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Lankan stock market needs serious State intervention

Comments / {{hitsCtrl.values.hits}} Views / Friday, 12 October 2018 00:00


The ASPI decreased eight points or 0.14% to 5,872 on Wednesday 10 October from 5,880 in the previous trading session and on Thursday down to 5,840. Historically, the Sri Lanka stock market (CSE All Share) reached an all-time high of 7,811.82 in February of 2011 and a record low of 4,258.80 in June of 2010. 

According to analysts, net foreign selling of Sri Lanka’s stocks and bonds is nearing $ 500 million dollars for 2018. The outflows have been one of the key significant factor in the devaluation of Sri Lanka’s currency and also the declining foreign reserves.

Based on CSE data year-to-date in 2018, net foreign selling of Sri Lanka’s stocks and Government securities stands at Rs. 83 billion ($ 486 m). A net Rs. 77 billion has come out of Government bonds, while Rs. 6 billion has come out of the Colombo stock market

Current situation 

Many of the emerging markets have been hit recently by external shocks, as outflows from emerging markets have caused those countries’ respective currencies and capital markets to weaken very badly. The Sri Lanka Rupee (LKR) sits at an all-time low of Rs. 171 to the dollar, while the local stock market has been in the doldrums for the last six months, partially due to the sins of the past. 

Foreign reserves in Sri Lanka have declined in Sri Lanka from close to $ 8.6 b at the end of August to near $ 7.2 b by the end of September. The major stock market indices in the country, the ASPI and the S&P SL 20, are down close to 10% and 20% respectively for 2018. Trading volumes at the Colombo Stock Exchange have reduced significantly, in addition to the stock price declines, with most days registering just a few million dollars’ worth of transactions. The Government needs to intervene and manage this situation like yesterday. 

The declining foreign reserves and currency value have so far been combatted mainly with credit and import controls. There have been limited interventions in the currency markets. The Government needs to be proactive in addressing these challenges by engaging with the private sector and listening to them and taking action. 

US interest rates on US treasuries are set to get to 3.5%. Also US interest rates are very likely to cause further turbulence in emerging markets and with oil prices set to hit new price levels, Sri Lanka needs to think radically differently to get over this crisis 

Way forward 

A successful event was held this week at the London Stock Exchange which saw over 100 funds and investors participating and holding a host of one-on-one meetings with Lankan listed companies. This was followed by the symbolic opening of trading of the LSE by Prime Minister Ranil Wickremesinghe.

Having stocks in free-fall in Colombo would sort of put a damper on these efforts and therefore brokers and investors say State intervention through State institutions could help to create a “positive market environment” and could ease out once volatility and the continuing decline stops. 

For example, when China›s stock market started crashing earlier this summer, its Government responded, in part, by having a giant State-backed financial institution buy shares and support prices. Suffice to say, this is not how markets are typically managed in advanced economic powers. But Sri Lanka is an emerging market that needs State handholding when in a crisis. 

However, fighting to prop up equities prices may not be a good thing for the State if once again the prices promptly tank again. That is why Sri Lanka needs brilliant technocrats who can pioneer a new form of hybrid, State-private sector oriented capitalism. 

The country’s growth slowdown and market chaos has very quickly dampened that grand image we had three years ago as a top emerging nation, and now the running theory seems to be that the Government is run by a bunch of clueless incompetents who are about to crash the economy and the currency. Neither characterisation has been true or fair. 

The current Government is well-suited for industrialising and creating an export power out of the resources and location advantages we currently have; however, if Sri Lanka ever wants to become a truly advanced economy with thriving markets and attract FDI, we need to have sensible leaders who are willing to bite the bullet and do things very differently and thereby forge ahead courageously.

(The writer is a thought leader.)

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