Friday, 6 June 2014 00:54
The Investor Forum in London last week organised jointly by the CSE and SEC in partnership with London Stock Exchange and Bloomberg, had a useful discussion by a top panel which also answered several questions from participants.
Panellists were Central Bank Governor Nivard Cabraal, Sri Lanka High Commissioner in UK Dr. Chris Nonis, Securities and Exchange Commission Chairman Dr. Nalaka Godahewa and Colombo Stock Exchange Chairman Krishan Balendra. The session was moderated by CSE Chief Executive Officer Rajeeva Bandaranaike.
Q: Moderator: Dr. Godahewa, I think in one of the speeches by Gordon Fraser of BlackRock, one key concern was liquidity and low liquidity is certainly a concern for most emerging markets and frontier markets. So markets have been devising different strategies to address this issue of liquidity. Can you explain some of the measures that Sri Lanka has taken in recent times to address this issue of liquidity?
A: Nalaka Godahewa: I think the liquidity issue is primarily to do with how the market has grown over the past few years; for a very long period till the end of the war, the market was stagnant and there were very few companies in the market and it is only now that the real prospect has started. As far as the Securities and Exchange Commission is concerned, and the Colombo Stock Exchange, we have looked at several areas to address this issue.
In 2013 we brought in a new regulation, where all listed companies are expected to raise their minimum public float to 20% within the next two years, which will make a significant impact. Secondly, we have taken measures to bring more companies to the market – we currently have 293 companies – which has grown very slowly through the past 20 years. But now we see more and more companies considering IPOs and right now my understanding is that about 45 new companies, some of them are pretty large companies, are in the pipeline to list in the next three years; that will again make a difference.
Q: Moderator: The public float requirement is a fairly decisive step that has been taken. If I can address the Chairman of the Stock Exchange Mr. Balendra, on an area that was not fully covered earlier, about the tax benefits that are available for foreign investors that are coming into Sri Lanka.
A: Krishan Balendra: A foreign investor will have to pay taxes that are identical to those a local investor pays, so typically on a dividend there is a withholding tax of 10%, there is no capital gains tax in Sri Lanka, sales proceeds for foreigners can be repatriated in full immediately and there is no restriction at all. On listed corporate debentures, with the 2013 Budget which was announced in late 2012, some significant tax breaks were offered again to local and foreign investors, the 10% withholding tax which would normally apply to an unlisted debenture would not apply to a listed debenture.
Q: Moderator: And any funds that come into Sri Lanka can be repatriated in full, the capital plus the returns?
A: Krishan Balendra: Yes, it can be repatriated in full.
Q: Moderator: Governor, if I can move on to you. The perception among most foreign investors is about the currency risk that is associated particularly with frontier and emerging markets, such as Sri Lanka. It is a perceived risk among potential investors. How would you respond to this?
A: Nivard Cabraal: Actually it is more than a perceived risk, many people factor that in as a risk, which is natural, because all have to be conscious that currencies can fluctuate and therefore the value of the investment that you have made could also change. We have seen a huge volatility in the markets in the recent past. If you look at the Japanese yen, we have seen a massive depreciation in the currency and the Indian rupee had a fair bit of a rollercoaster ride, so these are all concerns that could arise with regard to a currency.
Sri Lanka has been able to have a fairly stable path, which has been recognised by many investors. Of course it has not been an easy outcome to achieve, but it has been achieved by the strengthening of many other fundamentals. I think that is the way to go, but I don’t think that it is a case of the currency being stable alone; the currency remains stable because of so many other factors in the economy, which enable the currency to remain in a stable fashion. So Sri Lanka has taken those measures to give that stability to the currency and I think going forward we will be taking the necessary measures to ensure that the currency risk is reduced Nobody can eliminate the currency risk, but we can certainly manage the risks so that the risk people will have to encounter will be less.
Q: Moderator: Moving on to our High Commissioner to the UK Dr. Nonis, you mentioned that we have been enjoying peace dividends for five years now. From your perspective both as a representative of Sri Lanka’s private sector as well as now serving in the public sector, how do you see the progress both from a social standpoint as well as from an economic standpoint?
A: Chris Nonis: Well, as I alluded to earlier, we have had a positive GDP growth rate, but what is interesting is that the regional growth rate of many of the areas that were formerly affected by the conflict has been very significant. I think this disparity demonstrates the amount of effort that has been going into the conflict-affected areas. We have taken steps to keep interest rates at a single digit, along with inflation, and kept a positive balance of payments and taken steps to reduce the fiscal deficit and establish a stable economy and we have certainly established macroeconomic fundamentals for investment.
From a social perspective, we have the Millennium Development Goals; we have actually surpassed a majority of them. If you look at primary education, we have surpassed that and we have probably the best literacy rates in the entire region; we have a free education system; if you look at poverty eradication, we have certainly moved away from an HIPE and we have also improved our per-capita income to about $ 3,200 and are aiming for $ 4,000.
I think if you look at gender equity, we have surpassed the MDG goals and historically we have an excellent record of gender equity; many people might not know it, but we actually achieved universal suffrage 17 years prior to independence. Independence was in 1948 and we achieved suffrage in 1931. And many people would have also forgotten that we had the world’s first female Prime Minister, so we have always had a commitment to gender equity and also to democracy and development; since independence we had successive democratic leaders.
With regard to healthcare, we have very low prenatal and infant mortality rates in our region and one of the reasons attributed to that is that we have a relatively higher GDP expenditure on healthcare in comparison to other countries. Of course one of the other reasons alluded to that is the literacy rate of our population. So all those combined, I think you can see that our social indicators provide a very good environment for corporates.
Moderator: We would like to now open the floor to questions
Q: George Robinson, Partner at Sloane Robinson: We would like to address this question to the Central Bank Governor. Could you tell us your thoughts on the interest rates in Sri Lanka and the prime lending rates? Where are we from a Central Bank side – on the credit cycle, are we reaching an upswing or are corporates finding alternate ways of financing outside of the banking system? And can you talk about the importance of private banks verses public banks?
A: Nivard Cabraal: Whether banks are state owned, owned privately or are foreign banks, we have regulated them on the same basis, so that there is no change in the way they are expected to behave as well as comply with the regulations. They all have a level playing field and I think that is an important factor in ensuring that there is consistency in the banking sector. With regard to our interest rates, as we all know, the interest rate is a function of inflation; whenever there is high inflation there is a need to bring interest rates up so that there is a certain control being exerted. In Sri Lanka we have had high interest rates, which is because we have traditionally had high interest rates. But over the last five years or more, we have seen a consistent maintenance of inflation at low levels and now coming into the lower-single-digit levels. That has given us the ability to make a change in the interest rates regime. Our interest rates are at the lowest level rates that we have ever had, but at the same time we have been careful in not imposing too many shocks on the transition mechanism, because you know that adjustment is also important. Because banks and financial institutions have to move from a high interest regime to a low interest regime, not every factor will move at the same pace. So we have been giving the banks that space to move, with a few moral persuasion measures to make this happen a little faster than it would have happened otherwise. But we are satisfied that that change is taking place; as of now we think that the interest rates have reached reasonable levels, but we still see that there is further capacity for interest rates to come down. As far as the long-term interest rates are concerned, for lending to the business as well as housing, that adjustment is something we are watching for the next few months and that is something that we are looking at for the next one year.
Going forward we will have some tension reducing the interest rates, because there have been certain parties in the country which have been using the interest rates as a source of income. We are conscious that new products, as far as annuities and insurance products are concerned, are coming into the market. There is a shift from short-term deposits to much longer-term deposits, which is good for both the borrowers and lenders. I think Sri Lanka’s movement will be gentle, but we are expecting that movement to take place in the next few months.
Q: Michael Sippitt, Chairman at The Commonwealth Environmental Investment Platform: Governor, it was a privilege for me to meet with you in Colombo just a month ago, and of course you are aware that we have established a hub now of environmental investment in Sri Lanka with a focus on opportunities for energy and various other technologies. I would be most grateful for a quick overview of the renewable energy opportunities in Sri Lanka, to encourage us in developing this hub.
A: Nivard Cabraal: Sri Lanka has committed itself to have at least 20% of its energy out of renewable sources in the next five years. It is a vision of the President himself, therefore it gives the clarity of that nature. Having said that, we do recognise that there are tough answers for certain questions. One of those is that there are certain cost elements for producing the infrastructure necessary for that kind of renewable energy manufacture. We have done well in the case of wind as well as solar. There is quite a lot of work that has been done in relation to hydro power and mini hydro power. There is certainly more scope for Sri Lanka and we have had many people come in with the intention of investment in this nature. At this stage we have reached about 9% of our energy requirement being provided through renewable sources, excluding the major hydro power sources that we are generating already. There is certainly a lot of traction that is taking place, but we would like to see more investment coming in and we certainly welcome your efforts.
Q: William Rezel, Programme Officer at The Commonwealth Business Council: You have been talking about corporate governance and we have had an interest in about three areas. What are you doing in the following areas: risk oversight by the board, reporting on qualitative matters and board composition in terms of equity, especially in terms of gender?
A: Nalaka Godahewa: Corporate governance is a very important area for us and we have been looking into it very carefully over the past few years. The SEC has been looking into it very carefully over the past few years to compile a corporate governance code and it was devised even during 2013 and that is probably the most important revision and it is an ongoing process. As you probably know when it comes to accounting processes Sri Lanka is one of the best in the region and in terms of annual reporting we are also ahead of many other countries in the region, and this was mentioned by even this gentleman from Blackrock.
As far as board composition goes, it is an area that the SEC is currently focusing on, probably in our next revisions we will be looking towards that area. Just a couple of weeks ago, we launched a program for corporate director training and it is a voluntary program. In time we might also make some of these learnings mandatory. So this is an area that the SEC is very focused on and continuously working on.
A: Nivard Cabraal: If I may just add, in 2008, the Central Bank made corporate governance practices mandatory for banks; we were the first in the region to do that. Initially it was not very well accepted, as many such reforms go. We have found now that many of the banks are now very keen to comply and there is now also a compliance report that the auditor has to give. Going into the future we will ensure that corporate governance levels at banks are maintained to the highest possible level.
Q: Edward Pincheson, Director at Social Vision: Many skilled young people are working and living abroad and that is clearly driving homeward-bound remittances, how would you see the remittances in the future and is there any policy on bringing these young people back?
A: Nivard Cabraal: We believe that in time to come there will be a reverse migration that will take place in our country. Sri Lanka by 2017 would see a slight reduction in the remittances that would come in, particularly because we would see that reverse migration taking place. There will be new jobs that will be created in the country to ensure sufficient employment and scope for those returnees. We also hope that we will have more labour moving out of the country in the future for a short period, but we hope this will be skilled rather than unskilled labour. It is an interesting challenge and we want to make sure that all these conflicting parts are managed.
Q: Amal Abeyawardene, Director at Saphron Solutions Ltd and representing the Conservative Friends of Sri Lanka: What role do you see the diaspora community playing towards the image of Sri Lanka?
A: Nivard Cabraal: We are very pleased with the activities of the Sri Lankan diaspora in encouraging investment, but there has also been a negative group, which has pushed their agendas. If these negative sentiments can be managed, then we can move towards a more positive light. There has been a lot of work that has been done in terms of reconciliation and rehabilitation and these need to be highlighted. For example, the Northern Province has encountered phenomenal growth.
Q: Michael Pooler, Journalist Financial Times UK: What action needs to be taken to ensure FDI? I think it has been said that you require $ 4 billion a year to maintain a growth rate of 8%. What measures do you think need to be taken?
A: Nivard Cabraal: What we have done is ensure that there are enough mechanisms to bring in FDI, I think it is one part of the equation to have the sources of FDI and the other part is to have the capture of those investments. That is why Sri Lanka has had this idea of having these new hubs coming in to ensure that there are multiple recipients of that investment and we are seeing that traction taking place.
Q: Essentially I have found everything that you have been saying very interesting. But one of the things that I could not really follow is the education aspect. After having visited Sri Lanka so many times, one of the things that I am worried about is how bad English is in the lower management roles and I wonder what is being done to try to encourage English.
A:Nivard Cabraal: We certainly see English as an important link language, which we have taken steps ensure even constitutionally. There has been a constitutional amendment that established English as a link language.
At the same time for a long time English education was neglected and had to be enhanced in the last five to 10 years. There are twin areas of education that the Government is looking at – English and IT – and in the next 10 years that adjustment will also be in place. We see it as a very important part of the education process and in time to come there will be IT coming into the direct curriculum. Now it is coming in at the secondary level and that would mean that the students of Sri Lanka will be well-positioned to meet any challenges.
There are also private institutions which are teaching English today, and we believe that these too are playing an important role. These private sector institutions are coming in and therefore this is also an interesting business venture that companies could look at. But we do admit that it is an area where a lot of work to be done, but in time to come I think there will be a much better system of learning English and IT.