can take up to LKR 20,000 or up to USD 15,000 in foreign exchange without having to declare it.
  • With regard to migration transfers, the Act has increased the initial amount as well as the annual amount you can take as forex when migrating. The annual migration allowance has been increased to USD 30,000 per year
  • In addition, any pension payments, dividend income etc. would not be subject to the above limit.
  • Overall, there has been a reduction in the restrictions imposed on individuals.

Banking Sector Performance – Interview transcripts

Topic: Performance of the Sri Lankan banking sector

Speaker: Nimesha Jayakody – Senior Product Lead

Video length – 11:47 mins

00:18: How have the interest being fluctuating over the past couple of months?

  • From around 2013 interest rates in Sri Lanka were falling almost until the end of 2015.
  • In response to the growing worry of excessive credit growth, the Central Bank started taking some policy measures from last year.
  • Stemming from that we are now operating in an environment with relatively higher interest rates

01:00: How did loans perform last quarter? Any specific loan categories you want to talk about?

  • As a result of the measures taken by CBSL there are signs that private sector credit is slowing down. In line with that, the loan growth in local private banks during 2nd quarter of 2017 also slowed down compared to the previous 3 quarters.
  • Another reason for this slowdown is that Banks have become more selective with regard to their lending
  • With regard to specific loan categories, A recent Fitch Ratings report mentioned that construction is the single largest sector that the Sri Lankan banks are exposed to and by the end of 2016, the segment accounted for around 17.5% of their total lending
  • However by analysing the quarterly financial statements it’s not very easy to give a view as to whether this trend has continued in 2017 as the loan values to this segment could be included in broader loan categories.
  • Another category to look at is the leasing category. In the 2016 budget last November, the Central Bank tightened the maximum loan to value ratios so the lending institutions couldn’t lend as much for vehicle leasing compared to earlier periods.
  • However in 1st half of 2017, we are still seeing some growth in the loan volumes under this category but at a much slower rate.

04:26: How have the loan repayments been last quarter?

  • One key metric that we look at to understand how healthy a bank’s loans is the non-performing loans (NPL) ratio. NPL is a loan on which a borrower is not making any interest payments or repaying principal amount they had borrowed for a certain period of time. The NPL ratio is simply the value of these loans as a percentage of the total loans. Lower the ratio, better it is for a bank.
  • For some time in the past few years we saw the NPL ratios improving.
  • A key reason for this was the gradual reduction in pawning facilities starting from around 2014 which back then used to be a source of high NPLs. Now the effects of that is slowly going away.
  • However, during the most recent quarters pawning activity had picked up and many banks reported a higher NPL ratio
  • Another reason for higher NPLs in 2nd quarter of 2017 were the floods and droughts that affected a lot of people’s ability to repay what they had borrowed.

06:05: How was the profitability of the sector in the 2nd quarter of 2017?

  • Overall, the banking sector achieved a higher level of profits compared to the previous quarter
  • A core reason was the improvement in banks’ net interest margin, where the core income source for a bank is the interest income.
  • In addition, total operating cost had only increased marginally and the staff cost had reduced during the quarter, along with the portion of taxes they paid.

07:20: Any comments  about the future strategic plans of banks?

  • One thing banks are looking at is the technology developments and automation efforts to make it more convenient for customers and to possibly reduce operating costs in the long run.

08:06: How have recent regulations affected the banking sector?

  • One key regulation that the banks need to adhere to is the BASEL III requirements; an international regulatory framework for banks where they set minimum levels of capital that banks should hold given a set of criteria.
  • BASEL III is being implemented in Sri Lanka in 3 stages and banks had to meet the requirements under the first stage by 1st of July this year. Looking at the quarterly financial statements, all banks had met these minimum requirements.
  • The next hurdle date is set for 1st of January 2018. Some banks will definitely have to raise capital through rights issues and other ways to bring their capital to the expected levels.

09:10: Were any new banking products introduced to the market recently?

  • Banks are trying to increase the level savings deposits they have since they carry a lower cost of interest to them compared to fixed deposits. So there have been several new savings deposit schemes being introduced especially for women.

09:37: How will the banks perform in the medium term?

  • When trying to understand how the banking sector will perform, the movement of interest rates becomes quite important. Frontier Research expects broader market rates to go down further within the next months before they start picking up again during the 2nd half of 2018. Usually the bank interest rates start moving in a similar direction but with a delay.
  • There is still a window in the short term for the banks to hold on to relatively healthy net interest margins. If the banks manage their deposits and lending portfolios tactically they could still perform sufficiently well for the remainder of 2017.
  • There is some uneasiness in the sector about NPLs and it’s possible that it wouldn’t improve within the year. We shouldn’t completely rule out the possibility of a real estate sector bubble either which can affect the banking sector significantly.
  • Overall in my view the banks will perform moderately well like they had done so far this year, but they need to drive performance very carefully so as not to compromise their long term stability.
  • This I believe is very important because, if banks, which are one of the most connected sectors in the economy, weaken most other sectors/industry will start feeling it too.

Regaining GSP+ In Sri Lanka – Interview transcripts

Topic: Sri Lanka Regaining GSP+ – opportunities for firms

Speaker: Travis Gomez, CFA – Product Head

Video length – 9:10 mins

Starting point:

1:20:      How has the loss of GSP+ impacted local companies?

  • Between 2010 to 2017, companies that were traditionally more export oriented, were affected and the extent of this impact depended on their exposure to European Markets
  • A case in point is the HAYL’s group where some of its subsidiaries such as; Dipped Products, Haycarb and Hayley’s Fabric performance was affected due to the global slowdown
  • As a result, HAYL pivoted towards investing in the domestic sector and subsequently the contribution from these traditional export segments to the firm’s performance saw a dip
  • This shift was also facilitated by the ending of the war which opened up more opportunities in the local economy and the company invested heavily in sectors such as construction, power & Energy and Leisure.
  • Now with the regaining of GSP+, we could potentially see some turnaround in the performance of some of these s export segments of HAYL’s.

2:55: How important is GSP+ for Sri Lanka?

  • This is a somewhat controversial issue as we don’t have a lot of empirical evidence to gauge the impact
  • One reason for the difficulty is because we don’t have many listed companies that are exposed to European Markets and one of the few listed companies that have this exposure is Tee Jay Lanka (TJL)
  • Considering their revenue performance and margins over time, the loss of GSP+ seems to have had only a minimal material impact the benefit of GSP+ is in the form of allowing firms in certain sectors to get a leg up in terms of a cost advantage compared to competing countries.
  • This could explain the minimal material impact on TJL’s performance because in the case of Garments, companies like TJL, MAS, Hirdaramani do not attempt to compete in terms of cost with competitors such as Bangladesh (that also enjoys the benefits of GSP+).Instead they compete in terms of quality, use of new technologies as well as better lead times
  • Another reason in the case of large scale garment manufacturers is that they have been investing in manufacturing capacity in countries such as Bangladesh which enjoys the GSP+ benefit.

5:20 What has been the stock market’s reaction to the news of regaining GSP+?

  • Minor reaction from the market
  • The perception is that this has been talked about for a long time hence it’s been factored in
  • At the same time, it will take time for tangible benefits to materialize

6:08 What are the sectors that stand to benefit from the regaining of GSP+?

  • The obvious sector is garments, given the sector’s large exposure to the EU
  • Sri Lanka could benefit from the added cost advantage as well as the need of global garment buyers to diversify risk in terms of their geographical exposure
  • Hence, it is possible that some of the garment operations that were moved to countries like Pakistan to return to Sri Lanka
  • But the focus of garments should remain on the innovation side and competing on quality
  • An important point brought up by the EU delegation is that we need to diversify our exports to other segments. Hence other sectors that can benefit are the Agribusiness and fisheries segment.
  • Products such as Organic fruits and vegetables as well as canned fish and ornamental fish have high growth potential too.