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Sri Lanka's debt market activities are expected to grow further this year following improved economic conditions coupled with disciplined fiscal management policies, CEO, First Capital, Ajith Devasurendra said.

The Primary Dealing community continued to benefit from plummeting government securities yield in the year 2002 as in the year 2001, with the benchmark one-year treasury bill rate steadily declining by 274 basis points, exposing investors to an enormous capital gain opportunity, he said.

First Capital results

Referring to the growth of his company - First Capital Treasuries Devasurendra said it has recorded a significant growth in the year 2002 posting the highest profit so far since incorporation with the net profit for the year rising to Rs. 214 million from Rs. 157 million the previous year. This was an increase of 36%, he said in the annual report in 2002. The improved industry outlook with the decline in interest rates and the extension of the government securities yield curve helped the market players to strengthen their bottom lines.

Devasurendra attributed this success to its highly skillful staff and technology which has been even expanded to benefit customers.

"Our focus last year was to consolidate the already automated systems, with the lost amount of human intervention from deal entry up to accounting.

Our plan for this year is to contribute our best to develop the country's money markets. In this effort, we will be expanding the business into other areas in the country by way of awareness campaigns," he said.

Interest rates

The year 2002, after a long lag, witnessed some discipline in the fiscal management. The budget deficit for the year was estimated at only Rs. 5 billion higher than the actual target. In previous years the deviation had been much higher. This helped ease the pressure on the interest rates, Devasurendra said. In addition, the decline in inflation, improved liquidity in the money market and stability in the exchange rate too helped reduce overall interest rates.During the year inflation depicted a gradual decline as the consumer price levels showed some sort of stability. The annual average inflation dropped to 9.6% from 14.2% of the previous year.

Comparatively higher price levels that prevailed throughout last year, reduced the inflationary pressure on the current year. The economic recovery supply side of the economy improved, easing the price levels, especially agricultural goods. Though the money supply has been growing at 16%, the inflation has been edging down. In addition, the low moderate level of the currency devaluation of the year too helped price stability in the country, he said.

Referring to the debt markets as an industry, Devasurendra said that the positive liquidity position throughout the year and low private sector credit demand led to a diversion of liquidity to investment in government securities. The continuous issue of Treasury Bills and Bonds, with the extension of the longer term bonds from three years to six years also helped the secondary market trade actively and remain optimistic, while broadbasing market boundaries. Thus, improved depth in the secondary market, along with interest rate volatilities helped Primary Dealers turnaround inventories many times, as in the year 2001, he said.

In the aftermath of the issue of Sri Lanka Development Bonds in the forth quarter of 2001, the year began with a positive liquidity position. With the release of Central Bank profits, the liquidity positioning further strengthened in February. Once again with the issue of balance tranche of Sri Lankan Development Bonds of US $ 90 Mn, the market liquidity became a surplus, and that surplus continued to remain in the market.

Meanwhile, during this period the Central Bank continued to release liquidity by way of purchasing bills from the auctions and retiring Treasury Bills.

The availability of foreign resources in the second half of the year helped maintain a healthy liquidity position in the money market.

The improved and consistent liquidity surplus position that prevailed during the year helped easing the interest rates.

The Central Bank played an active role in the market guiding the exchange rate to desired levels. However, since end March the rupee held strong against the US dollar and the annualised rupee depreciation edged down 3.9%.

With the dollar weakening in the international markets due to adverse market conditions that were prevailing in the US economy and slower than expected economic recovery, the rupee stood firm against the dollar.

The improved trade balance and overall balance of payments, reduced the pressure on the demand for dollars. With comparatively lower US dollar interest rates, most of the exporters were encouraged to covert the proceeds to rupees, which helped improve supply in the market, he said.

Internal systems and skills

"We expect to focus more on improving Management Information Systems and Risk Management this year. In this regard, key senior personnel have been afforded overseas training to provide risk-based controls to minimise risk on the balance sheet of the company."

Industry development

The Company places due emphasis on the need for Human Resource Development of the staff, which is invaluable for its progress. Identifying the training needs relevant to their jobs and developing them has yielded successful results in improving performance during the year. We will continue to focus our attention on training and development, as Human Capital is an important asset in our organization.

However, Devasurendra said that the absence of a central depository system to facilitate scripless trading of securities continued to hamper operations. "The proposed installation of the Scripless Securities Settlement System (SSSS) and the Real Time Gross Settlement System (RTGS) by Logika UK Ltd by September 2003 will result in vast increases in market volume by eliminating the drag of physical conveyance of securities.

It is believed that volumes may increase by at least six times compared to the present levels during a two-year period, as experienced by countries which have implemented RTGS and Central Depository Systems."

The Primary Dealer Community has already started Forward Rate agreements and Interest Rate swaps to afford risk minimisation tools to investors in line with products introduced in developed debt markets across the world.

Infrastructure development such as the Bloomberg Trading System which is expected to be operational from March 2003 and the RTGS and SSSS expected to be operational from October 2003. "These initiatives would make a positive impact on the industry," he said.

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Copyright 2001 The Associated Newspapers of Ceylon Ltd.
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