Finance Minister Ravi Karunanayake last week told investors in London that a new Sri Lanka is emerging and the new Government is on course to strengthen the economy with the support of the local and foreign private sector.He outlined the new Government’s vision and plans as well as what could be expected from the upcoming 2016 Budget during his keynote at the Invest Sri Lanka Forum held in London. Following are excerpts:
The Invest Sri Lanka Forum is timely and it is my intention to spell out the Government policies here. As you know Sri Lanka is today a new Sri Lanka. It was very much a topic that’s being spoken about. On 8January 2015 Sri Lanka had a change and that change was the new President was elected in my country and on the same day, new Prime Minister Ranil Wickremesinghe was appointed by President Maithripala Sirisena.
On 17 August we had a reconfirmation of the will of the people by having the United National Party elected as the governing party; then our Prime Minister and the President put forward a very strong Government by having a national coalition and today we have a two-thirds strong Government. The political will of the people has been spoken and that is the reason why I said Sri Lanka is on the move.The British in 1815, when they came to Sri Lanka, they conquered Sri Lanka and obviously took over the ‘Pearl of the Indian Ocean’. Our democracy was threatened in the last couple of years and I am sure I don’t need to reemphasise on that; it was known more as the ‘Tear in the Indian Ocean,’ but today with democracy at its best, vibrant, and the people’s voice spoken, I’m sure all of us together can build a new Sri Lanka. So this is the intention of our Government, to place Sri Lanka back on the world map. My intention here today is with you all to take it to new heights.
The Government of Sri Lanka on election had three specific things to be done, that is to replace Sri Lanka in the foreign front, human rights and Sri Lanka’s international perception, the domestic policy and the fiscal policy. Let me take one at a time. As for human rights and international perception, I’m sure that last month this was addressed through the human rights issues in Geneva. Our President, Prime Minister and our Foreign Minister have addressed the main criteria matters that were there and endorsement came out of that, with a joint declaration with the British Government and America leading it.The international perception with that has changed dramatically.
Then the domestic order has to be relooked at. The election on 8 January 2015, we certainly did certain corrective actions. We had to ensure good governance coming to our country. With that the independent commissions came to life. The independent commissions which basically have been put in place during the last month have been a reassurance. Media freedom has been ensured and the Right to Information will be a reality soon. These are necessary ingredients if we are here to ensure that Sri Lanka is marketed properly. We had to ensure the redistribution of wealth in the country. Distribution has been even right throughout the country. Consumption has taken place and we are seeing consumption going towards capital development and that is helpful for tomorrow’s earnings.
Then we have to take the fiscal policy, the revenue if I may take first, we had to do some corrective actions. I as the Finance Minister on behalf of the President and the Prime Minister we sat down and had our priorities in place. We have a revenue to GDP drastically dropping from 17% of GDP in year 2004 to roughly 10.8% of GDP today. We need to increase this. We have look into areas on how this could be done, sustainably.We had a huge recurring expenditure taking place; as a result the fiscal deficit was going well beyond acceptable norms and it has been corrected today.
You would see in the Interim Budget, we had to reduce the budget deficit which was roughly projected at 5.8% to 5.6% and today we are looking at further corrective actions that will take place. Then the revenues to be increased, costs to be controlled, subsidies to be targeted, fiscal deficit being in a manageable position so for now as I said it is at 6.8% of the GDP. We need to ensure that a fiscal deficit of not more than 3.5 to 3.8 is achieved by the year 2017 and we will ensure that these targets are met.
What have we inherited? I would rather like to say the inheritance of economy, because I don’t want to dwell in the dead past and what has gone wrong. On 20November we will present the first Budget of our Government. The Prime Minster will make an address to Parliament on 5November to spell out the main criteria, how to we are going to do that. Now here are some of the factors I need to take you all through, we have an 8.9 trillion public debt and we have a Government revenue of true GDP of 10.8%. This is not tolerable. We need to put it into a more professional approach; it has to be done without affecting very many people. We have to keep the energy and the enthusiasm of the investors but we also need to take some corrective action.
Sri Lanka’s economy is expanding. The 12.5 trillion GDP is what we have at the moment. Our Stock Exchange is worth $ 22 billion with 294 companies listed. It is our intention to make sure that we have the budget deficit around3.5 to 3.8% of GDP by the year 2017 and 2018.
We like to see the capitalisation of the Stock Exchange rising to at least $ 50 billion by end of 2016. We will ensure that we will put in certain actions and plans and help you to ensure that growth takes place not only with the present companies but a higher number of new companies listing. We like to achieve a GDP of approximately about $ 135 to 150 billion by year 2020 which means achieving around 7 to 7.5% growth. We will ensure that we will take on meaningful proposals as there is no point being in an illusionary world. We will walk along with you all to ensure that we achieve every single target that we are set ourselves.
Being a professional Government, it our intention that we work towards every single specific item that we have mentioned. What have we done? In the last 35 days we have basically visited three countries, the Prime Minister and I, we went to Japan and the enthusiasm that is coming out from Japan is spellbinding. We were in Switzerland yesterday and here today, so it is our intention that we take the country to where it matters, we want to have a friendly policy with every single country; thereare many who question us on what our policy is with India with China. Now it is our intentionto be friends with all and be enemies with none, that’s our intention.
We need to in Sri Lanka de-bureaucratise ourselves, we need to modernise ourselves, and we need to ensure the archaic law setup there is modernised and you will see that taking place on 20November 2015 via Budget 2016 where certain things will basically put the entire country into a storm. I like to see the Stock Exchange having cross listings in the London Stock Exchange, in the Singapore Stock Exchange and we need to get that done. We need to have our neighbouringcountries coming and investing in the Colombo Stock Market in dollar terms. I have been speaking with these Colombo Stock Exchange and Securities Exchange Commission on the legal impediments. Those will be corrected and we will ensure that all meaningful assistance will be given to ensure that is done as soon as possible.
Other irritants will be corrected as well. The Exchange Control regulations will be something of the past and the Department will be replaced with the Foreign Exchange Management Agency which will help to modernise and put Sri Lankawhere it should be to ensure that theGDP which is roughly about 58% in the service industrybe maximised. We also need to bolster the industry sector which is about28% of GDPand commercialise agriculture and expand itfrom the current 10-12%.
The Bank of Japan has intimated its interest in coming to Sri Lanka. Three other very big banks from the Middle East and one from Asia would be coming by the end of the year as well. We will be ensuring the financial sectoris opened up as well. The President and the Prime Minister have been discussing with me and we are trying to see how we can ensure that Sri Lanka becomes a mini financial centre like Singapore or Dubai and serve South Asia. We will name it the Colombo Investor Financial Centre and ensure that we are able to start that with immediate effect. The reason iswe believe we have lost far too much time in the past.
Sri Lanka successfully concluded the Euro Bond issue of $ 1.5 billion which was four times oversubscribed and that is clear direction as to where we can take Sri Lanka.
I would like tosee the private sector contribute in a big way to the economy and the country’s future bytaking advantage of the platform we have created and make Sri Lanka’s economy very strong. We will also look forward to higher foreign direct investments and a greater role by foreign companies.Sri Lanka will be a very investor and business friendly country.With the Indo-Lanka Free Trade Agreement,UK investors must take the advantage of thisplatform and the Government will create the enabling environment.
Invest Sri Lanka Forum in London a success
text and pix by Nisthar Cassim
The Colombo Stock Exchange (CSE) last week successfully concluded the Invest Sri Lanka Forum in London promoting the country and its capital market.
The event, conducted in association with the Sri Lanka High Commission in UK and Bloomberg, drew around 150 UK-based fund managers. From the Sri Lankan side, senior officials from 12 leading listed companies and around 30 representatives from several broking firms attended. Chief Guest at the Forum was Finance Minister Ravi Karnanayake whilst Guest of Honour was Acting High Commissioner in UK Dr. Chanaka Talpahewa.
Other speakers included Copal Amba Sri Lanka Country Head Chanakya Dissanayake, CSE Chairman VajiraKulatilaka, SEC Director General VajiraWijegunawardane, London Stock Exchange CEO Nikhil Rathi and Stewart Investors Portfolio Manager (Global Emerging Markets) Ashish Swarup. The Forum included a panel discussion involving Sri Lanka speakers and was moderated by Bloomberg’s Head of Corporate and Investor Access Tom Tyler.
The listed companies held over 140 one-to-one meetings interested UK fund managers over two days.
The participating Lankan firms were John Keells Holdings PLC, Commercial Bank of Ceylon PLC, Hatton National Bank PLC, National Development Bank PLC, Dialog Axiata PLC, CarsonsCumberbatch PLC, Lion Brewery (Ceylon) PLC, People’s Leasing & Finance PLC, Softlogic Holdings PLC, Tokyo Cement PLC, Singer Sri Lanka PLC , MTD Walkers PLC and Sunshine Holdings PLC.
The last Sri Lanka Invest Forum in London was a major success and was part of several roadshows held covering cities such as New York, Singapore, Mumbai and Dubai. Prior to London Forum, CSE held a breakfast meeting also aimed at promoting Sri Lanka in Zurich, Switzerland.
Today the Daily FT features highlights of the key presentations made at the London forum.
CSE Chief highlights opportunities in Sri Lankan capital market
If you think about Sri Lanka’s history of the last 10 years, I would divide it to three distinct phases. First is from 2005 to 2010 during which the war escalated and issues went out of control and life became that much more difficult but in 2009 the war ended and then the next phase started where there was a lot of energy, a lot of requirements for infrastructure was felt. This is because that aspect of the country was neglected because of the internal conflict.
There were a lot of infrastructure related projects that took off and was completed and government to government borrowing was there. That phase went on but there were gaps on the government side as well as the reconciliation side. The third phase started in 2015 with the election of President and this really proved Sri Lanka has democracy at its best with very peaceful election. In August 2015 a new Government was elected again with a free and fair election. All these show the robustness of democracy in Sri Lanka. The new Government has begun addressing both reconciliation and development.
Economically Sri Lanka has grown with low inflation so there is very much room for growth without the pressure of macroeconomic constrains. If you take the Colombo Stock Exchange there are 294 companies listed. This and market capitalisation which is at present $ 22 billion are expected to increase during the next two or three years.
With regard to world indices, the Colombo Stock Exchange has performed much better and similarly it has performed much better than regional peers. However it has scope to grow since market capitalisation is only 32% of GDP. We see this as an opportunity. We have plans to ensure more listings whilst we have to still accept the fact that the Government does a lot of economic activities via State-Owned Enterprises. We expect SOEs will start coming to the market, especially their subsidiaries. That will help to increase this market capitalisation to GDP ratio.
We have very attractive peace and growth potential in Colombo Stock Exchange. Similarly there is a very low core relation between the Colombo market and rest of the world which is very important aspect to the portfolio managers.
Colombo has also maintained its status quo and has not come down when the world markets have declined. I think the reason is there was a lot of good news coming from Colombo and the world has given bad news. Similarly if you take ‘risk to return,’ Sri Lanka is in a very good position because we have higher returns or reasonable returns at low risk. Foreign participation has increased and foreign outflows have not been that high compared to the peers in the world.
The other side of the coin is the development taking place at the corporate debt market. It has been increasing drastically, taking advantage of tax concessions. We see 2015 may be a record-breaking year for corporate debt market. The unit trust industry has also developed rapidly thanks to tax concessions given by the Government, including opening it up for foreign investors.
Despite 30 years of war, the Colombo Stock Exchange in the 1990s was ahead all regional players in terms of infrastructure. We were the eighth to do a CDS but unfortunately we stagnated and others took us over. We have to leapfrog and that will happen during next year and year-and-a-half in becoming an international standards stock exchange.
Sri Lanka is also reforming the SEC to strengthen regulation. We are also progressing on the risk management side and will launch the CCP in November. That will help us to bring in new products and derivatives and we have started developing platform to derivatives so that we are ready when the time of CCP is come. We would like to do ETFs as well. Rules are being prepared and we will be developing new products in the future.
Similarly on the governance side we are going to demutualise the Colombo Stock Exchange and list the stock exchange very soon. We expect the demutualisation to take place in early 2017. With regard to market infrastructure development we want to bring in a state-of-the-art system, mobile apps and other various convenience to investors so they can start trading and getting information from the Colombo Stock Exchange.
We are also focusing on training our staff and enhance investor education. We will train and develop our staff to international standards very fast. Recently the CSE joined the United Nations Sustainable Stock Exchange initiative because we knew the Colombo Stock Exchange can play very important role in putting sustainable growth into the economy through our actions.
I must reiterate there are very exciting things happening on both the economy side and capital market side. We are the closest neighbour to India and we have a Free Trade Agreement. Sri Lanka can become like what Hong Kong is to China. We can become a key gateway to India and South Asia as we are politically well-placed since we are friendly with everybody. On our part we will promote dual listings within South Asian exchanges and we are looking forward to Governmental support too. So overall I must say it is time to invest in Sri Lanka and a lot of exciting things will happen and the Government and as well as the CSE we hope to see you investing more in the Colombo stock market.
Sri Lanka has got huge long-term potential: Stewart Investors’ Ashish Swarup
As a team we have been investing in Sri Lanka for about 25 years and personally I have spent about 12 years of my life investing in emerging markets all over the world. If I sound very sceptical about today, it’s probably because of that.
We have a very simple philosophy, we generally focus on people we are investing in and try to find honest and competent people and basically back them for a long term. We look for companies which are managed in long-term fashion. What I mean by that is that companies should not have just focus on short-term share or profits, but also should take care of things like environment and employment in the broader society around where the company is operating.
We don’t spend so much of time talking about GDP, debt and so on because we think we really don’t understand those numbers. We do care a lot about property rights, rule of law, how a country is taking care of its minorities. We think those kind of things drive a country’s progress.
We as a team like Sri Lanka, we think as a country it got huge long-term potential. We usually prefer noisy and chaotic democracies versus dictatorships.
So with the current administration we are very pleased that the country is moving in the right direction. We like free media, independent courts, less corruption, nepotism and so on. So I think country has definitely made a lot of progress in last few years.
What we admire the most about the country is its business community which extremely vibrant and very friendly. Sometimes it is actually too friendly. We actually like family businesses where families have passed on the operation control to professional whilst keeping the long-term direction of the business in their own hands and we are a really big fan of Hemas Group which set a good example of how a family business should be run. We also have the privilege of working with honourable and competent professionals in the industry like Marianne Page and Murtaza Jafferjee.
“We will not be the global exchange group we are today without MillenniumIT team in SL”: LSE CEO
We have a longstanding partnership with the Colombo Stock Exchange. Every year this event in London gets bigger and bigger with more interest in Sri Lankan companies and Sri Lankan economy. Let me say a few words why we as the London Stock Exchange consider this forum to be so important.
We are one of the largest foreign investors in Sri Lanka and we have been for many years. The technology that runs the London market and many of the markets around the world where we have partnerships are all run out of Sri Lanka. We have a major investment in MillenniumIT and it has played absolutely fundamental role making sure our platforms here in London are stable, resilient, best in class and admired around the world.
The launch of the new trading system in the Colombo Stock Exchange was in partnership with MillenniumIT. So together we have built some resilient systems serving investors around the world and those systems built in Sri Lanka are used by 40 exchanges around the world and financial infrastructures around the world including the Johannesburg Stock Exchange and infrastructures in Ghana and we have also got partnerships as far as Canada, Mongolia and Peru. So the Sri Lankan exports of this technology is extending right around the world.
We have found in our investment in Sri Lanka one of the greatest assets has been the outstanding quality of the work force, and the quality of the people and education system. That has provided huge benefits to our company, The London Stock Exchange Group. Simply put, we will not be the global exchange group we are today without our Millennium IT team in Sri Lanka.
I hope through this Forum that many similar partnerships would be formed between companies here in London and international markets here in London and companies who have travelled here from Sri Lanka to be with us.
Saying a little bit about the investment climate in Sri Lanka, as I said earlier, the feedback we are getting from the investment community is that their interest is increasing and the Colombo Stock Exchange is an ideal place for the diversification of risk as its trades at small discount to the regional markets with a market capitalisation to GDP ratio amongst the lowest in the region and a low correlation to developed markets. So it’s a good way to broaden out your risk.
We are very pleased to welcome companies to here in London and as you know London has in terms of asset management, international equity under management than any other financial centre in the world. So we hope today, many investors and issuers get a chance to talk about the opportunities in Sri Lanka. With the election of a new Government and we as investors are confident of a new investment environment and prospects for growth will pop up. The growth of CSE and Sri Lanka will only increase in the future.
Well-integrated national economic policy in the offing: Lanka’s
Acting High Commissioner
Sri Lanka is a nation whose resilient economy continue to grow closer to 5% even when the country was fighting a worst form of terrorism for nearly 30 years. The conflict ended only in 2009. The economic landscape of Sri Lanka has been undergoing a rapid transformation since the end of the conflict, where the overall GDP growth has been averaging around to 7% to 8%.
The north and east of the country, the areas affected by the conflict, have been reporting double digit growth. Infrastructure facilities such as highways, power generation and telecommunication has seen substantial improvements over the last few years.
The Government which came to power in August this year is currently in the process of designing a well-integrated national economic policy for effective utilisation of Sri Lanka’s untapped potential towards enhanced growth.
Against this backdrop, I consider the Investor Forum a very timely exercise that would provide an excellent opportunity for us to have a closer look at the emerging economic order of Sri Lanka, which is taking shape with the newly-elected Government’s policies.
I believe that this forum’s outcomes would be very useful in your investment decisions involving Sri Lanka. I like to assure you that the High Commission of Sri Lanka in the UK would be pleased to extend its fullest cooperation to the Colombo Stock Exchange, the London Stock Exchange and the business community both here in the UK and Sri Lanka in all their future endeavours.
SEC is pursuing a full review of the rules, regulations and the standard: DG
Rather than speak about the existing regulatory framework, I wish to speak on the regulatory reforms that we are currently working on which we hope to have in place before too long and will be very relevant for investment decision making for those who are present here.
Sri Lanka traditionally has been depending on the banking sector for its fund raising and investment activity, which is reflected in the capital market size, which is reflected to GDP which is 30%. In this aspect, it offers a unique opportunity for all stakeholders to enable the growth of the capital market to complement the banking sector in propping economic expansion, especially in relation to raising long-term funds and encouraging long-term investments to support the aspirational growth of the country.
We have witnessed how deepening reforms in respective capital markets around the world has resulted in rapid economic expansion in many countries.To achieve this end however investor and public confidence are critical along with integrity of the markets and their participants. Markets cannot achieve their fundamental purpose in funding the economy without trust and confidence. Ensuring investors have trust and confidence in the capital market remains at the heart of everything we as SEC do. Monitoring the securities industry requires a coordinated effort and the SEC’s role is to maintain a fair and orderly and efficient market to promote stability and most importantly to protect investors.
As the regulator of the capital market, the SEC is mandated to play a crucial role in creating an enabling environment to issuers to get funds, ensure adequate safeguard for investors and to ensure that professional standards are maintained.
Traditionally regulation enforces a set of rules and necessary action is to change the behaviour of regulated participants. What investors and the public require most today is assurance and accountability.
In the broader sense with expectation of governance over and above compliance with rules and regulation, this requires embracing moral and ethical considerations and understanding and management of risk and the creation of sustainable value.
A change in the thinking over the rationale for market regulation is reflected in the global agenda for the international financial system.In response to the many crises, global standard setters like the International Organization of Securities Commission (IOSCO), of which Sri Lanka SEC is a member, have been called in to make recommendations for regulation securities as part of an international effort to support global financial sustainability and through systematic risk.
In line with this SEC along with the Colombo Stock Exchange is fast-tracking the setting up of a Clearing House to ensure an efficient and accurate clearing and settlement mechanism in our capital market. Measures that we have taken to reduce systematic risk also provide protection to investors, help maintain confidence and transparency.
The laws and rules that govern the securities industry are derived from a simple and straightforward concept. All investors whether large institutions or private individuals should have access to certain basic information about an investment prior to buying it and for long as they hold it. To achieve this our compliance program requires full disclosure quality and reliable information ongoing basis for investors to make informed investment decisions. Only through a steady flow of comprehensive and effective information can people make sound investment decisions that facilitate capital formation, which is so importantfor our nation’s economy.
We are continuing our efforts to integrate a culture of compliance, continuous engagement and management of conflicts into the financial system. Deterrence will be at the heart of our securities regulation and we have attempted to design a regulatory framework that holds individuals and entities accountable, prevents misconduct and promotes public confidence. We are focusing on regulations to detect wrongdoing early and enhance measures to detect market offences with the objective of taking timely preventive measures. We believe that this strategy will reduce securities violations and create a level playing field for all stakeholders.
In the Sri Lankan context we recognise the importance of benchmarking against internationally recognised standards which would reflect the strength and robustness of the regulatory framework.
In that light we are currently pursuing a full review of the rules, regulations and standards that govern the capital market in our country against core principles. We recognise benefits of such an endeavour which will place us in a position of strength by ensuring that our regulatory framework remains appropriately balanced, focused and forward looking. This will also aid in attracting international portfolio investments into our country. Crucial to the SEC’s effectiveness in each of these areas is enforcement of the role for good governance and make it a part of the market regulatory discipline.
The Securities Law in Sri Lanka which was enacted28 years ago is not equipped to deal with future needs and emerging challenges in modern capital markets.In today’s interconnected capital markets, regulators have an increasingly challenging role balancing the need of creating capital markets while mitigating systematic risk and carrying out effective oversight while staying one step ahead of wrongdoers and practices that exploit investors. With the expanding capital market, it has necessitated the SEC to amend the current SEC Act to address the gaps in our current law and restore investor confidence in our capital market, while providing investors and the markets with more reliable information and more information on honest dealings.
The main purposes of these lawscan be reduced to two common notions. Companies publicly offering securities must tell the public the truth about their businesses, the securities they are selling and risks involved in investing. People who sell and trade securities, brokers, dealers and the exchanges must treat investors fairly and honestly putting investors’ interest first. It is envisaged that the amended Act will inspire more confidence in aspiration, regulation and justice and ensure that those who act in a manner that is in violation of the law will be held accountable.
At present amendments are being finalised by a high level committee and it is envisaged that the committee will present it to Parliament in 2016. This will give us powers to introduce civil actions and administrative sanctions/actions like imposing penalties, issuing reprimands, discouraging of ill-gotten gains and payment of ill-gotten gains to investors. Currently for market offences, the SEC can only apply criminal action. Apart from that, the amendment will also provide a demutualised stock exchange and also provide for the CCP “bankruptcy remoteness” plus also extend our regulatory purview over some of the currently unregulated intermediaries as well as asset classes.
The most important thing is all these will be in line with recommendations. Regulatory objectives however cannot be met on the strength of regulatory role alone. It is imperative that market discipline supports regulatory discipline and ensures confidence and fairness in the market. It is when all three – disciplines, regulatory, market and self – are functioning effectively that the optimal balance of facilitating regulation can ensure market integrity. Against this backdrop we are encouraging better business conductto create more a competitive and efficient investor centric market. We are committed to ensuring investor needs are prioritised and managed by firms properly with the right governance and internal checks and balances.
As the CSE goes towards a more energetic and dynamic business environment, there will be an even greater need for market regulations. Hence the planned demutualisation of the CSE with the objective of better reflecting interest of all stakeholders and being run as a for-profit organisation could lead to possible conflict of interest. As such this will undoubtedly lead to reduction in the regulation role performed by the exchange, which will resultin some of the delegated regulatory functions driven back to the SEC. By far the best way for investors to protect the money put in the securities is to do research and ask questions. Investor education is essential in a regulatory regime of empowering investors. Therefore our financial literacy programs are based on providing basic skills and knowledge to enhance investor protection and to promote investor confidence and investor participation in the capital market.
One of the major sources of information on which the SEC relies on to bring the enforcements into action is the investors themselves. Better informed investors are so crucial to the functioning of the efficient markets as well.
On that note I would like to summarise the regulatory framework that can be expected to be in place soon. Deepening of the capital market as I said earlier is critical to economic growth and to achieve this end we will focus on the following: Establish an effective and clear regulatory framework; ensure standards and measures of good governance; strengthen and enforce firm actions against market offences; effective risk management – amove toward a risk-based regime; enable a pool of informed investors and enhance industry-wide professionalism and ethics; and ensure a level playing field for all stakeholders which we believe will enhance public trust and confidence in our market.
In conclusion, key regulatory reforms are currently being worked out which will lay a solid foundation to our capital market by the end of 2015. Along with the market regulation reforms that we discussed, three key initiatives are being focused on – the SEC Act amendment, implementation of the CCP, and the demutualisation of the CSE.
We hope that our capital market will be given a solid footing for us to aspire to be an important emerging market going forward. So with all the reforms taking place I would like to suggest if there is ever a time to consider Sri Lanka as an investment option, the time is now.
2015 political reset augurs well for a robust investment climate starting 2016: Copal Amba Country Head
Copal Amba, a Moody’s analytics company, has been running investment research support delivery centre since 2002. We have been partnering with the Colombo Stock Exchange since 2013. The year 2015 has been a very good and interesting year for Sri Lanka. It has been a year of monumental political change, we have a new Executive President and a unity Government which has been elected with a strong reform mandate focused on the institutional capacity building and good governance.
To give you a little perspective the Sri Lankan stock market is trading at a discount to most regional peers and this discount is even more apparent when you look at Sri Lanka’s economic growth profile which is at the higher end of the regional profile. Sri Lanka is not short of growth and that has been a very consistent theme over the past three or four years. Inflation is low and this is also partly due to the low international commodity prices – it is also likely that the Central Bank will maintain a more upward bias, because we are seeing a strong pick-up in private credit and strong increase in consumer spending and demand across the board.
In September this year the Central Bank allowed for the currency to depreciate, ending at about 7% year-to-date depreciation. This was due to two main factors, we saw the pressure on reserves building up, with some amount of investor exits from the Rupee debt market – in line with most emerging markets. But also we saw a widening trade deficit which was marked by a sharp pickup in consumer spending and the related imports, at a time when the export market remained relatively weak. Now with the currency depreciation behind us, we believe that the reserves will start climbing up, we also saw a successful sovereign bond issue yesterday.
The underlying trends in foreign direct investment post-war, there was significant growth. Also foreign earnings are very much underpinned by the strong remittances, the country gets about $ 7 billion, per-annum as at 2014. And these growth trends are likely to continue, now that there is exchange rate stability as well.
The 2015 political reset augurs well for a robust investment climate starting 2016. A balanced foreign policy was taking shape repairing previously strained relations with the US, the EU, India, and Japan, which are Sri Lanka’s largest trading partners.
This has led to US co-sponsoring UNHRC resolution, whilst the EU GSP+ re-application process was underway. Furthermore Sri Lanka and India are discussing a broader economic cooperation pact whilst Trans-Pacific Partnership scoping already being discussed. All of this could reinvigorate export growth.
The new National Government agenda is focused on strengthening institutions, attracting FDI (relaxing investment controls and improving property rights), incentivising exports (plan to set up 45 EPZs by 2020), driving efficiency in State enterprises through public-private partnerships, and developing soft infrastructure (increasing spending on education to 6% of GDP).
Infrastructure development remains a priority and is to continue unabated – based on alternative financing schemes, such as build-operate-transfer. Large-scale projects such as the Western Megapolis are to get underway, with planned completion by 2030.
Following two significant elections in 2015, the investment environment was somewhat subdued, as investors adopted a wait-and-see approach. With these concerns largely behind us, 2016 is poised to see a return to growth themes. The BOI’s recent indication of a $ 5 billion FDI pipeline augurs well for future sustainable economic development.
Focusing on the sectoral growth prospects, the middle-class spending has also gone up considerably, this was also reflected in quite an uptick in corporate earnings that are directly focused on consumer spending. We saw the FMCG non-durables sector grow quite sharply during the first quarter and pick-up further.
Tourism is still on the first innings, this is because it is largely the peace dividend that has been driving the arrivals. Arrivals have been growing very sharply and last year, we opened up to the Chinese which is the largest tourism market in the world and the arrival numbers have been growing at very healthy rates. Some of the key players focus is now on increasing the value rather than the volume of tourists visiting the country.
He also said there are untapped opportunities in areas such as retail and private healthcare.
Dissanayake noted the construction growth momentum is poised to pick up in 2016 with increasing urbanisation and Western Megapolis to fuel long-term construction spend. With regard to the logistics sector, he said port capacity expansion will drive further growth.
The banking sector growth will be supported by underpenetrated sectors after somewhat of a slow-down in credit growth in 2013 and 2014. It has shown quite a healthy growth around 20% in loan books.
Overall Sri Lanka has notched up significant economic achievements since 2009 but there is yet more to be done. Key risks are dominated by fiscal slippage. Fiscal consolidation challenged by the combination of higher spending and lower revenue collection – full year fiscal deficit for 2015 to exceed 6%. Political risks associated with fiscal discipline may also prove challenging.
Another is public debt to GDP levels are currently among the highest in the region, with interest payments alone accounting for nearly one-third of Government revenue.
Low risk appetite that has weighed on emerging markets may continue to suppress foreign capital inflows into Sri Lanka and exert pressure on the rupee.