Bourse market cap to grow 45% in 2011 – SEC

Colombo (Reuters): Sri Lanka’s Securities and Exchange Commission (SEC) said on Tuesday it aims to boost the Colombo Stock Exchange’s capitalisation by 45 per cent to a Rs. 3.3 trillion ($29.67 billion) by the end of 2011.

Most growth will come from listing up to an additional 75 companies to try to boost liquidity and increase the proportion of shares regularly traded, SEC Director General Malik Cader told Reuters in an interview.

“There will be one trillion (rupee) in new market cap by 2011,” Cader said. “This is a very easy and reachable target for the simple reason being the listing of anything between 60 to 75 companies.”

Central Bank Governor Ajith Nivard Cabraal had said on 26 November that the Government aimed to double the market’s capitalisation in two years.

Five large companies in which the Government has a large stake will be listed in a move to replicate on a smaller scale India’s success in raising more than $9 billion from the sale of stakes in state companies.

The stock market is the best-performing market in Asia this year with a rise of more than 90 per cent and it led Asian markets last year with a 125 per cent gain as investor confidence rose after the end of a 25-year civil war in May of that year.

Local retail investors and government funds have been aggressive buyers of the market. But foreign investors have booked profits by selling a net Rs. 24.3 billion so far this year, which followed a Rs. 11.4 billion outflow in 2009.

Many institutional investors and funds have shied away from the share market because of its small size and lack of free float, currently estimated by the SEC at 30 per cent.

Cader said 35 finance companies and some small private firms will be listed by June. All insurance firms will be made to list to help increase liquidity and transparency.

The current market capitalisation is Rs. 2.3 trillion ($20 billion), having doubled in the first 10 months of 2010.

“Basically foreign investors should see value. When they see value and liquidity, you will see them coming in. We expect a lot of foreign inflows particularly next year,” Cader said.

Still, by some measures, the market is already highly valued. Its forward price-to-earnings ratio of 20.5 is the highest in Asia and well above 13.2 for Asia’s emerging markets and 12.3 for global emerging markets, Thomson Reuters StarMine data showed.

To entice overseas money, the SEC might consider increasing the foreign holding limit in the stock market slightly from the current 20 percent limit. Offshore investors will also be allowed to trade in exchange traded funds (ETF) to be introduced to Sri Lanka next year, Cader said. “We are coming up with ETF from the second quarter of 2011. There will be gold and metal ETFs in the market, which will be market-driven,” he said.

The SEC is also considering listing the Colombo Stock Exchange, replicating similar moves in Malaysia and Singapore, once the current demutualisation process is completed, he said.

Pros and cons for foreign investors in Sri Lanka

Colombo (Reuters): Sri Lankan President Mahinda Rajapaksa has presented the country’s first full post-war budget, with the aim of cutting a perennially wide budget gap, making tax and fiscal reforms and boosting the country’s investment appeal.

Below are some of the pros and cons for foreign investors who are contemplating entering Sri Lanka’s $42 billion economy:

PROS

Lower tax regime

• Overall, taxes have been cut and a complicated system smoothed out. Tax incentives for big investments and tax exemptions on profits from listed debentures and equity have been proposed for foreign investors. Reforms in the State-run Board of Investment are expected to further reduce red tape.

Relaxation of strict foreign exchange controls

• The new measures are expected to boost dollar liquidity while the rising trend of the rupee may also attract offshore interest, as has happened in the treasury securities market. Restrictions on inflows to open up new business offices also have been eased.

Lower interest rates

Higher liquidity from reduced taxes is expected to bring interest rates down and encourage more economic growth. This will also ensure government domestic borrowing has a minimal impact.

Fiscal prudence

A clear focus on cutting the budget gap and other prudent public finance measures in the budget should boost state revenue and curb the deficit to a 19-year low of 6.8 percent. That economic stability should in turn help investors and businesses.

Infrastructure development

Over $6 billion in post-war infrastructure projects have been given priority with public investment of 413.7 billion rupees ($3.7 billion) budgeted in 2011. Offshore investors have long complained about Sri Lanka’s poor infrastructure, so the moves to boost ports and build roads have been welcomed.

CONS

Implementation

• This is the biggest risk. Budgets with either austerity measures or prudency measures have in the past have been painted as the common man’s enemy, so political stability is the key for implementation. If the now-weak opposition can stoke unrest over budget measures, the government may be tempted to open up the public coffers for a short-term gain. That in effect will kill any real effective reforms.

Anti-government protests

• This will be the single major risk for foreign investors. Marxist-led trade union actions have in the past crippled the economy. They toppled a pro-capitalist government that wanted to cut the country’s debt before giving subsidies to the rural poor in 2004. Plans to tax state employees and trim perks in the 2011 budget could breed resentment.

Overly optimistic revenue targets

• Economists say the budget lacks clear revenue collection steps, assuming a rise in foreign investment. In the absence of them, analysts say the government may have to raise taxes in an ad hoc manner as in the past. It will have both adverse social and political impacts, which could create a risky environment for direct investment.

Expensive labour

• Treasury Secretary P.B. Jayasundera has said ‘cheap labour’ will not be an option to attract foreign capital. A new private pension scheme has been announced to help meet the needs of fast-ageing population, so the cost of starting a business will not be as cheap as in the past.