Rising global oil prices a major concern

THE market showed a downward trend through out the week, with both indices falling notably compared to last Friday's peak closing levels. The ASPI (All Share Price Index) fell by 56.6 points or 2.6%, compared to last week, to close the week at 2122.5 points.

While, the MPI (Milanka Price Index) fell by 71.5 points or 2.5% compared to last week closing levels to close on Friday at 2788.1 points.

Interest on Telecom counters remained with Dialog retaining its position as the highest traded stock, for yet another week running with 7.7 million of its shares trading for the week. The share price fell slightly by 4.3% Week on Week to close the week at Rs. 16.50 per share.

Meanwhile, SLT saw approximately two million of its shares trade this week, closing the week at Rs. 22.25 per share.

Kelani Cables saw its prices shoot up by Rs. 43.75 per share amid a dividend and 1:1 bonus announcement. The Stock Exchange called for the cancellation of all trades that took place on Friday after an issue with regard to the release of the announcement.

Approximately 0.39 million of Kelani cables shares traded for the week closing the week at Rs. 162.50 per share. NDB shares saw its price appreciate by 6% or Rs. 11 per share on Friday to close the week at Rs. 195 per share.

Approximately 0.57 million of NDB shares traded for the week of which the most part of 0.5 million came on Friday.

The market turnover fell substantially by 49.1% Week on Week, to stand at Rs. 1.31 billion compared to Rs. 2.57 billion, recorded last week. The average daily turnover for the week stood at a low of Rs. 261.4 million.

Foreign investors remained net buyers for the week amounting Rs. 7.6 million. Foreign purchases for the week saw a substantial dip of 81.3% to stand at Rs. 138.7 million, compared to Rs. 742.7 million of foreign purchase recorded during last week. Foreign sales saw a similar trend falling by 67.2% to stand at Rs. 131.1 million for the week.

The foreign participation for the week stood at 10.3% falling notably compared to last weeks participation level of 22.2% of total activity. Dailog, Nawaloka, Vanik Incorporated, Reefcomber and Ceylon Glass were amongst the highest traded stock for the week.

Unlike prior hurricanes such as Ivan, Katrina could inflict a lot of pain on the US economy, as a whole, because of the potential for extensive damage to oil and natural gas supplies in the Gulf of Mexico, as well as to the many refineries in Louisiana.

It is still too early to determine exactly how much harm Katrina did but one thing certain is, a slow down in US economy over the next six months.

Hurricane Katrina - impact on Sri Lankan economy

Some of the Sri Lankan exports to USA, specially garments, may be affected in the medium term as a result of the slowdown in the US economy. On the other hand US may have to worry about recovering from their domestic natural disaster.

Thus we believe that Sri Lanka may have to look for the assistance from other nations in tsunami rebuilding exercise.

Accordingly, hurricane Katrina may not result in a significant direct impact on the Sri Lankan economy, though the indirect consequences can be sizeable, when looking at its impact towards the already escalating global oil prices.

Oil up... Up... and up...

Hurricane Katrina, continuing problems in the Middle East, heavy energy purchases by China, and refinery shortfalls have shown signs that the high-energy prices are here to stay, and if they do start to decline, they will only fall moderately over the next year or two. (See our oil update for further details) Global oil prices, which averaged around $56.50 per barrel in June, rose to average at $65 per barrel during August.

Sri Lankan economy is likely to come under severe pressure due to mounting global oil prices that may hurt a range of economic indicators that include inflation, Fiscal deficit, balance of payment, and forex reserves.

The rising global oil prices could be a major concern, as the Government is increasingly finding it difficult to subsidize fuel. Last month Government waived off the VAT on diesel and milk powder in a bid to control the escalating inflationary conditions.

Thus no price revision in domestic fuel prices means that the Government coffers would be further tightened with the subsidy mounting to as high as $200 million in 2005.

The balance of payment (BOP), which recorded a surplus of US$174 million during the 1H 2005, could come under severe pressure due to the rising oil bill.

The higher private remittances, official inflows to the government and the benefit of debt relief, were the main reasons for such a surplus and consequently the official international reserves stood at US$2.38 billion at the end of June.

We believe that both official reserves and the BOP would be adversely affected by the rising oil prices and the non-revision of the domestic oil prices.

Inflation reaches 12.8% in line with our projection

As projected by us the annual average CCPI touched 12.8% by end of August, with point-to-point inflation standing at 10.9%, compared to August 2004.

However CCPI dipped by 1% compared to last month as improved supply of key agricultural commodities, partly due to the Yala harvest, helped to a 1.68% drop in the food index.

These developments were perfectly in line with our projections. (Refer our Economy update, "Policy rates unchanged in August but a likely upward revision in September" released on 18th August 2005).

Dip in food prices off set the rise in oil

Due to seasonal trends Food index, which represents nearly 62% of the total basket of goods, take a breather during the months of July and August.

Despite a deviation during July (in July, Food Index increased rather than decreasing), seasonal pattern returned in August as the 1.68% dip in food index, helped to off set a 0.41% increase in the fuel index.

Our projections indicate that the inflation (annual average CCPI) would settle down at 11.3% by end 2005, a marginal dip from the current levels mainly due to the higher base value since January 2005.

With more pressure on domestic fuel prices, we believe that the inflationary scenario can get further worsened unless cautious measures are applied.

Market mixed

Market struggled to beat the upward resistance, as both indices succumbed to selling pressure. However volatility was seen in most part of the week, with market taking a breather towards the latter part of the day after gaining during early hours of trading.

We expect a similar trend to continue in the coming week with both indices likely to respond to mergers and acquisitions in the political front.

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