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Monday June 3rd, 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.

KEY RATING DRIVERS

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
surplus.

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.

RATING SENSITIVITIES

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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Water levels rising in Sri Lanka Kalu, Nilwala river basins: Irrigation Department

ECONOMYNEXT – Sri Lanka’s Irrigation Department has issued warnings that water levels in the Kalu River basin are rising and major flooding is possible due to the continuous rain. People living in close proximity are advised to take precautions.

“There is a high possibility of slowly increasing prevailing flood lowline areas of Kiriella, Millaniya, Ingiriya, Horana, Dodangoda, Bulathsinhala, Palinda Nuwara and Madurawala D/S divisions of Ratnapura and Kalutara Districts, up to next 48 hours,” it said issuing a warning.

“In addition, flood situation prevailing at upstream lowline areas of Ratnapura district will further be prevailing with a slight decrease.

“The residents and vehicle drivers running through those area are requested to pay high attention in this regard.

“Disaster Management Authorities are requested to take adequate precautions in this regard.”

The island is in the midst of south western monsoon.

DMC reported that 11,864 people belonging to 3,727 families have been affected due to the weather in Rathnapura, Kegalle, Kilinochchi, Jaffna, Mullaitivu, Kalutara, Gampaha, Colombo, Galle, Matara, Hambantota, Puttalam, Kurunegala, Kandy, Nuwara Eliya, Anuradhapura, Polonnaruwa, Badulla, Moneragala, and Trincomalee districts.

Meanwhile, the Meteorology Department stated that showers are expected on most parts of the island today.(Colombo/June3/2024)

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UNP gen secy defends call for postponing Sri Lanka poll, claims opposition silent

The UNP party headquarters in Pitakotte/EconomyNext

ECONOMYNEXT — United National Party (UNP) General Secretary Palitha Range Bandara has defended his call for postponing Sri Lanka’s presidential election by two years, claiming that his proposal was not undemocratic nor unconstitutional.

Speaking to reporters at the UNP headquarters Monday June 03 morning, Bandara also claimed that neither opposition leader Sajith Premadasa nor National People’s Power (NPP) leader Anura Kumara Dissanayake have spoken against his proposal.

“I have made no statement that’s undemocratic. My statement was in line with provisions of the constitution,” the former UNP parliamentarian said.

He quoted Section 86 of Chapter XIII of the constitution which says: “The President may, subject to the provisions of Article 85, submit to the People by Referendum any matter which in the opinion of the President is of national importance.”

Sections 87.1, 87.2 also elaborates on the matter and describes the parliament’s role, said Bandara.

“I spoke of a referendum and parliament’s duty. Neither of this is antidemocratic or unconstitutional. As per the constitution, priority should be given to ensuring people’s right to life,” he said.

“Some parties may be against what I proposed. They may criticse me. But what I ask them is to come to one position as political parties and make a statement on whether they’re ready to continue the ongoing economic programme,” he added.

Bandara claimed that, though thee has been much criticism of his proposal for a postponement of the presidential election, President Wickremesinghe’s rivals Premadasa and Dissanayake have yet to remark on the matter.

“I suggested that [Premadasa] make this proposal in parliament and for [Dissanayake] to second it. But I don’t see that either Premadasa nor Dissanayake is opposed to it. To date, I have not seen nor heard either of them utter a word against this. I believe they have no objection to my proposal which was made for the betterment of the country,” he said. (Colombo/Jun03/2024)

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Support for AKD drops to SP’s level while RW makes gains, Sri Lanka poll shows

ECONOMYNEXT — Support for leftist candidate Anura Kumara Dissanayake dropped six percentage points to 39 percent in April, levelling with opposition leader Sajith Premadasa, while support for President Ranil Wickremesinghe increased three points to 13 percent in a presidential election voting intent poll.

The Sri Lanka Opinion Tracker Survey (SLOTS) conducted by the Institute for Health Policy showed that, according to its Multilevel Regression and Poststratification (MRP) provisional estimates of presidential election voting intent, National People’s Power (NPP) leader Dissanayake and main opposition Samagi Jana Balawegaya (SJB) lader Premadasa were now neck and neck while United National Party (UNP) leader Wickremesinghe had made some gains. A generic candidate for the ruling Sri Lanka Podujana Peramuna (SLPP) had the support of 9 percent of the people surveyed, up 1 percentage point from March.

These estimates use the January 2024 revision of the IHP’s SLOTS MRP model. The latest update is for all adults and uses data from 17,134 interviews conducted from October 2021 to 19 May 2024, including 444 interviews during April 2024. According to the institute, 100 bootstraps were run to capture model uncertainty. Margins of error are assessed as 1–4% for April.

SLOTS polling director and IHP director Ravi Rannan-Eliya was quoted as saying: “The SLOTS polling in April suffered from a lower response rate owing to the New Year holidays, and we think this may have skewed the sample in favour of SJB supporters. The early May interviews partly compensated for this, and it’s possible that our June interviews may result in further revisions
to our model estimates.

Rannan-Eliya also noted that a number of other internet polls may be overestimating support for the NPP or its main constituent party the Janatha Vimukthi Peramuna (JVP) by about 10 percent.

“We’ve been asked about some other recent internet polls that showed much higher levels of support for the NPP/JVP. We think these over-estimate NPP/JVP support. SLOTS routinely collects data from all respondents on whether they have internet access, and whether they are willing to participate in an internet survey. These data show that NPP/JVP supporters are far more likely to have internet access and even more likely to be willing to respond to internet surveys, and this difference remains even after controlling for past voting behaviour. Our data indicates internet polls may overestimate NPP/JVP support by about 10 percent, and for this kind of reason we have previously decided that the time is not right to do internet polling,” he said.

According to the IHP, its SLOTS MRP methodology first estimates the relationship between a wide variety of characteristics about respondents and their opinions – in this case, ‘If there was a Presidential Election today, who would you vote for?’– in a multilevel statistical model that also smooths month to month changes. It then uses a large data file that is calibrated to the national population to predict voting intent in each month since October 2021, according to what the multilevel model says about their probability of voting for various parties (‘post-stratification’) at each point in time. The multilevel model was estimated 100 times to reflect underlying uncertainties in the model and to obtain margins of error, the institute said. (Colombo/Jun03/2024)

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