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Stock market loses Rs. 52 b in value, loss tops Rs. 400 b in just over two months

Comments / {{hitsCtrl.values.hits}} Views / Wednesday, 9 March 2016 00:00


The Colombo stock market yesterday lost Rs. 52 billion in value, bringing the total to exceed Rs. 400 billion in just over two months of trading, as investor concerns heightened against constant changes in fiscal policies.

The benchmark All Share Index shed 2% yesterday to dip below 6,000 points level and languish at nearly two-year low as investors prepared for some bad news for capital markets including reintroduction of Capital Gains Tax and yet another revision in fiscal policies via a special statement by Prime Minister Ranil Wickremesinghe in Parliament later in the afternoon.

To shore up much-needed revenue to settle mounting debt accumulated by the former Rajapaksa regime, the Prime Minister announced Value Added Tax (VAT) rate will be increased to 15% from the 2016 Budget move of 11%. This will bring in an additional Rs. 85 billion according to tax experts. Reversing another 2016 Budget decision, the Government yesterday hiked income tax rate to 17.5% from 15%.

Without specifics, the Government also announced Capital Gains Tax will be introduced for the first time since 1987.

Though new tax policies have irked capital markets and corporate sector, most analysts as well as the Government have justified the move given the precarious fiscal management issues.

The Prime Minister told Parliament the Government owed Rs. 9.5 trillion, as he revised some of the main Budget numbers presented in November. He said the former Government headed by Mahinda Rajapaksa had not included Rs. 1.04 trillion in borrowing by State enterprises in the national debt, which was estimated at Rs. 8.48 trillion at the end of last year. The country has to pay Rs. 1.21 trillion on its debts this year, including Rs. 562 billion in interest.

“This crisis can be overcome only by reducing the budget deficit and a medium-term joint financial program aiming at suitable reforms to reduce the debt burden,” Wickremesinghe told the Parliament.

The stepped up taxation moves also comes amidst the Government’s talks with the International Monetary Fund (IMF) for a stabilisation program. A team from IMF is due later this month for the finalisation of the program, for which the Government was told it has to fix the low revenue effort in the 2016 Budget exercise to a more desired level given the high debt burden and State expenditure, some of which were to bolster the stimulus promised during elections in 2015.

Reports indicated that the Government was looking for $ 1.5 billion in IMF assistance but others said the figure would be higher.

The IMF has long called on Sri Lanka to reduce its budget deficit, raise revenues, and bolster its foreign exchange reserves. These are likely to be the main conditions for the grant of a loan, economists say. In that context IMF loan to boost foreign exchange reserves and avert a balance of payments (BOP) problem.

In 2015 the trade deficit expanded marginally by 1.7% to $ 8.4 billion but the overall BOP is estimated to have recorded a deficit of $ 1.5 billion compared to a surplus of $ 1.37 billion in 2014 on account of heavy outflows and lower than expected inflows, especially foreign remittances.

Whilst improved fiscal management would augur well for the economy and thereby to the stock market, inconsistency and revisions have shaken private sector and investor confidence as well as dimmed outlook for future corporate earnings.

“The Government is responding to an urgent revenue need,” Anushka Wijesinha, the Chief Economist of Sri Lanka’s main business chamber, was quoted as saying by Reuters. “But ad hoc tax policy changes like these will hurt investor sentiment. The credibility of the Budget is lost.”

This pessimistic view may dampen stock market activity today, accordingly to analysts unless investors take heart from damage control measures by the Government.

“The interest in the share market will be down, while the Capital Gains Tax will be one of the main concerns,” Reuters quoted Danushka Samarasinghe, Research Head at Softlogic Stockbrokers as saying yesterday. “Trading will be choppy and the index may fall as much as 10% in the near future.”

Other analysts said the Government has no choice, but to raise taxes in order to increase its revenue and reduce budget deficit, which have been the long request of the IMF.

Pointing to attractive valuations at least on paper, Reuters said the All Share Index remained in oversold territory for the ninth straight session, with the 14-day relative strength index at 13.645 on Tuesday, compared with Friday’s 18.647 as per Thomson Reuters data. A level between 70 and 30 indicates the market is neutral.

With yesterday’s fall the ASI closed at 5,934.72, the lowest finish since 24 March 2014. It has fallen 4.2% in the last six straight sessions through Tuesday. Year to date the decline is 14% on top of the 8% negative growth in 2015, the first in past three years.

However a redeeming feature yesterday was net foreign buying in the market to the tune of Rs. 244 million whilst overall turnover was Rs. 900 million. Year to date net foreign outflow nevertheless was Rs. 924 million.

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