Revival Bill faces fresh flak

Amidst tumbling value in the Colombo bourse, the Government’s Revival Bill suffered a fresh blow when rating agency Moody’s yesterday warned of investor uncertainty and negative impact whilst a fresh Fundamental Rights case was filed against new legislation.

Triple adverse developments or reactions were despite the Government remaining hell bent in its continued justification of the Revival of Underperforming Enterprises and Underutilised Assets Bill, which it managed to pass in Parliament last week.

                

Moody’s in its Weekly Credit Outlook yesterday stated: “Despite authorities’ statement that this is a one-off move and that further expropriation will not occur, the measure may undermine the predictability of future policies and increase investor uncertainty, which would make it credit negative for Sri Lanka. The Government’s seizure of assets creates ambiguity around the protection of private property in Sri Lanka.”

Whilst noting that the Supreme Court has ruled the bill wasn’t inconsistent with the Constitution, Moody’s said the stated purpose for seizing the assets is that they are either underutilised, idle, have had no ongoing business operations for many years or that their use contravened the public interest. Two of the seized land assets were held by companies listed on the stock exchange.

“It is unclear, however, whether the assets will be managed by the State or resold to other investors and how performance will be revived. The use of the fast-track procedure, which we believe limits public scrutiny, largely reflects the tendencies of the current Government to exert strong and direct influence over the economy,” the rating agency pointed out.

Moody’s also said that maintaining investor confidence was key to Sri Lanka’s ability to continue to collect the peace dividend.

“The authorities have embarked on a broad-based effort to review and reform regulations hindering investment to attract more private sector participation in the economy. But an unintended consequence of this expropriation measure may be that it casts a cloud over the investment climate. If so, it would be credit negative for Sri Lanka,” the agency added.

In July Moody’s assigns definitive B1 rating with a positive outlook to Sri Lanka’s global sovereign bond, which turned out to be a stellar success. Moody’s rating in July as well as that by two other rating agencies was welcomed by the Government and showcased as positives.

Despite Moody’s report, Sri Lanka’s 10-year bonds, maturing in 2020 and 2021 hardly moved on Monday and were quoted at a cash price of between 102.50/103.50 and 101.7012/102.7012 respectively according to Reuters.

In a related development reinforcing loss of confidence, the Colombo stock market lost Rs. 33 billion in value yesterday increasing the total wealth wiped out to Rs. 74 billion since 3 November.

The All Share Index dropped by 1.5% to its lowest for the year to 6,240 points whilst Milanka Index declined sharper by 2%. The exact closing of ASPI at 6,239.52 points is a 26 month low. Year to date negative return is now 6% for ASI and 21.6% for MPI. Turnover was a more respectable figure at Rs. 518.6 million as against Friday’s two year low of Rs. 393 million.

The controversial Revival Bill has 36 enterprises including listed Hotel Developers Lanka Plc, which runs the five-star Hilton Colombo, and 6,300 hectares of land owned by Pelwatte Sugar Industries Plc.

Shares in Pelwatte Sugar have fallen 15.5% and those of Hotel Developers Lanka have dropped 27.1% since the market first got wind of the proposed bill on 1 November. Trading in both has been halted since Wednesday.

President Mahinda Rajapaksa’s administration has come under strong criticism by opposition parties, leading and district level business chambers, lawyers as well as sections of clergy for expediting the bill without public discussion or allowing the properties’ holders to argue their side.

The Revival Bill also smacks of nationalisation, which the country was experienced in 1971 under Premier Sirimavo Bandaranaike’s regime eventually leading to her downfall.

The bill’s proponent, Economic Development Minister Basil Rajapaksa has assured that no private assets will be taken over. In his speech in Parliament last Wednesday, he said: “What this draft bill means is that none of these enterprises are private property. I wish to reiterate that these are public property given to these entrepreneurs under certain conditions. If these conditions have been violated, we should categorically state that the same law applicable to the poor should be applicable to the capitalists too.”

See below the full comment of Moody’s:

Sri Lanka Expropriation Bill dampens positive credit story: Moody’s

On 9 November, the Sri Lankan Government fast-tracked a controversial bill through Parliament that permits nationalisation of specifically named assets of privately managed companies the Government deems as underperforming. Entitled the Revival of Underperforming Enterprises and Underutilised Assets, the new law empowers the Government to acquire one holding company plus 36 assets held by private owners that have at some point received aid or land from the State.

Despite authorities’ statement that this is a one-off move and that further expropriation will not occur, the measure may undermine the predictability of future policies and increase investor uncertainty, which would make it credit negative for Sri Lanka. The Government’s seizure of assets creates ambiguity around the protection of private property in Sri Lanka.

The stated purpose for seizing the assets is that they are either underutilised, idle, have had no ongoing business operations for many years, or that their use contravened the public interest. Two of the seized land assets were held by companies listed on the stock exchange. It is unclear, however, whether the assets will be managed by the state or resold to other investors, and how performance will be revived.

The use of the fast-track procedure, which we believe limits public scrutiny, largely reflects the tendencies of the current Government to exert strong and direct influence over the economy. Nonetheless, Sri Lanka’s Supreme Court ruled early last week that the bill was not inconsistent with Sri Lanka’s Constitution.

Since the end of the 26-year long civil war in 2009, Sri Lankans have reaped a peace dividend of stronger economic growth: real GDP growth picked up to 8% in 2010 from an average of 4.7% during the conflict and there’s much greater consumer price, exchange rate and financial market stability.

Maintaining investor confidence is key to Sri Lanka’s ability to continue to collect the peace dividend. The authorities have embarked on a broad-based effort to review and reform regulations hindering investment to attract more private sector participation in the economy. But an unintended consequence of this expropriation measure may be that it casts a cloud over the investment climate. If so, it would be credit negative for Sri Lanka. (Source: Moody’s Weekly Credit Outlook)