The Mobius mantra for Sri Lanka growth

Well-known investor and emerging markets guru Dr. Mark Mobius during his recent visit to Sri Lanka placed the odds of returning to strong growth in the country’s favour, provided the Government moved efficiently to implement policies, which include establishing an investor-friendly environment and competitive tax regime.

Dr. Mobius, who is a founding partner of the Templeton Emerging Markets Group, which is estimated to be worth $ 50 billion, and is widely recognised as the architect of the emerging markets asset class, sat down with the Daily FT during his jam-packed visit to give his assessment of Sri Lanka’s opportunities and challenges. Below are excerpts of the interview:

By Uditha Jayasinghe 

Q: As this is your first visit after the Presidential Election, what were your first impressions? 

A: It’s very positive. We are seeing a much more positive and even aggressive move to reform things and to get things moving again, so it is very exciting. It’s a good time to be here and to see these changes. 

Q: The need for reforms has been discussed for some time. In your view what should be the key reforms the Government must focus on? 

A: Taxes, this does not necessarily mean a tax reduction but a tax simplification. I believe they are also focusing on making taxes competitive in comparison the other countries in the region. The second one would be foreign exchange reforms so that it is easier to bring money in and out of the country. The third would be travel, to make things much easier for the tourism industry concerning travel and other necessary support such as rapid expansion of the airport and other measures. I think that could be done using modular techniques to improve the flow in and out of the airport. 

Another big reform that is needed is the development of financial markets. One of the things that can be encouraged locally is the domestic bond market, there has to be a much more vibrant bond market. A lot of people don’t seem to realise there is an awful lot of money here, but it’s overseas or under the mattress because people are not putting it into financial instruments. That market has to be made more attractive and liquid so that is a very important point.   

One of the things that can be encouraged locally is the domestic bond market, there has to be a much more vibrant bond market. A lot of people don’t seem to realise there is an awful lot of money here, but it’s overseas or under the mattress because people are not putting it into financial instruments. That market has to be made more attractive and liquid

Q: What do you think needs to be done to develop the domestic bond market? 

A: One, issue more domestic bonds; two, simplify and encourage the development of a liquid bond market; and three, make sure you start listing Government enterprises. I know the Government is hesitant about this. We should not use the word privatisation. I’m not talking about privatisation. I’m talking about listing. You could list 5% or 10% of the stocks but list the entire equity capital of the State Owned Enterprises (SOEs) and you immediately expand the scope of the market.  

Templeton Emerging Markets Group Founding Partner Mark Mobius

This could be banks, insurance, railways, I know a lot of these entities are losing money, that is okay. There are all these internet companies that are listed but they are losing money (laughs), you don’t have to be making money to be listed. Of course you have to warn people these companies are not making money but part of the listing process results in reform. Once you are listed you are visible, the company has to publish its financial statements, it has to explain to people where the money is going and this process will drive reform. Transparency propels reforms. 

Q: You have been very vocal about what you see as insular policies such as restrictions on imports and with tax changes fiscal slippage is a concern. How do you think Sri Lanka should tackle these dual challenges? 

A: Regarding insular policies I think you have to be very, very careful to ensure that there is no big disturbance of the domestic economy. Obviously, as you know, Sri Lanka has a lot of people dependent on produce linked to agriculture, so you have to make sure you have some protections for them. Let’s face it – the world is not a fair place, countries around the world have unfair trade practices. So the key in that is to first of all initially protect these industries but then wean them away from this protectionism. So you need to tell them, ‘We have a three-, four- or five-year timeframe, but eventually this will be freed up and you have to get your act together.’ So I’m not entirely against insular policies.  

One, issue more domestic bonds; two, simplify and encourage the development of a liquid bond market; and three, make sure you start listing Government enterprises. I know the Government is hesitant about this but the listing process results in reform. Once you are listed you are visible, the company has to publish its financial statements, it has to explain to people where the money is going and this process will drive reform. Transparency propels reforms

The concept of free trade does not exist anywhere in the world, really. We got to get used to that idea. One of the things that President Trump has pointed out is that “free trade” turns out to be this big disadvantage for some countries. As for fiscal policies I think that the Laffer Curve does work, sometimes, not always, and in the case of Sri Lanka by making the tax code easier and simplified and even lowering the rate you would probably be able to increase the tax revenues going forward. Because a lot of this is not just making it easier for people to pay their taxes but also expand the economy. How do you expand the economy? Well, firstly you have to make it easier and more attractive. I think the Government is quite aware of that. 

Q: You are confident of growth for Sri Lanka but where do think it will really come from? 

A: The key is capital. Capital needs to come into investments, into industries and into every area of the economy and that capital does not necessarily need to be foreign capital. It can be domestic capital as well. In fact I would say the prerequisite of foreign capital is the attraction of domestic capital because a lot of Sri Lankans have money outside the country or they have money in the country and they are hiding it, it’s one way or the other (laughs), but they don’t want to invest. You have to get this money out of the woodwork and then you will see really good growth. 

Q: Sri Lanka, despite the war ending more than a decade ago, has consistently performed badly in attracting FDI. What sort of prognosis do you have on this front? 

A: The world will rally. If those tax changes take place and if the Government really pushes on the infrastructure spending, definitely. During the previous Government there was a big slowdown because they stopped the casino investments, they stopped the Chinese investments and these were things that are very discouraging. 

Q: If you were to invest in Sri Lanka, what would your tips be for prospective investors? 

A: First look at the return on capital or companies, second look at the balance sheets so that you are clear on where debts are in relation to equity and what is the dividend being paid, which is an indication of a company’s ability to make money, and then make sure there is more than one share class. If there is more than one share class, then that is not disadvantageous to the running of the company and there must be good liquidity. 

Q: You have been quite bullish about India’s growth projections but there is also fear that the region’s growth is slowing because it is not doing enough reforms and therefore is no longer the fastest-growing region in the world. How do you view this situation? How can South Asia grow sustainably? 

A: This is the interesting thing about India, and it relates to Sri Lanka – when you are making reforms of the nature that Prime Minister Modi has, you cannot expect people to react favourably initially because they have to adjust. Let’s say you have a Value Added Tax (VAT) and the guy who has to keep a record of that has never paid taxes and he has been hiding from the Government? Now he has to keep a record, and he doesn’t like it. So things slow down. There will be an initial slowdown, which is what you are seeing in India, once that hump is over, then you will see things taking off. I think in 2020 India will be better than last year.  

The world will rally to invest in Sri Lanka. If those tax changes take place and if the Government really pushes on the infrastructure spending, definitely

Q: One of the challenges for South Asia and indeed Sri Lanka is we have these large informal sectors, which can lead to uneven growth. How can Sri Lanka formalise and draw the informal sector into more productive growth? Particularly in getting more women into the formal workforce? 

A: Interestingly enough, the tax system will be the cure for many of these ills because if you have a Value Added Tax, it becomes very transparent as to who is paying it and who is not. So transparency is key. The informal sector can be very vibrant and can contribute a lot to the economy. If women and minority groups are allowed to operate in the informal sector without interference, often it’s good for them because they are able to earn more money and develop. 

The Government has to make it easier for people to operate. For example, how long would it take for me to come and start a business in Sri Lanka? As opposed to Hong Kong where it can be done in two days or whatever? These are the questions that need to be asked. If someone in the informal sector can easily register their business, they probably will, and then you bring these people in and allow them to grow. 

Q: How do you think tourism can be improved and expanded? 

A: Making it visa free is crucial and also make it easier to get through the airport. Sri Lanka is at the crossroads of global shipping lines, you have a deep sea water port, why aren’t you getting huge cruise ships coming in here? I’m surprised that hasn’t been developed yet. This is ideal. They are not going to India because they have a problem with deep sea ports so they go to Singapore and Hong Kong but have few other options. You have a city that is very accessible, you get off the boat and you are in the city and it’s possible to see a fair bit of the country in just two or three days. It’s incredible.  

The key is capital. Capital needs to come into investments, into industries, and into every area of the economy and that capital does not necessarily need to be foreign capital. It can be domestic capital as well. In fact I would say the prerequisite of foreign capital is the attraction of domestic capital

Q: What other industries do you think would be worth prioritising? 

A: I think software, not just programming, but also calling services and research services. Now research services are separated from the brokering service. Earlier brokers made money in commissions and they included the research in that but now it’s separated and you have the growth of dedicated research companies. Sri Lanka could do well in this sphere. 

Q: You are very enthusiastic about investing for good. How can we encourage Sri Lankans to invest for good? What drives people to do that and how can that ecosystem be created? 

A: The Invest for Good concept and the Environmental Social Governance factors have not really changed. We didn’t use those terms in the past but we were always concerned about risk and if you are concerned about risk you have to look at what the company is doing to the environment, how it is treating workers and you have to look at how it’s being governed. So these things are being emphasised more and let us say memorialised in the thinking of investors. Sri Lanka is no different from any other country in the world. They have to adhere to these principles. 

Q: What keeps you up at night? 

A: I’m very positive about the spread of the internet and smart phones. So if anything keeps me up at night it would be the impact of that. We are already seeing it has resulted in riots in Hong Kong, in Chile and everywhere around the world you are seeing the ability of people to get together quickly and the ability to organise themselves without needing to know each other. This is a big, big change and we have to ready for the good and bad of that.

Pix by Upul Abayasekara