Financing infrastructure, driving development

Tuesday, 10 December 2013 00:00 -     - {{hitsCtrl.values.hits}}

With its tenure stretching back to 1892, the Hong Kong and Shanghai Banking Corporation’s relationship with Sri Lanka is established in the country’s roots and commitment to its financial development. Regarding the ongoing plethora of foreign investment in Sri Lanka’s infrastructure development, the Daily FT was in conversation with HSBC Global Banking & Markets Director (Project and Export Finance, Asia-Pacific Capital Financing) Laura Galvin and HSBC Sri Lanka’s Global Banking Financial Institutions Group Head Shamindra Marcelline. Following are excerpts: By Kinita Shenoy Q: What is the purpose and importance of your current visit to Sri Lanka? Galvin: I’ve been visiting Sri Lanka on business for the past 10 years. This time, I’ll be following up with HSBC’s institutional and corporate clients to discuss financing requirements for 2014. I’m particularly interested in capitalising on the momentum in the country post the announcement from Sri Lanka’s board of investment that they expect $ 2billion worth of FDI in 2014 from the Commonwealth Heads of Government meeting. Q: What makes Sri Lanka’s economic development story unique? How do these compare to the other regional countries you have worked with? Galvin: Our office has responsibility for all Asian markets and I’ve specifically had exposure to markets such as Australia, Malaysia, Philippines, and most recently Vietnam. Despite being one of the smaller economies in emerging Asia at about $ 60 billion in 2012, Sri Lanka’s infrastructure development is greater than many of its neighbours. In terms of what makes it unique, I see a stronger public role in driving infrastructure than most other countries in the region; this has been particularly relevant following the end of the civil war in 2009, especially to link the Northern and Eastern Provinces. The economy in Sri Lanka is gaining from a huge peace dividend following the cessation of a three decade long civil conflict in 2009. Initially, the growth boost came from more resources being put to use and reconstruction efforts after the war. Apart from internal growth potential, the winning of peace has also lifted the country’s potential to create better trade links with bigger markets in the region, particularly China and India. Marcelline: Sri Lanka has a great strategic location, and post war, there is a lot of positivity in terms of the country’s infrastructure. We are catching that growth trajectory and after having being at war for 30 years, the post-war development really stands out and is driving Sri Lanka to the forefront. We are strategically placed to enable and support this ongoing development phase given our established presence and long-running commitment to Sri Lanka Q: How much has HSBC lent Sri Lanka until date and what’s the appetite potential for the future? Galvin: HSBC maintains the position as the largest foreign bank operating in Sri Lanka and has been an active player in supporting the Government of Sri Lanka in its debt raising activities including acting as Joint Lead Manager and book runner for all five of the Government’s Sovereign Bond issuances totalling $ 4 billion. In addition to this, over the last decade we have been very active in arranging financing for projects domestically in the infrastructure, power and telecommunications sectors. Sri Lanka remains a priority market for us in the region and we intend to continue to strive to be the banking partner of choice for our clients in the country. Marcelline: We are the largest foreign bank in Sri Lanka and our presence is a symbol of our commitment to the country as well as an indicator of investor confidence. In addition to our funding of infrastructure projects in key growth sectors we have also facilitated more than $ 1 billion in investments into Government securities, we are also the key enabler of investments into equities in Sri Lanka. So, we bring in our expertise and network capabilities in many folds. Q: What infrastructure development projects are in the pipeline? Galvin: Global infrastructure trade is set to triple by 2030, according to HSBC’s latest Trade Forecasts, and it sees a significant rise in its share of global trade. Clearly, demand for overseas goods and equipment will surge as countries like Sri Lanka look to increase their manufacturing capacity domestically and civil infrastructure. So in Sri Lanka, we see a lot in the transport infrastructure sector, along with the petroleum industry which may provide a boost to the country’s infrastructure given that the country has been offered bids for licenses on 13 blocks which have high petroleum potential. Marcelline: Given our global reach and regional presence, we like to focus on sectors that has potential for growth be it; oil, gas or telecommunications. However, there has also been and we continue to see considerable development being made in terms of the smaller industries as well, such as fisheries harbours, water distribution and irrigation and rural road network which directly benefit the local population in the area, improving their day-to-day livelihood. This provides the rural population with vital access to health and education services thereby increasing the economic inclusivity. HSBC has also financed a wide range of other key development projects in Sri Lanka over the past several years in the public and private sectors. To name a few landmark transactions, we have acted as Sole Arranger for the financing for the Dikkowita Fisheries Harbour, the pioneer solar drip irrigation project, Sri Lanka’s largest independent power plant (at that time) in Kerawalapitiya and a number of rural and steel bridge projects. We expect to continue to do so in the future. Q: How does HSBC compete with lending from emerging economies? Specifically Chinese entities such as EXIM Bank? Galvin: Sri Lanka’s links with China have strengthened as more infrastructure has been built by the Chinese domestically. Clearly the political ties between the two countries are very strong. Notably in the port sector with the Chinese-built Hambantota port set to be the country’s largest, with a price tag of about $ 1.5 billion. Given our global platform in project and export finance and domestic presence in both Sri Lanka and China, we have very strong ties with all of the Chinese policy banks and regularly work alongside them to arrange financing in Sri Lanka and other markets in the region. Q: What do you see as the potential implication of Sri Lankan banks looking to directly tap off-shore markets? Marcelline: We think it’s a great opportunity; local banks should align their business in line with international standards – being able to adapt faster to changes in the business environment, technological improvements, etc. Also the international rating processes required to access certain pools of foreign debt capital liquidity would also help improve the local compliance and governance measures It is an ideal opportunity for the local banks to use trusted advisors such as HSBC who have a long running presence in the country and committed to the long-term goals of Sri Lanka. We welcome local banks to leverage through our expertise and guidance, identifying and going out to markets, and understanding them. This is a part of embracing financial globalisation, in order to remain competitive. It is paramount. Q: What is your take on Sri Lanka’s financial market and potential? Galvin: The stock market rallied strongly after the end of the war in 2009 but has performed less well in the last two years. Our equity strategist believes that recent macro improvement has so far failed to translate into gains for the equity market. The banking sector in Sri Lanka is highly concentrated. Four state banks and two large commercial banks own nearly two thirds of banking sector assets. The banking system is healthy, with a high capital adequacy ratio and low and falling non-performing loan ratios. However the main issue is that banks don’t have big enough balance sheets to take on financing big infrastructure projects themselves, this is where HSBC comes in given our global network, access to offshore pools of liquidity and relationship with Export Credit Agencies and multilaterals we are able to provide financing solutions to suit the infrastructure requirement. Marcelline:  We welcome consistent and sound policy making decisions. As mentioned previously, Sri Lanka now offers a growth story for both those who are here and those who want to come in. The development of capital markets is encouraging. The regulatory push on IPOs, local corporate debt issue and relaxation of exchange controls are good indicators that investors look for. Pix by Sameera Wijesinghe