By Srian Obeyesekere
It was a bright rainbow year just gone by for the Sri Lankan economy which has showed tremendous economic momentum with the island reaping the initial fruits of peace in terms of an improvement in business confidence amidst benign macro economic fundamentals.
The sky high news greeting the country was the Central Bank of Sri Lanka, which released its ‘Roadmap 2011’ a fortnight ago, stating that key sectors of the economy returned to the high growth trajectory having achieved impressive performances in 2010. According to its estimates, Sri Lanka’s Gross Domestic Product (GDP) last year is expected to have grown by 8 per cent. The banking regulator has also projected that GDP will grow by 8.5 per cent in 2011, 9 per cent in 2012 and to 9.5 per cent by end 2013.
In light of this development, the Bottom Line spoke to some of the corporate leaders from key industries to get their views on the likely prospects for this year and the challenges that will be existent in the sector.
Following are the comments from these imminent personalities interviewed.
Tourism
“The year 2011 is expected to be a landmark year in putting Sri Lanka on the road to economic development on the back of a booming tourism drive during the year while providing employment for 1.2 million youth. However, rosy as the picture looks for the future, it will be not be plain sailing. There are several hurdles facing various industries from tourism to apparel and ceramics that need to be positively addressed in climbing to the mountain top. With Sri Lanka looking at an all time high of 700,000 tourists this year, the industry is expected to accelerate national development on all fronts utilising an abundance of natural resources and crucially giving a fillip to the burning unemployment problem,” Tourists Hotels Association of Sri Lanka, (THASL) president Anura Lokuhetty said.
Accordingly, he said that 2011 will give the impetus to all round industrial development including agriculture, fisheries and the cottage industry while heading for an all time record 2.5 million arrivals in 2016 as envisaged by President Mahinda Rajapaksa.
“Tourism has a great multiplier effect and at least 20 per cent of the country’s population will be dependant on tourism. It would help eradicate social problems as well which was a key factor to a sound economy and a healthy nation. With employment opportunities created at home, the nasty effects to families by people working abroad will also be overcome,” he said.
However, he cautioned that with the vast abundance of natural resources and with peace prevailing in the country, we must not be over enthusiastic about it and impose any restrictions on various accessibilities in tourism in Sri Lanka that would deter tourists.
We have seen an online visa requirement to obtain visas prior to coming to Sri Lanka. However, restrictions should be introduced by the government from time to time in a ‘customer friendly’ manner,” Lokuhetty added.
He also noted that for tourism to improve Sri Lanka needs 15,000 more rooms.
“With international companies like Shangri La interested in building hotels in Sri Lanka, tourism development should accordingly be done in a sustainable manner. Loans in that respect and good locations should be utilised only for five-star hotels and up market boutique hotels so that the clientele would be different to three-star and four-star hotels. The latter should be clustered and not isolated.”
Simplification of taxes and a few clarifications were required. But importantly, changes in tourism development should be in such a manner as to encourage investors. There should be no sporadic charges of taxes and additional burdening on hoteliers because hotel related foreign companies come here to earn profit.
Five-star hotels should have a minimum rate to sell rooms. This would help improve revenue to the industry. It was also important to realise that not only the number of guests matter, but that also their duration of stay was a key to revenue. In this respect, marketing efforts should encourage tourists specially those from the West to stay longer in the country.
IT Industry
Meanwhile, the IT industry is making vast strides in the knowledge economy sphere with more and more students and kids moving into it. The chairman of Sri Lanka Association of Software and Service Companies (SLASSCOM), Dinesh Saparamadu predicted a very bullish 2011 for the industry since more and more interest is shown by international companies in setting up their businesses in Sri Lanka.
“This is going to be a good year for the IT industry. The knowledge services prospects are very good and the industry is set to become more vibrant in Sri Lanka. International companies are making more and more inquiries to start enterprises in Sri Lanka and therefore, the IT industry may come into fusion with more international companies setting up business in Sri Lanka and working with local companies in so much as making their ventures or joint partnerships very successful,” opined the SLSSCOM chairman.
Saparamadu stressed that both the IT and Knowledge Services or BPO export market was very interesting and that there are lots of opportunities in the knowledge services export market for IT people to see their products and services.
He also stressed that the IT industry was so vibrant that the huge demand for knowledge economy was not only prevalent in Sri Lanka but across the globe. It is more from the demand side. In the supply side, we have seen a keen interest from students and parents in IT/BPO as a career which will definitely help the industry to grow, said the SLASSCOM chairman while urging Sri Lankans to get firmly involved with the fast moving IT industry.
Apparel
In the enchanting apparel industry where garments are a prized obsession in the fashion world, there are serious constraints in terms of diversifying the industry into the international market following the EU withdrawal of the GSP+.
The impact of the withdrawal of the GSP+ facility last year together with escalating costs of production could affect the apparel industry after March this year, according to Sri Lanka Apparel Exporters Association chairman Rohan Abeykoon.
“If the status quo on the external factors that are bringing business into Sri Lanka change like capacity issues in Bangladesh together with reliability issues and price hikes in China, then the loss of the GSP+ and high production costs could begin to have its ill effects on the industry, “ he said.
He stressed that it is imperative that the apparel industry grows in 2011 because it was going to be a key year post GSP+.
“This is in keeping with the five year strategy of the industry to grow into a US$ 5 billion industry by 2013,” Abeykoon said.
He said the industry will face some challenges like rising costs, exchange rate fluctuation, loss of GSP+, cheaper sources with concessionary benefits and capital for expansion.
He also emphasised that risk management will also be key for growth in 2011 because it was hard to maintain consistent margin pricing on a macro level unless the entity was supplying a niche customer.
The target for the year, he said should be around US$ 3.5 billion in keeping with the growth plan over the next five years.
“We need to look to grow business into other EU member states other than specifically the UK. But that opportunity has been negated with the loss of GSP+. And margins were coming down for exporters too as a result,” he further opined.
Sri Lanka’s premier marketable products are niche items like lingerie, high value dresses, high performance apparel and value added products, Abeykoon added.
“Our strengths are being world-class manufacturers, highly compliant and ethical, environment friendly, reliability, good quality, logistic excellence and innovativeness. Our weaknesses are poor backward integration, costs, speed to market, distance to market and general lack of productivity while the opportunities were mainly branding,” he said adding that the threats to the industry were bilateral and multi lateral agreements between trading blocks and labour shortages.
The apparel industry which picked up since September 2010 from a downward trend in the first eight months to reach a Rs.3 billion mark expects a similar trend to continue in 2011 to go up to 5 per cent to 6 per cent, according to secretary general, Joint Apparel Association Forum (JAAF), Rohan Masakorala.
“We performed well because of the recovery from the global economic crisis. Therefore, we have seen increased volumes in our two main export markets, Europe and the US,” he said.
Masakorala went on to elaborate that the industry is focussing on targeting new export markets like Japan, China, Russia and India towards converting the product portfolio into a high end product.
He, however, observed that ‘we are cautious because the economic recovery is not at full strength.’
Making the ‘Made in Sri Lanka’ label synonymous with quality, reliability and social and environmental accountability in the global context is been given top priority by the JAAF, disclosed M Raghuraman, executive vice president of Brandix Apparel.
“In this respect we are working together to come up with business models that will rely more on the business fundamentals. And the industry is gearing up to leverage its position in the region and offer hub services to the retailers and brands,” he said emphasising that importantly ‘preferential market access is important for a small country without a significant market of its own.’
“We see a high demand in the market but with significant price pressure. The appreciation of the Sri Lankan Rupee, cotton prices being at an all-time high, retail prices still being sluggish have all created enormous price pressures. Our customers’ margins have also been impacted thereby affecting us,” Raghuraman observed.
He pointed out that this unsatisfactory situation was largely due to the unique environment that the apparel value chain operates in. As a result of decades of quota restrictions and a proliferation of preferential market access instruments, the industry kept moving towards the cheapest sources of labour or availability of free trade agreements and not necessarily to locations where the fundamentals were right. This fragmented supply base, purely driven by cost, had little reason to innovate or even the funds to do so.
He stressed that Sri Lanka, as a country, was maximising on the strong reputation that has been built as a reliable supply in every way – this reliability is not only in terms of the ethical and environmental positioning but also the reliability on steady supply without disruptions even through the three-decade-old war.
As to the challenges the industry faced, he opined that it was evident that the scope of innovation was significantly enhanced by the research and development which can only be afforded by companies who have built sufficient scale.
“We need integration that not only streamlines the value chain but also is large enough to afford such an investment,” Raghuraman added.
On the export front, the market in terms of apparel had picked up in the second half of last year. This had been due to a combination of customers placing more orders post-recession and also due to the business migrating to the country with the rising costs in China as well as various other issues cropping up in the Asian region.
“We forecast that this current trend will continue on to 2011 as well. As a company, the remarkable growth rate which we achieved right throughout the year despite the various challenges in the global apparel industry was most encouraging. The company’s strategic plan is to make Sri Lanka a hub for the sub-continent, whilst growing its manufacturing base both in Sri Lanka and the region,” he said.
He said that this will enable the industry to leverage our inherent strengths, our experience, customer contacts and technical knowledge and couple them with the vast resources and human capital available in the region to bring about exciting new growth prospects for Brandix.
As to the future prospects of 2011, Raghuraman said that aggressive plans are in place to further expand our growth from that of last year.
“We are confident that the results generated will speak for themselves,” he added.
Looking at the new markets for 2011, he revealed that once again plans are in place to penetrate into more diversified markets and regions.
“However, our main concentration will be on servicing and further enhancing relationships with our key customers whilst constantly providing them with our value proposition of being the inspired solution for branded clothing with added attributes of Speed, Innovation and Passion,” he stressed.
Banking
In the banking sector, prospects were high with the profitability of the banks expected to improve during 2011, the managing director of Hatton Nation Bank (HNB), Rajendra Theagarajah told The Bottom Line.
“The banking sector will benefit due to the reduction in the VAT and corporate tax rates during the year,” he said.
Theagarajah said a major issue on liquidity could not be seen because currently the banking sector excess liquidity amounts to more than Rs 100 billion. Further, due to a fair growth in the deposit base during 2010, there was no major issue on liquidity seen in the short to medium-term. However, the huge excess liquidity currently seen in the market will be absorbed by the anticipated loan growth.
He reiterated that the banking sector is likely to benefit from the tax and VAT reduction which will positively contribute towards the bottom line of banks
Among the challenges facing the banking sector he identified was to: (a) Build capacity in term of human capital to support the anticipated growth: (b) Change the conservative mentality to take advantage of the growth opportunities: (c) Attract tier 1 and 2 capital to support growth and maintain capital adequacy ratios: (d) Streamline process and procedures to handle increased volumes by reducing turnaround time; (e) Have proper risk management practices in place to preserve loan quality despite aggressive loan growth and to increase productivity and reduce cost to counter the reduction in margins.
Ceramics
The GSP+ has had a major impact on the ceramics industry affecting companies exporting to Europe. Bangladesh which has duty free access to Europe under another scheme is the biggest competitor, chairman, Dankotuwa Porcelain Limited Sunil Wijesinghe commented.
As to the prospects for 2011, he said, “The domestic-oriented companies such as tiles will do very well because of the buildings and refurbishments using tiles, the export-oriented tableware companies will find it very difficult to survive. However, the appreciation of the rupee and the creeping inflation this year will be a key concern”.
The chairman said that ‘while Dankotuwa was focussing more on the Indian and local market and other unexplored markets, exports for 2011 were going to be very tough.
“Markets are going for cheaper sources and during a recession, they are less concerned about quality. Exports for 2011 are going to be very tough. That is because markets are going for cheaper sources,” the chairman pointed out.
source - www.thebottomline.lk
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