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Ill-timed and unacceptable rating action by Moody’s renews concerns of subjectivity – CBSL



A recent rating action by Moody’s Investors Service (Moody’s) on the Sri Lankan economy reflects, among other things, “serious governance weaknesses of such agencies, where they systematically overlook positive developments and expectations in emerging economies, but attribute much greater weight to downside risks. The ill-timed and unacceptable rating action by Moody’s renews concerns of subjectivity, the CBSL said in a statement.

Extracts of the statement:

The Government of Sri Lanka (GOSL) wishes to express strong displeasure on the recent assessment by Moody’s Investors Service (Moody’s) that led to the rating action, after being placed under review for downgrade three months ago in a similar fashion. Once again, Moody’s irrational rating action with regard to Sri Lanka comes a few days before a key event, namely the announcement of the Government Budget for 2022, and this apparent hastiness and the view expressed during discussions with Moody’s analysts that the nature of the Budget is irrelevant to the financing plans of the Government clearly demonstrates the lack of understanding of such analysts.

It also reflects serious governance weaknesses of such agencies, where they systematically overlook the positive developments and expectations in emerging market economies, but attribute much greater weight to downside risks. Moody’s assessment has also failed to take into account the latest developments in strengthening the country’s external position through an array of measures, some of which have already yielded intended outcomes, as announced by the Central Bank of Sri Lanka (CBSL) on 26 October 2021. Moreover, the assessment exposes the rating agency’s ignorance on the well-established political stability within a democratic setup, when it claims about “governance weaknesses” and “challenging domestic political environment”, and its obvious insensitivity to the challenges faced by a country that is recovering from adverse external events without bringing pain to investors who have stood by Sri Lanka during various difficulties that the country has undergone in the past.

In addition to the six-month strategy articulated in the Road Map presented by the CBSL on 01 October 2021, Moody’s assessment has failed to recognise the medium to long term funding arrangements that are being finalised with various bilateral sources, which are due to be materialised in the near term. They include, among others, credit lines of several billions of USD from India and the Middle Eastern counterparts to procure petroleum; an arrangement for a large forex loan from a Middle Eastern nation as a bilateral long-term loan, and the proposals received for the syndicated loan arrangement that are being evaluated at present. In addition, a substantial amount of funds is expected from the already lined-up prioritised project loan related inflows to the Government. The recent discussions on bilateral currency SWAP arrangements with several central banks are also expected to provide the country with additional support in the near term.

Without considering such cashflows, any assessment on the repayment capacity of the Government carries prejudice. Rating action based on such biased assessment is unfair and detrimental to the country’s prospects, as Sri Lanka is emerging strongly from the adverse effects of the COVID-19 pandemic. Needless to say, such action by an international rating agency calls into question the validity of its advice to the investor community. Nevertheless, it is clear that international investors have continued to put faith in Sri Lanka’s plans for recovery, as repeatedly reflected in their preference to hold Sri Lanka’s International Sovereign Bonds (ISBs) to maturity, despite claims by Moody’s about a heightened risk of default by Sri Lanka.

The GOSL is in the process of preparing its Budget for the forthcoming year to be presented on 12 November 2021 with economic activities returning to near normalcy, and the country is already experiencing strong signs of revival of tourism and other activities that generate non-debt creating foreign currency inflows, including the monetisation of under-utilised non-strategic assets. This untimely rating decision taken prior to the Budget shows that Moody’s has not taken all the relevant information to form its assessment of the country’s performance and the expected path, into account. Even a layman would recognise that the Budget is an important statement for a country as it sets the tone for policy initiatives and structural reforms which could help alleviate the external challenges and improve fiscal settings in the near to medium term. Legitimacy of financing, in the form of an Appropriation Act, includes all foreign financing with a clear direction of the fiscal path. Therefore, it is surprising that Moody’s fails to provide due consideration to the forthcoming Budget, disregarding the vital information that would be released with the announcement of the Budget, in arriving at its rating action.

Such action by Moody’s is not new to Sri Lanka since Sri Lanka has experienced similar rating action by Moody’s several times in the past as well. For instance, Moody’s placed Sri Lanka on review for downgrade on 17 April 2020 right at the onset of the COVID-19 pandemic and just after the Government signed a Foreign Currency Term Financing Facility (FTFF) with China Development Bank (CDB), hindering the implementation of the arrangement and delaying fund receipts. The downgrade was effected on 28 September 2020, just ahead of the ISB maturity in October 2020. Further, Moody’s placed Sri Lanka under review for downgrade on 19 July 2021 whilst the CBSL was finalising a currency SWAP with the Bangladesh Bank and was about to repay a maturing ISB. Such questionable action generates credibility considerations as to whether Moody’s actions are driven by economic considerations only.

The GOSL and the CBSL are closely engaging with all stakeholders, including the international investor community. Such engagements have helped clear any doubts of investors on the Government’s willingness and the ability to honour all upcoming debt service obligations, as it has done throughout history. The Sri Lankan economy has demonstrated strong signs of broad-based recovery, with a real GDP growth of 8.0 per cent in the first half of 2021. The vaccination drive is progressing at full strength, covering over 60 per cent of the population with both doses and almost 100 per cent of the population over 30 years, thus providing confidence of a strong rebound in economic activity in 2022. With the revival in tourism and the fruition of efforts to strengthen foreign exchange earnings through merchandise exports, exports of services, worker remittances, as well as domestic and foreign investments, the medium term growth path is likely to be robust. Improving performance of merchandise and trade in services in a fairly short period of time has shown the economy’s ability to reach its potential despite misplaced fears raised by Moody’s. It is deeply disappointing that Moody’s seems to be attempting to derail this potential of the country by downgrading Sri Lanka’s rating based on a static methodology, which is irrational, particularly at the time of a global pandemic. The Government’s commitment towards fiscal consolidation through expenditure rationalisation would complement the gradual rise in government revenue with normalising activity, thereby narrowing the fiscal deficit, that has not been recognised.

Moody’s. The pro-growth reforms implemented by the Government has laid the foundation for a domestic production led export-oriented economy over the medium term, despite some adjustment costs in the transition. Ignoring such ability and commitment of the Government has led to ill-informed conclusions by Moody’s.

Against this backdrop, the Government wishes to re-assure all stakeholders, including the international investor community, that Sri Lanka remains committed to honouring all forthcoming obligations in the period ahead. The Sri Lankan authorities welcome direct engagement with investors and invite investors for regular one-on-one discussions without being distracted by such unfounded announcements by external agencies.


Healthcare, Consumer and Agri propel Sunshine Holdings’ strong FY23 performance



Amal Cabraal, Chairman

Diversified Sri Lankan conglomerate Sunshine Holdings (CSE: SUN) recorded resilient revenue growth in a challenging macroeconomic environment, reporting notable top-line growth during the year ended 31 March 2023. Group’s Healthcare and Consumer sectors led growth while healthcare segment remained the major contributor to total Group revenue in FY23.

Sunshine recorded a consolidated Group revenue of Rs.51.9 billion for the year ended 31 March 2023, an increase of 61.3% over last year. Profit after tax (PAT) for the period in review was contracted by 28.0% to Rs. 3.6 billion. The gross profit improved by Rs.3.3 billion, up 31.9% YoY, compared to the previous year, driven by revenue growth. Gross profit margin for the period stood at 26.0%, a contraction of 580 basis points against the corresponding period last year.

The Group’s Healthcare business emerged as the largest contributor to Sunshine’s revenue, accounting for 46.1% of the total, while Consumer Goods and Agri Business sectors of the group contributed 36.6% and 16.9% respectively of the total Group revenue. The Group EBIT closed at Rs. 7 billion, an increase of 23.0% YoY.

Commenting on the results, Amal Cabraal, Chairman of Sunshine Holdings said, “The Group had to face and overcome tough economic factors and adverse market conditions which persisted throughout the year. These headwinds impacted some of the core sectors, and are expected to continue to do so in the short to medium term.”

However, Cabraal highlighted the Group’s commendable response to these challenges, adding, “Through robust cost management initiatives and process reengineering efforts, supported by the integration of digital technologies, Sunshine has delivered a strong performance in FY23. Despite the difficulties, the Group has displayed resilience, and takes an optimistic outlook on fortifying operations to further strengthen overall performance.”

Cabraal further emphasized that “Every possible measure has been taken to ensure business sustainability and continuity in the upcoming months.”

Healthcare sector recorded a revenue of Rs. 23.9 billion during FY23, a significant increase of 36.7% YoY backed by the improved performance in Pharmaceutical, Medical Devices and Manufacturing segments. EBIT for the sector was Rs. 3.0 billion with PAT of the sector increased by 13% YoY. Lina Manufacturing, the pharma manufacturing business, commenced commercial operations in the Metered Dose Inhalers (MDI) plant in July 2022, which was a significant milestone for the business.

Consumer Goods sector reported a 135.6% YoY increase in revenue to close at Rs. 19 billion in FY23. The revenue increase was predominantly driven by the addition of export business. The consumer brands Zesta, Watawala, Ran Kahata and Daintee continued to grow market shares, despite challenging consumer sentiment.

Agribusiness sector revenue increased by 35.4% YoY during FY21/22 to Rs. 8.8 billion, driven by the increase in palm oil NSA. PAT of the Agri sector closed at Rs. 2.3 billion for FY21/22, down by 33.6%.

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ADB budget support loan doesn’t elicit positive response from bourse



By Hiran H.Senewiratne

The CSE did not react positively yesterday to the Asian Development Bank’s approval of a US$ 350 million loan as budget support, as part of Sri Lanka’s economic stabilization program, together with the rupee’s appreciation against the dollar, market analysts said.

“The ABD is supporting a series of policy reforms which are required to stabilize the economy and to spur growth. Budget support loans ease cash flows of the government and do not involve imports of goods. This has created some limbo for investors, market analysts said.

Consequently, shares edged- down in mid- day trade and ended on a negative note. The main All- Share Price Index was down by 118.97 points, while the most liquid index S&P SL20 was also down by 41.3 points.

Turnover stood at Rs 516 million without any crossings. In the retail market, top seven companies that mainly contributed to the turnover were, Dialog Axiata Rs 73.7 million (7.2 million shares traded), Lanka IOC Rs 54.42 million (426,000 shares traded), Expolanka Holdings Rs 51.7 million (382,000 shares traded), Prime Lands Residencies Rs 25.1 million (3.11 million shares traded), Browns Investments Rs 21.3 million (4.3 million shares traded), Hemas Holdings Rs 18.8 million (298,000 shares traded) and Elpitiya Plantations Rs 16.2 million (164,000 shares traded). During the day 38.3 million share volumes changed hands in 11000 transactions.

The rupee opened at Rs 296.50 /297.50 against the US dollar in the spot market yesterday, while bond yields were up, dealers said. The rupee closed at Rs 296.00 /297.50 to the US dollar on Friday after opening at around Rs 302.80/303.10.

Sri Lanka’s rupee is appreciating amid negative private credit which has reduced outflows after the central bank hiked rates and stopped printing money.

In the first year of an IMF program, a pegged central bank usually collects reserves and mops up liquidity generated from the purchases or there is a balance of payments surplus.

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HNB reopens Student Savings Unit at St. Joseph’s College



HNB MD /CEO Jonathan Alles (centre) and HNB Executive Director and Chief Operating Officer Dilshan Rodrigo (right) presenting the first HNB TEEN+ card to a savings account holder

Reaffirming its commitment to fostering financial literacy among students, Sri Lanka’s leading private sector bank HNB PLC, announced the reopening of its Student Savings unit at St. Joseph’s College, Colombo.

The reopening comes as part of the bank’s continued efforts to instil the habit of saving among young minds. The event was graced by the esteemed presence of St. Joseph’s College Rector, Rev. Fr. Ranjith Andradi, and the Managing Director/CEO of HNB, Jonathan Alles, Executive Director and Chief Operating Officer Dilshan Rodrigo who are distinguished past pupils of the College, along with Deputy General Manager- Retail and SME Banking Sanjay Wijemanne, Assistant General Manager, Network Management and Business Development Supun Dias and Head Office Branch Chief Manager, Dilanka De Silva.

During the ceremony HNB Managing Director/CEO, Jonathan Alles expressed his delight, stating, “We are extremely pleased to be a part of this momentous occasion, celebrating the reopening of the Student Savings Unit at St. Joseph’s College. Through this Unit, we aim to empower students with a deeper understanding of saving and the value of living within their means. By developing this essential life skill, students will be well prepared to fund their higher education and make other important investments in the future.”

The Unit will mainly offer student access to the wide range of savings products and investment plans available for minors. Moreover, the bank aims to create a digital payment ecosystem for the school also offering members of the staff and the Old Boys Association with exceptional services and benefits.

St. Joseph’s College Rector Rev. Fr. Ranjith Andradi, expressing his pride in the partnership, stated: “We are proud to be associated with HNB in reopening the Student Savings Unit. This initiative not only imparts valuable lessons in investing and saving but also instils a strong sense of financial management in our students. We believe this partnership will contribute to their progress and success.”

The Student Savings Unit, introduced by HNB in 1994, has played a pivotal role in promoting financial literacy among students. With 162 units established across Sri Lanka, HNB actively engages students in managing mini-banks within their schools, fostering leadership and financial responsibility. Each year, HNB provides comprehensive training to over 1,000 students, empowering them to become financially savvy individuals.

HNB is rated A (lka) by Fitch Ratings and was awarded the esteemed title of ‘Sri Lanka’s Best Corporate Citizen’ for 2022 by the Ceylon Chamber of Commerce. Other major accolades include being ranked among the Top 1,000 Banks in the World for six consecutive years by the acclaimed UK based “The Banker Magazine”, being adjudged the ‘Best Retail Bank in Sri Lanka’ for the 13th occasion by the Asian Banker, as well as securing a Top 5 position on Business Today’s Top 40 rankings for 2022.

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