Sri Lanka hotels mull rupee pricing to avoid exchange rate risk

May 14, 2011 (LBO) – A volatile rupee against the Sterling Pound and Euro has made forward pricing a risky business for Sri Lanka’s tourism sector which wants to price hotels in the local currency to avoid exchange rate risk, a senior executive from John Keells Holdings said. However despite economic problems in the PIG economies (Portugal, Italy and Greece), the Euro and Sterling Pound has held ground albeit with much volatility against the Sri Lankan rupee.

“We hope we will in the not-so-distant future start quoting in (Sri Lankan) rupees,” Vasantha Leelananda, head of John Keells Holdings leisure inbound sector said.

“This is what India did two to three years ago when they were in absolute high demand.”

Leelananda was a panelist at the inaugural CIMA LBR-LBO Colombo Forum, on currency fragility and its impact on developing countries attended by a large number of senior corporate executives held recently.

The tourism sector has seen a renaissance in the last two years with a record number of arrivals from south Asia and Europe, who have come to soak up the sun and experience Sri Lanka’s cultural heritage.

In 2010 the leisure sector raked in over 500 million dollars.

Leelananda said the winter 2011 brochure’s are marketed to potential visitors in August, but the prices are contracted as early as March. Visitors who ultimately arrive to Sri Lankan shores pay at prevailing rates.

A volatile currency is making hoteliers nervous as a significant movement the opposite way can turn margins into losses.

He said pricing with the dollar was less risky as the greenback was much more stable against the rupee, but wild swings in the Sterling and Euro has made pricing difficult; especially against competing markets is Asia.

“If you look at US dollar on May 01 (2009) it was 116 (against the rupee), in 2010 it was 113.00 rupees and in 2011 it was 109.00 rupees, so the rupee’s strengthening has been consistent and following a pattern,” Leelananda said.

“But the Euro in 2009 was at 159.00 rupees, in 2010 it was 143.00 rupees and again on 2011 it was 162.00 rupees and today I believe it was 155.00 rupees so the volatility is very, very rapid.

“Looking at the Sterling in May 01t 2009 it was 179.00 rupees, in 2010 it was 166.00 rupees, and we see a big variance there and then again catching up to 182.00 rupees in 2011.”

Most large tour operators hedge their currency risks via forward contracts, but have to pay large premiums to cover wide price bands.

The Sri Lankan rupee since the end of the 30-year ethnic war has consistently appreciated against the US dollar, which has also depreciated against almost all major currencies owing to loose American fiscal policy.

The US budget deficit is estimated to hit 1.5 trillion dollars in 2011, while total debt is expected to increase to 15 trillion dollars.