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Wednesday July 24th, 2024

“Free trade zone” of international universities on the cards for foreign students

The cabinet has green-lit a proposal to establish a Board of Investment (BOI)-approved “free trade zone” of international universities to attract foreign and non-resident students to the country.

Co-cabinet spokesman and Higher Education Minister Bandula Gunawardena told reporters today that the objective of the so called ‘free trade zone’ (in the Minister’s words) is to make Sri Lanka an international education hub home to branches of world-renowned universities.

Institutes of higher education, depending on their global ranking, will be welcome to set up shop in Sri Lanka, and will enjoy tax concessions and state-funded infrastructure facilities, the Minister said.

He said the plan took root after analysing the Putrajaya Educational City in Malaysia spearheaded by Malaysian Prime Minister Mahathir Bin Mohamad as a means of bringing foreign exchange to Malaysia.

About 21,000 students leave the country for higher education resulting in a loss of Rs 50 billion in foreign exchange annually, the Minister noted.

If this is to continue it will cause the rupee to depreciate resulting in a higher cost of living, he added.

The government hopes that through the proposed project, Sri Lanka will see a spike in the number of foreign students entering the country, accompanied by an increase in foreign exchange revenue as fees for the international universities may only be paid in foreign currencies and not in Sri Lankan rupees.

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Fitch confirms ‘A-(lka)’ domestic rating of Seylan Bank Plc

ECONOMYNEXT – Fitch Ratings said it was confirming a national long-term ‘A-(lka)’rating on Sri Lanka’s Seylan Bank Plc with a stable outlook, amid an improvement in operating environment, indicated by headline macroeconomic indicators.

Fitch said it expected a modest increase in Seylan’s proportion of net loans to total assets (60.0% at end-1Q24) in the near- to medium-term, as lending resumes, comparable with its peers.

“We expect a modest increase in Seylan’s proportion of net loans to total assets (60.0% at end-1Q24) in the near- to medium-term, as lending resumes, comparable with its peers.”

The full statement is reproduced below:

Fitch Affirms Seylan Bank at ‘A-(lka)’; Outlook Stable

Fitch Ratings – Colombo – 22 Jul 2024: Fitch Ratings has affirmed Sri Lanka-based Seylan Bank PLC’s (Seylan) National Long-Term Rating at ‘A-(lka)’. The Outlook is Stable. Fitch also affirmed Seylan’s Sri Lankan rupee-denominated outstanding subordinated debt at ‘BBB(lka)’.

KEY RATING DRIVERS

Intrinsic Profile Drives Rating: Seylan’s National Long-Term Rating reflects its own financial strength, which is influenced by the bank’s exposure to the sovereign’s weak credit profile (Long-Term Foreign-Currency Issuer Default Rating (IDR): RD; LongTerm Local-Currency IDR: CCC-) and the ongoing sovereign debt restructuring, which had been putting pressure on Seylan’s credit profile. The rating also reflects Seylan’s modest domestic franchise as Sri Lanka’s seventh-largest commercial bank.

Stabilising OE: Sri Lankan banks’ operating environment (OE) continues to show signs of stabilisation, as evident in sustained improvements in reported headline macroeconomic indicators, supporting the recovery in banks’ operational flexibility.

Further improvement to the banks’ OE remains contingent on successful execution of the sovereign’s external debt-restructuring exercise alongside the restoration of the sovereign’s creditworthiness, given the strong link between sovereign financial health and banks’ operating conditions.

Economy Supports Lending: We anticipate the improvements in macroeconomic conditions to support Seylan’s capacity to generate and maintain business volumes.

However, the bank’s business profile continues to be affected by the weak domestic operating environment. We expect a modest increase in Seylan’s proportion of net loans to total assets (60.0% at end-1Q24) in the near- to medium-term, as lending resumes, comparable with its peers.

Sovereign Risk Remains: Seylan’s risk profile assessment continues to be affected by its exposure to the weak sovereign and economic environment. Defaulted foreign-currency sovereign bonds represented 1.7% of its assets at end-2023, with impairments of 52% held against them. Furthermore, local-currency-denominated treasury securities accounted for 21% of assets, comprising 56% in treasury bonds and 44% in treasury bills at end2023. This makes the bank susceptible to the sovereign’s repayment ability and liquidity status.

Impaired Loans to Decline: We expect Seylan’s impaired (stage 3) loans ratio to decline gradually over the medium term – given the bank’s recovery efforts, improvements in borrowers’ repayment capacity due to economic stabilisation, and moderate loan-book growth. This is reflected in the modest improvement in the ratio to 13.8% in 1Q24 from 14.3% at end-2023 (end-2022:12.6%). That said, the impaired-loans ratio remains higher than the industry average of 12.8% (end-2023: 12.8%).

Reduced Risks to Profitability: We believe that downside risk to profitability from the restructuring of sovereign bonds has declined, and any additional impairment, if necessary, will be manageable due to the existing provisions on the holdings. We expect Seylan’s operating profit/risk-weighted assets (end-1Q24: 4.7%, 4-year average 2.1%) to moderate over the medium term, due to the decline in interest rates and the increased risk density from the rising share of loans in assets. However, we expect these to be partially offset by lower credit costs.

Manageable Risks to Capital: We believe that the downside risk to capital from the bank’s exposure to defaulted sovereign bonds is manageable, considering the announced restructuring terms, given that the bank held provisions covering 52% of this exposure at end-2023. Its regulatory common equity tier 1 (CET1) capital ratio was 13.0% at end1Q24 (excluding 1Q24 profit), below the industry average of 14.2%.

Funding and Liquidity Risks Ease: Seylan’s funding and liquidity stress has eased on both the foreign and local-currency fronts relative to the crisis period, due to favourable external sector flows and the bank’s focus on liquidity preservation, as reflected in its higher liquidity coverage ratio. We believe these developments have reduced the risk of bank failure. However, Seylan’s funding and liquidity profile, particularly in foreign currency, remains susceptible to sudden changes in creditor sentiment driven by adverse changes to the sovereign’s credit profile, similar to peers.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

The bank’s National Rating is sensitive to a change in the bank’s creditworthiness relative to other Sri Lankan issuers.

A deterioration in Seylan’s key credit metrics beyond our base-case expectations relative to peers would also lead to increased downward pressure on the rating, which is driven by its intrinsic financial strength.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Positive rating action on the sovereign may lead to an upgrade in the rating. A sustained improvement in key credit metrics beyond our base-case expectations relative to peers, could also lead to an upgrade.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS SUBORDINATED DEBT

Seylan’s Sri Lankan rupee-denominated outstanding subordinated debt is rated two notches below the National Long-Term Rating anchor. This reflects Fitch’s baseline notching for loss severity for this type of debt and our expectations of poor recoveries.

There is no additional notching for non-performance risks, as the notes do not incorporate going-concern loss-absorption features.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

The subordinated debt ratings will move in tandem with the bank’s National Long-Term Rating.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Additional information is available on www.fitchratings.com (Colombo/Jul24/2024)

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Fitch confirms ‘A(lka)’ domestic rating of Sampath Bank Plc

ECONOMYNEXT – Fitch Ratings said it was confirming a national long-term A(lka) rating on Sri Lanka’s Sampath Bank Plc with a stable outlook, amid an improvement in operating environment, indicated by headline macroeconomic indicators.

The bank had stage 3 loans of nearly 17 percent at end-1Q24 (2023: 16.6 percent).

Fitch expected this ratio to decrease in the near- to medium-term alongside focused recoveries.

“We expect Sampath’s impaired (stage 3) loans ratio to decline gradually in the medium term, due to its recovery efforts, improvements in repayment capacity of borrowers from the stabilisation in economic conditions, and moderate loan book growth.”

The bank also had defaulted sovereign bonds. “Defaulted foreign-currency sovereign bonds, which accounted for 1.9% of assets, had impairments amounting to 52% of its holdings as of end-1Q24.”

The full statement is reproduced below:

Fitch Affirms Sampath Bank at ‘A(lka)’; Outlook Stable

Fitch Ratings – Colombo – 22 Jul 2024: Fitch Ratings has affirmed Sri Lanka-based Sampath Bank PLC’s (Sampath) National Long-Term Rating at ‘A(lka)’. The Outlook is Stable. Fitch also affirmed Sampath’s outstanding Sri Lankan rupee-denominated subordinated debt at ‘BBB+(lka)’.

KEY RATING DRIVERS

Intrinsic Profile Drives Rating: Sampath’s National Long-Term Rating reflects its own financial strength, which is highly influenced by its exposure to the sovereign’s weak credit profile (Long-Term Foreign-Currency Issuer Default Rating (IDR): RD; LongTerm Local-Currency IDR: CCC-) and the ongoing sovereign debt restructuring, which had been putting pressure on Sampath’s credit profile. The rating also reflects Sampath’s modest domestic franchise as Sri Lanka’s fifth-largest commercial bank.

Stabilising OE: Sri Lankan banks’ operating environment (OE) continues to show signs of stabilisation, as evident in sustained improvements in reported headline macroeconomic indicators, supporting the recovery in banks’ operational flexibility.

Further improvement to the bank’s OE remains contingent on successful execution of the sovereign’s external debt-restructuring exercise alongside the restoration of the sovereign’s creditworthiness, given the strong link between sovereign financial health and banks’ operating conditions.

Economic Stabilisation Aids Business Profile: We believe the gradual improvement in economic conditions should support Sampath’s ability to generate and defend business volumes, despite the vulnerabilities from the weak sovereign and economy. We expect a moderate resumption in lending alongside the gradual economic recovery, similar to peers. This should result in a higher loan book share of assets (net loans to assets of 48.0% at end-1Q24) in the medium term.

Sovereign Risk Remains: Sampath’s risk profile assessment continues to reflect its exposures to the weak sovereign and economic environment. Defaulted foreign-currency sovereign bonds, which accounted for 1.9% of assets, had impairments amounting to 52% of its holdings as of end-1Q24. In addition, local-currency-denominated treasury securities contributed to 34% of its assets at end-2023, of which 59% were treasury bonds and the remainder in treasury bills, which makes the bank susceptible to the sovereign’s repayment ability and liquidity status.

Impaired Loans Decline Gradually: We expect Sampath’s impaired (stage 3) loans ratio to decline gradually in the medium term, due to its recovery efforts, improvements in repayment capacity of borrowers from the stabilisation in economic conditions, and moderate loan book growth. Prolonged economic challenges that continued for most of 2023 led to a further impaired-loans accretion, which together with loan book contraction resulted in the bank’s impaired-loans ratio rising to 16.6% by end-2023 (end-2022: 11.6%), above the industry’s 12.8%.

Declining Risks to Profitability: We believe downside risk to profitability from the restructuring of sovereign bonds has diminished, and any incremental impairment, if necessary, will be manageable, given the existing provisions on the holdings. We expect Sampath’s operating profit/risk weighted assets ratio (1Q24: 4.8%, 4-year average 3.2%) to moderate over the medium term on account of the decline in interest rates. This will be partially offset by lower credit costs, alongside the increase in risk density from the growth in the share of loans.

Downside Risks to Capital Manageable: We believe downside risk to capital from the bank’s exposure to defaulted sovereign bonds (1.9% as of end-1Q24) is manageable, as per the announced restructuring terms – given the bank’s provisions on these instruments amounting to 52% on the exposure at end-1Q24. The regulatory common equity tier 1 (CET1) capital ratio declined marginally to 15.6% by end-1Q24 (excluding 1Q24 profit) from 16.7% at end-2023, following a cash dividend payment, but remains one of the highest among Fitch-rated large Sri Lankan banks.

Funding and Liquidity Risks Remain: We believe Sampath ‘s funding and liquidity stress has eased on both the foreign- and local-currency fronts relative to the crisis period.

This was due to favourable external sector flows and the bank’s focus on liquidity preservation, as reflected in its high liquidity coverage ratio. We believe these developments have reduced the risk of bank failure. However, its funding and liquidity profile – particularly in foreign currency – remains susceptible to sudden changes in creditor sentiment driven by adverse changes to the sovereign’s credit profile, similar to peers.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

The bank’s National Rating is sensitive to a change in its creditworthiness relative to other Sri Lankan issuers.

A deterioration in Sampath’s key credit metrics beyond our base-case expectations relative to peers would also lead to increased pressure on the rating, which is driven by its intrinsic financial strength.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Positive rating action on the sovereign may lead to an upgrade. A sustained improvement in key credit metrics beyond our base-case expectations relative to peers, could also lead to an upgrade.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS SUBORDINATED DEBT

Sampath’s Sri Lankan rupee-denominated outstanding subordinated debt is rated two notches below the National Long-Term Rating anchor. This reflects Fitch’s baseline notching for loss severity for this type of debt, and our expectations of poor recoveries.

There is no additional notching for non-performance risks, as the notes do not incorporate going-concern loss-absorption features.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

The subordinated debt ratings will move in tandem with the bank’s National Long-Term Rating.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Additional information is available on www.fitchratings.com (Colombo/Jul24/2024)

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Sri Lanka presidential candidate cash deposits not updated in 43 years: MP

MP Dullas Alahapperuma

ECONOMYNEXT — The cash deposits Sri Lanka’s presidential candidates are required to pay have not been revised in 43 years, opposition MP Dullas Alahapperuma said, calling for a significant increase in order to save money and to prevent proxy candidates.

Alahapperuma told parliament on Wednesday July 24 that, as per the Presidential Elections Act No. 15 of 1981, a candidate nominated by a recognised political party has to deposit only 50,000 rupees while an independent candidate, or a candidate nominated by any other party or by an elector, must pay only 75,000 rupees.

The MP said the cabinet of former president Gotabaya Rajapaksa had approved an amendment to the act to increase these amounts.

“The election commission proposed that this be increased to 2.5 million rupees for political parties and 3 million for independent candidates. This was a pertinent proposal. There were 35 candidates who contested the last election,” he said.

The Act notes that “Where the number of votes polled by any candidate does not exceed one-eighth of the total number of votes polled at the election, the deposit made in respect of such candidate shall be declared forfeit and shall be transferred by the Commissioner from the deposit account to the Consolidated Fund, and in every other case the deposit shall be returned to the person who made the deposit, as soon as may be after the result of the election is declared.”

At the 2019 presidential election, said Alahapperuma, the deposits made by all candidates besides the top two contenders were transferred to the Consolidated fund.

“The number of candidates might be 80 or 85 this election. Many candidates have no basis for contesting, and it costs a vast sum of money to print ballots and other expenses, not to mention the time consumed for counting votes. This is not just to prevent proxy parties from contesting but also to save a lot of national wealth,” he said.

Leader of the House Susil Premajayantha responding to Alahapperuma said, however, that it would not be possible to pass the proposed amendment in time for the 2024 presidential election.

“The election commission made this proposal some time ago. But we know that to gazette a bill, we need to first draft the bill, the cabinet has to decide on it, send it back to the Legal Draftsman, and receive clearance from the Attorney General. So there is no time to bring this amendment for the upcoming presidential election. You can propose it at the next one,” he said. (Colombo/Jul24/2024)

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