Indices close moderately high on volatile trading

Acuity Stockbrokers Research (ASR) in their week market review indicated that the week started off with an optimistic note on Monday before dipping substantially during mid week.

However, on Friday indices managed to regain lost ground resulting in indices to end in green for the week. This week the All Share Price Index (ASPI) gained 16.2 points or 0.43% to close at 3824.1 points while the more sensitive Milanka Price Index (MPI) gained 33.6 points or 0.77% to close at 4387.6 points.

National Development Bank (NDB) contributed Rs.901.6 million to the total market activity this week after trading 4.0 million shares in volume, becoming the largest contributor for the week. NDB edged higher to close the week at Rs.221.50 per share compared to last week’s closing price of Rs.222.75 per share, whilst trading between a price band of Rs.219.50 & Rs.225.00 per share over the week’s trading.

Apart from the above, Seylan Bank Non Voting and Asian Alliance contributed considerably to the week’s turnover.

Seylan Bank Non Voting contribution was approximately Rs.279.6 million and Asian Alliance was Rs.247.9 million to the total turnover, with approximately 12.3 million Seylan Bank Non Voting and 4.9 million Asian Alliance shares trading during the week. Seylan Bank Non Voting saw its price appreciating moderately by 14.3% to close at Rs.24.00 per share this week, while Asian Alliance ended the week at Rs.59.00 per share a dip of 7.0 % Week-On-Week.

Overall activity levels improved by 34.7% to Rs.6.4 billion this week, with turnover surpassing Rs.1 billion on each trading day. NDB represented 14.1% of the total activity for the week. The average daily turnover stood at Rs.1.3 billion compared Rs.1.0 billion posted last week.

The week saw a substantial increase of 120.7% in foreign purchases, to stand at Rs.0.9 billion and foreign sales to stand at Rs.1.4 billion witnessing a 103.7% increase. The resultant net outflow was Rs.0.5 billion. Foreign participation stood at 17.5% of total activity for the week.

The heavily traded stocks during the week were Nawaloka, Seylan Bank (Non Voting), Renuka Holding and Janashakthi Insurance.

In their point of view ASR indicated that the week ended 5th March, saw the Government Treasury Department releasing the “Pre Election Budgetary Position Report 2010”.

The report goes to explain the provisional fiscal account figures for the year 2009. Further, it explains the reasons for the movement of the fiscal account. Hence, articulated below is extracts of the report and brief analysis by Acuity for the benefit of our investors.

Revenue

The reduction in the revenue contribution is due to mainly the reduction in the Tax based revenue. The total revenue recorded an overall growth of 7% for the full year compared to 2008, despite the decrease in revenue as a % GDP. A significant drop in the volume and value of vehicle imports liable for excise duty, reduction in import duties and excise taxes levied at the point of import (due to the erosion in the value and volume of imports), the impact of the implementation of free trade agreements, continuous decline in cigarette sales and the slowdown in liquor production were the main contributory factors for the decline in revenue as a % of GDP.

Expenditure

The lion share of the expenditure growth was due to the recurrent potion of it. The recurrent expenditure increased by 19%. Major contributory factors were enhanced relief assistance provided to internally displaced persons after liberating the North from terrorist activities, enhanced public investment, increase cost of living allowances for public servants and the pensioners and the more than expected cost of interest payment on public debt.

2007 2008 2009 (Prov) 2009 Target Revenue

Revenue & Grants as a % of GDP 16.6 15.6 15.1 15.2 Revenue as a % of GDP 15.8 14.9 14.6 14.8 Tax as a % of GDP 14.2 13.3 12.9 13.3 Non Tax as a % of GDP 1.6 1.6 1.7 1.4 Grants as a % of GDP 0.9 0.7 0.5 0.5

Expenditure

Expenditure as a % of GDP 23.5 22.6 24.8 22.2 Recurrent Exp as a % of GDP 17.4 16.9 18.4 16.9 Capital Exp as a % of GDP 6.1 5.7 6.5 5.3

Budget Deficit as a % of GDP- excluding grants 6.9 7.0 9.7 7.0

Funding

Foreign funding as a % of GDP 1.8 0.3 1.7 0 Local funding as a % of GDP 5.1 6.7 8.0 7.0

2007 2008 2009

Re-Current Expenditure 100% 100% 100% Goods and Services 47% 48% 43% Interest Payment 29% 29% 35% Subsidies and Transfers 24% 23% 22%

Amidst such economic turmoil, the Government being able to increase the investments in the capital projects (as a % of GDP) is commendable. Hence, the increase in the capital expenditure should have better spill- off effects on the economy (GDP growth) going forward.

Going Forward:

Economic Growth

The bloodline for economic growth in any country is the amount of investment made in pivotal sectors. This, investment is propelled by high savings. Savings by way of pure domestic savings, FDI’s, bilateral investment, multilateral investment, remittances etc.

Sri Lanka’s investment per GDP is approx 24%. However, for the island nation to achieve the expected double digit economic growth we should achieve investment to GDP in the range of 35% - 40%.

The achievement of the savings levels to support the investment is of paramount importance. Lately the foreign remittances levels have improved and also Sri Lanka has been able to capture major bilateral investment from China and India, by way of ports, roads & railway, power plants etc.. Hence, Sri Lanka will have to continue achieving high savings levels by alternative sources such as multilateral; FDI’s and even via Public Private Partnerships (PPP) if we are to succeed in achieving double digit economic growth. However, the GDP growth prospects for the year 2010 would be 6%-7%.

Thus, the GDP growth would be expected from investments predominantly in agriculture, banking, manufacturing, construction and tourism.

Fiscal Improvements

It is of paramount importance to improve the revenue generation (which has actually decelerated as a % of GDP). The broadening of the Tax base is of vital importance. The current tax system is over whelmed with indirect taxation, hence, the tax authorities should look into uncomplicated and broaden tax base.

As much as it is important to broaden the tax base, it is as equal importance to implement fiscal consolidation and discipline. Reckless new public spending on recurrent expenditure will be disastrous to the economy and would tamper the macro position. Hence, improvement in the business operations of the many state entities, such as, Ceylon Petroleum Corporation and Ceylon Electricity Board is pivotal.

The expanding budget deficit would invariably increase the requirement of funding. Hence, more debt funding would increase the countries government debt to GDP ratio, this was at a very high level of 105% in 2002 and had gradually declined to 84% by end 2009.

An alternative method of funding the Capital Investments in the country would be by way of PPP. Not only would this ensure FDI’s coming in to the Country, also encourage the Private Sector participation in infrastructure investment projects.

Neighboring India is a classic example of a country thriving on the PPP concept through proper framework and conducive reforms.

- Asian Tribune -