Sri Lanka business looks to manage interest, exchange volatility

April 29, 2008 (LBO) – Sri Lanka’s top business chamber is hosting a forum to provide deeper understanding of exchange rate and interest rate hedging amidst high volatility seen in recent years. “Sri Lanka has been experiencing chronic high interest rates and frequent exchange rate fluctuations and this has become a hotly debated topic in both business and academic circles.

“High inflation in Sri Lanka has pushed interest rates upward causing a sharp increase in the cost of borrowing for businesses,” the CCC said in a statement.

“The interest and exchange related risks however could effectively be managed by using hedging instruments such as derivatives and other financial techniques.”

Rising and fluctuating interest rates has affected company cashflows, while exchange rate fluctations have affected importers and exporters, making business planning difficult.

“In addition to this, the global demand is contracting due to the credit crisis and the recessionary situation in the west, impacting on the bottom line of companies,” the Ceylon Chamber said.

“All these factors make cost management increasingly important, not only to remain competitive but also to survive in such a turbulent environment.”

Instruments that could be used to hedge future risks included forwards, futures, options and swaps. By fixing the future prices of commodities, foreign exchange or interest rates, companies could reduce uncertainty about the future.

“Effective management of the capital structure using debt and equity and short/long-term debt also becomes important when the cost of borrowing increases,” the chamber said.

“High interest rates increase cost of capital and could lead to cash flow problems for companies that have not looked at scenarios and planned for it.”

The Ceylon Chamber training seminar to be held on May 09, would be chaired by John Keells Holdings group director Ronnie Pieris.

Central Bank deputy governor W A Wijewardene would speak on the Basic Economics behind Interest and Exchange Rate Fluctuations, Frontier Research chief executive Amal Sanderatne would present an outline on the Sri Lankan economy.

Ajith Devasurendra, head of the Taprobane group will speak on managing interest rates and related risks, Brandix finance director Trevine Jayasekera on structuring capital effectively and Lanka Wealth Management chief Mangala Boyagoda on managing forex flows and reserves.