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Friday June 21st, 2024

Sri Lanka Construction Guarantee Fund premiums plunges, investment income up

ECONOMYNEXT – Premium income at Sri Lanka’s Construction Guarantee Fund plunged 87 percent in 2023 period amid a downturn in the industry but investment income was up, Fitch Ratings said, confirming the firm’s IFS rating of ‘BB(lka)’. The outlook is stable.

“The government’s weak fiscal position has resulted in fewer new construction contracts, the suspension of existing projects and payment delays to contractors. This has affected CGF through a drop in premium income,” Fitch said.

“Premium income plummeted by 87% in 2023 to LKR13 million on low guarantee volume amid a sluggish local construction sector.” (Colombo/Apr11/2024)

The full report:

Fitch Affirms Construction Guarantee Fund’s ‘BB(lka)’ National IFS Rating; Outlook Stable

Fitch Ratings has affirmed Sri Lankabased Construction Guarantee Fund’s (CGF) National Insurer Financial Strength (IFS) Rating of ‘BB(lka)’. The Outlook is Stable.


Weak Operating Conditions: CGF’s performance exhibits a strong correlation with government construction activity, as the company offers guarantees and related services to small- and medium-sized contractors involved in government projects. The government’s weak fiscal position has resulted in fewer new construction contracts, the suspension of existing projects and payment delays to contractors. This has affected CGF through a drop in premium income and a higher risk of claims by employers.

Underwriting Pressure: We expect underwiring performance to remain weak over 2024-2025 on low business volume.

Premium income plummeted by 87% in 2023 to LKR13 million on low guarantee volume amid a sluggish local construction sector, while claim costs increased by 10% and administration costs rose by 38% on investment-related withholding tax hikes. Consequently, Fitch calculates CGF to have incurred an underwriting loss of LKR107 million in 2023, from a profit of LKR16 million in 2022.

The company says the majority of outstanding guarantees do not carry claim risk, as they are extensions of existing guarantees granted for administrative purposes. Meanwhile, earnings were buoyed by a 61% rise in investment income on higher interest rates, with net profit reaching LKR333 million (2022: LKR285 million). Return on equity was 16%
and averaged 17% in the last three years.

Eased Investment and Liquidity Risks: Fitch believes investment and liquidity risks have eased following the positive rating action on the Sri Lankan sovereign’s Local Currency IDRs as well as on Fitch-rated Sri Lankan bank and non-banking financial institutions; see Fitch Upgrades Sri Lanka’s Long-Term Local-Currency IDR to ‘CCC-‘ and Fitch Affirms Ratings on 15 Sri Lankan Banks; Removes Watch Negative; CBL on Negative Outlook.

CGF adopts a conservative investment mix, with around 78% of invested assets held in cash and term deposits at state-owned Bank of Ceylon (Long-Term Foreign-Currency IDR: CC, National Long-Term Rating: A(lka)/Stable) at end-2023. Treasury bills accounted for the remainder.

Adequate Capital: Net guarantee risk exposure/total capital was 0.5x at end-2023 (2022:0.4x). CGF’s gross guarantee liabilities have fallen to LKR1.5 billion, from a peak of LKR12.0 billion in 2020, due to lower volume of new guarantees and a discontinuation of some projects. Total claim initiations since inception have been low, at LKR150 million, or 7.2% of end-2023 equity. Capital is supported entirely by internally generated net

Moderate Company Profile: We rank CGF’s company profile as ‘Moderate’ compared with that of other insurers in Sri Lanka, reflecting its ‘Moderate’ business profile and ‘Neutral’ corporate governance. CGF is fully owned by the state, with the secretary to the treasury functioning as the trust’s settlor. Its competitive position is strengthened by the expertise of its trustees, which comprise both public- and private-sector institutions. It has a small operating scale, with total assets and equity of LKR2.9 billion and LKR2.1 billion, respectively, at end-2023.

High Risk Appetite: We regard the fund’s risk appetite as high, as it provides guarantees to high-risk contractors, particularly small- and medium-scale contractors registered under the Construction Industry Development Authority’s National Registration Scheme, without requiring collateral. CGF attempts to mitigate this risk by conducting comprehensive screening of the contractors’ technical and financial capabilities. The board of trustees has set a cash collateral requirement of 20% for advance payment bonds.


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

– Rising investment and asset risk, including a downgrade of the ratings of financial
institutions or the sovereign ;

– Sustained weakness in financial performance or weaker risk management practices;

– A deterioration in the company profile, for instance, due to significant weakening in CGF’s association with the government, or a deterioration in its business risk profile, due to a decline in the country’s economic conditions that affects the domestic construction sector.

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

– Sustained improvement in the company profile in terms of a larger operating scale as
well as successful diversification into profitable and stable business lines.

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Indian FM meets Sri Lanka political leaders; focuses on committed deals

ECONOMYNEXT – Indian External Affairs Minister (EAM) S. Jaishankar met President Ranil Wickremesinghe and a range of political leaders during his visit to Sri Lanka, focusing on commitments made by Sri Lanka to India, including land and energy pipeline connectivity.

Sri Lanka has committed to renewable energy deals for the Indian Adani group, Trincomalee port development, an investment zone around the port, a bridge between the island nation’s Northern Mannar and South India’s Rameshwaram, a power grid, and an oil and gas pipeline between the two nations.

Though most of the committed projects have been discussed and some already signed, they face delays amid public protests, court cases on environmental concerns, anti-Indian sentiments triggered by high prices of renewable projects, local politicians as well as perceived Chinese influence, analysts say.

India has been pushing Sri Lanka to fast-track these deals under Prime Minister Narendra Modi.Jaishankar’s visit also comes ahead of Sri Lanka’s presidential polls later this year.

Jaishankar met President Wickremesinghe in a one-on-one meeting, Prime Minister Dinesh Gunawardena, and Foreign Minister Ali Sabry before delegation-level talks with Ports, Shipping and Aviation Minister Nimal Siripala de Silva, Agriculture and Plantation Industries Minister Mahinda Amaraweera, and Power and Energy Minister Kanchana Wijesekera.

“Appreciated the progress made on various bilateral projects and initiatives. Under President Ranil Wickremesinghe’s guidance, we discussed the way forward for India-Sri Lanka cooperation, especially in power, energy, connectivity, port infrastructure, aviation, digital, health, food security, education, and tourism sectors,” Jaishankar said on his official Twitter platform.

He also met former President Mahinda Rajapaksa, opposition leader Sajith Premadasa, and leaders of various political parties from the North, East, and the upcountry region.

“Interaction of EAM with the leadership of the Government of Sri Lanka provided an opportunity to review and accelerate progress in the multifaceted India-Sri Lanka partnership,” the Indian External Affairs Ministry said in a statement.

One of the key focus areas of discussion was the Vision Document adopted by President Wickremesinghe and Prime Minister Modi during the Sri Lankan leader’s visit to India in July 2023.

“Discussions added momentum to the ongoing projects as well as initiatives for promoting connectivity in all its dimensions, particularly in domains of energy, physical infrastructure as well as economic and people-to-people ties.”

Jaishankar also met leaders of Sri Lanka’s upcountry Tamils, who originally came from India as plantation workers. He discussed development and devolution of power with an eight-member delegation of Tamil leaders from the Northern and Eastern provinces, including Shanakiyan Rasamanikkam and M. A. Sumanthiran.

India helped Sri Lanka with financial and humanitarian aid when the island nation faced an unprecedented economic crisis amid delays by the International Monetary Fund loan to rescue Sri Lanka.

“Following Sri Lanka’s economic recovery and stabilization, forging deeper long-term economic cooperation was underlined as a priority for sustainable and equitable growth of Sri Lanka, and mutual prosperity in the Indian Ocean Region,” the Indian External Affairs Ministry said.

Though the Sri Lankan government has claimed that Jaishankar’s visit was a precursor to Indian Prime Minister’s visit, the Indian External Affairs Ministry did not mention anything about a possible Modi visit.

This visit is Jaishankar’s first bilateral visit after the formation of the new government.

The Adani wind power project in the Northern district of Mannar has seen some public protests over environmental concerns after some experts said the project has failed to conduct a proper Environmental Impact Assessment (EIA). Critics also protest against its transparency.

President Wickremesinghe, opposition leader Premadasa, and Marxist Janatha Vimukthi Peramuna (JVP) leader Anura Kumara Dissanayaka are expected to contest in the election to choose the island nation’s 8th leader.

Sri Lankan leaders have been under pressure from India in the past two decades amid increasing Chinese influence in the island nation, seen as a security threat to India, analysts say.

The docking of a Chinese nuclear submarine in 2014 led to a dramatic government change in the 2015 presidential poll with the ousting of former leader Mahinda Rajapaksa, who later accused India of orchestrating his defeat.

Rajapaksa’s brother Gotabaya in 2021 unilaterally canceled a key port terminal project given to India’s Adani group after promising Jaishankar to sign the deal.

Gotabaya Rajapaksa was later forced to flee the country in 2022 after mass protests due to his economic policies. (Colombo/June 21/2024)

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Sri Lanka car permit tax losses Rs14bn in two years of partial disclosure

ECONOMYNEXT – Sri Lanka has lost 14.3 billion rupees in taxes from car permits given to public servants, including doctors, military officers, central bankers, finance ministry and tax officials, in 2019 and 2020 information disclosed by the finance ministry shows.

Inclusive of some 2021 tax losses when imports were banned for the rest of the year, 14.4 billion rupees of foregone revenue from a waived luxury tax is shown.

The list only shows waivers of a so-called ‘luxury tax’ imposed on larger vehicles above a certain value and size.

The list does not show other vehicles imported under car permits such as double cabs or cars below a certain size.

The list also does not seem to include tax free cars imported by politicians.

In 2019, Sri Lanka has lost 8.3 billion rupees from the luxury tax on car permits and in 2019 the loss 5.92 billion rupees.

In 2021 when car imports were stopped as the central bank started printing money to cut rates and target ‘potential output’ only 85.6 million rupees were lost.

Among the biggest tax waivers of over 10 million rupees went to some doctors and military officers. Doctors were among the biggest users of tax slashed car permits in the list.

Sri Lanka at one time did not allow cars imported by state workers to be transferred for many years.

But reportedly after Customs raided a finance company involving a fleet of vehicles, the rule was relaxed by the then President.

Among the largest tax waivers listed were given to Rolls Royce and Maclaren assigned to Melwire Rolling (Pvt) Ltd.

The 45.6 million rupee Rolls Royce was given a 42.1 million rupee tax waiver.

The 41.46 million McLaren was given a 37.9 million tax waiver.

There were also a large number of Audi A5 and Q2 vehicles listed at prices over 80 million rupee. It is not clear whether the disclosure is an error. The market value of the A5 and Q2 are much lower.

Up to end 2023, 138 cars imported under a migrant worker remittance scheme was listed to lose 436 million rupees in luxury taxes.
The total for the three years was listed at 14.86 billion rupees, involving 2,034 cars in 2019 and 1,470 cars in 2020.

It is not known how much the total tax losses or total vehicle imported through ‘car permits’ is. (Colombo/June20/2024)

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Construction of Sampur solar power plant to begin mid-July

ECONOMYNEXT – Joint energy projects between India and Sri Lanka, including the Sampur solar power plant due to begin next month, took centre stage during bilateral discussions between president Ranil Wickremesinghe and visiting Indian External Affairs Minister S Jaishankar on Thursday.

Wickremesinghe and Jaishankar discussed initiatives aimed at enhancing energy connectivity and developing the renewable energy sector, a statement by his media division said.

“Significant attention was given to plans for an LNG supply, a proposed petroleum pipeline linking the two countries, and advancing oil and gas exploration projects. Additionally, it was announced that construction of the Sampur Solar Power Plant is set to commence in July 2024.”

The visit comes amid delays in key Indian projects including land, oil and gas pipe, and grid connectivity deals, Adani’s wind power plant deals which are facing a legal battle, and port and investment zone projects in the Eastern port district of Trincomalee.

Indian supported projects for developing Trincomalee and expanding the Kankasanthurai port, the ongoing development of Jaffna Airport and Colombo Airport, and the expediting the unique digital identity card project were discussed.

The efficiency of projects supported by the Indian government aimed at bolstering Sri Lanka’s liquid milk industry and fertilizer production, were also examined.

Sri Lankan leaders have been under pressure from India in the past two decades amid increasing Chinese influence in the island nation as the move is seen as a security threat to India, analysts say. (Colombo/Jun20/2024)

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