Cabraal on dealing with challenges

Shares thoughts on sustainability in volatility and the way forward

The Guest of Honour, Dato’ Charon, President and Members of the Professional Bankers’ Association, my dear friends, first of all, let me thank the Association of Professional Bankers for inviting me this evening to your 24th Convention and giving me the opportunity to share a few thoughts on a timely topic, ‘Sustainability in Volatility : the Bankers’ Challenge’.

When the theme for today was introduced by your President, he spoke about re-engineering, reinventing, and repositioning. Just last week, I was at the defence seminar and at that seminar, the focus was on reconstructing, resettling, reintegrating, reconciling, and re-habilitating. All these themes are today becoming buzz words, and I think we are also on the right track to be reflecting on those matters that are vital for our country.

My dear friends, this address to the bankers is one that I take very seriously each year. As your President mentioned, I accepted this year’s invitation without hesitation because I knew I will get an opportunity of talking to the professional bankers of our country on this important topic.

Sustainability and volatility

Let us therefore begin at the beginning, by trying to understand the sense of the words, sustainability and volatility. As the dictionary defines, sustainability is about continuation and the maintenance of a particular situation or a process or a system.

Volatility is defined in almost the opposite manner, in that it is described as change, fickle, unsettled, unstable, erratic and unsteady. Sustainability in volatility is therefore obviously going to be a huge challenge, and a kind of a paradox, and hence, that’s something that we will need to focus on very carefully, as persons who are involved in banking in these turbulent times.

In the last few years, globally, we have faced more crises and problems, than in any other period in the past. Before one crisis could finish, another has emerged. If we consider the last 5 years, we have experienced a painful global food crisis, a debilitating oil crisis, a crippling sub-prime crisis, an unprecedented banking crisis, a devastating economic crisis, a deadly debt crisis, a destructive political crisis, and a highly damaging confidence crisis.

In the past, economic policymakers and bankers would have found that, often, they had the luxury of being able to finish off with one crisis, and then get ready for the next one, after taking a little breather in between. But, now, there is no such luxury. That’s the environment in which we are working.

As Dato’ Charon mentioned in his speech, when we watch any news channel or read any newspaper, we mainly see gloomy stories. It is therefore tough for everyone because we need to make our own organisations sustain and grow, notwithstanding all these crises and the dooms day stories that are being churned out every second.

Dealing with challenges

My dear friends, if we are to deal with these challenges effectively, the first thing that we will probably need to understand, is that there are no standard responses for these different situations. Remember, also that there are no “one size fits all” kinds of approaches. Each day will pose fresh problems and issues, and we will need to deal with those on a day to day basis.

As I said at the beginning, I prepared for this address diligently, and in preparing, I picked a few books from my library to find out what the global experts on various connected topics have to say in these volatile circumstances. Let me just give you a brief introduction to some of those interesting and relevant thoughts I came across.

In the book titled, ‘Passport to Profit’ written by Mark Mobius in 1999, Mobius provides a useful guide to global investing, and he reflects on the different trends as he sees evolving, in 1999. Some of those trends and principles are true even today, and it is possible to fashion some theories and strategies on the thoughts of Mobius. Then, I glanced through some of the ideas that are contained in ‘Saving Capitalism from the Capitalists,’ written by Raghuram Rajan and Luigi Zingles. There, they speak about unleashing the power of financial markets to create wealth and spread opportunity.

As Dato’ Charon said sometimes people conjure up various situations out of nothing, and although some things may seem real, those may not actually be so in reality! Remember that is sometimes quite true with financial markets in particular. Then, Steven de Levitt and Stephen Dubner’s book in 2005 called ‘Freakonomics,’ which is described as a report by a rogue economist, explores the hidden side of everything. It makes interesting reading, as that book too speaks about the need to be aware as to what really constitutes a certain situation, even though it may look different on the surface.

In yet another interesting book, titled ‘The Extreme Future,’ written by James Canton in 2007, an attempt is made to codify the top trends that the author believes will reshape the world in the next 20 years. This too, is an interesting volume, as it sets out the possible different directions the world may move in the next 15 to 20 years. To my mind, it is an extremely interesting book, as some of the trends anticipated are indeed mind-boggling! But, we need to understand that these mind-boggling futuristic events may perhaps be things that can happen someday soon, as well. In that regard, let me also share a personal story with you.

New and extreme future

I remember I met Sir Arthur C Clarke a few years ago when he celebrated his 90th birthday at the Central Bank auditorium, in the presence of His Excellency the President, Mahinda Rajapaksa. On that day, I had the opportunity of talking to Sir Arthur C. Clarke on a one on one basis, and I asked him as to what will be the next major futuristic event that the world will celebrate.

I posed that particular question to him, because, in the early ’80s, I had met him at a conference at the BMICH and I had asked him what the world is going to be like in the 20 years following. In response, he had told me that people will be carrying an instrument in their hands which will tell them where they exactly are, as that instrument, will have a GPS. He also said that it would the only instrument that they will need to carry, in order to be contactable anywhere in the world. Mind you, this was said by Sir Arthur C. Clarke, well before there was call identification, call forwarding, roaming, etc.

This time, when I asked him the same question on his 90th birthday, his answer was that there will be a cable that will be drawn from the earth to the moon, along which there will be elevators moving, transporting people up and down from the earth to the moon! I can see some of you are laughing today when I say this, but remember that’s what he said, and he has predicted certain amazing events in the past! Maybe, in 15 years’ time, you may be laughing too, and that may be when you are going up one of those roaming elevators to the moon!

My dear friends, this is the type of new and extreme future that is unfolding before us. Sometimes, we find it difficult to grapple with some of these things that are happening, because those are moving at such a rapid pace, but these things are surely the events that are being fashioned in the world today.

The dollar meltdown

During my quick weekend study, I also came across another excellent, thought provoking book, titled, ‘The Dollar Meltdown,’ written by Charles Goyette, in 2009. There, he speaks about surviving the impending currency crises with gold, oil and other unconventional investments. He also seemed to suggest that the dollar may not be the most important reserve currency in due course and also that the dollar will have serious difficulties in maintaining its current pre-eminent position.

This argument of Goyette has been increasingly finding favour with some other analysts and writers recently, but just after digesting those thoughts of Goyette and others, I browsed through another book, ‘The End of the Euro,’ written by Johan Van Overtveldt, in 2011. There, Van Overtveldt refers to the uneasy future that is engulfing the European Union, which was alluded to by the keynote speaker, Dato’ Charon, as well. So, can anyone tell us what is happening?

One author speaks about the dollar meltdown, and the other speaks equally authoritatively, about the end of the euro. If so, what do people do when they have to invest? Obviously, these are tough choices. Tough decisions. Volatility, uncertainty, instability. No one can be certain. But, that’s the way the world moves now, and will most certainly move in the future. These are all uneasy, unpredictable situations. No one has the right answers before the events unfold.

But, surely even in that complex and volatile environment, the logical way forward is for us to talk about these matters, and be conscious of these events, and remind ourselves that we will have to continuously face these types of situations into next decade or so, as well. Let’s then try to understand that that’s the environment in which we will have to function. Not an easy environment. But, that is reality, and we have to face it.

Facebook

If we need any further convincing, let’s also examine the recent case study of Facebook. The keynote speaker spoke about the second and third largest global share issues this year, being made by Malaysian companies. That’s correct. At the same time, we all know that the largest global share issue this year was done in the US, by Facebook.

The Facebook IPO came to the market in end May at US$ 35 per share, and at that value per share, the market cap of Facebook Inc was a whopping US$ 104 billion! US$ 104 billion is actually over five times the total market cap of all Sri Lankan listed companies! But, by the end of July in just two months or so, the Facebook share had dropped to US$ 21 per share. That means, the market cap of Facebook had plunged to just US$ 62 billion. A drop in value of US$ 42 billion!

That drop, my dear friends, is about twice the size of the entire market cap of the Colombo Stock Exchange. Well, that’s volatility for you! That is a scale at which global volatility takes place!

In addition to this type of changes, we also experience volatility as a result of fluctuations of currencies, interest rates, growth rates, credit ratings, news stories, scandals, innovations, changes in management, changes in political leadership, changes in regulators, and many other issues and situations. These are the volatilities that you, as bankers, and we, as Central Bankers, are confronted with each year, each month, each day, each second. That has happened in the past, and will happen in the future too.

Sri Lanka’s economy

But fortunately, notwithstanding all these uncertainties, Sri Lanka has been able to achieve its best ever period of economic growth, and best ever set of macro-fundamentals, when compared to its past. Fortunately for me, the keynote speaker spoke, described many of these economic achievements of Sri Lanka, and so, I don’t need to elaborate on those today. Thank you very much for that, Dato’ Charon.

Dato’ Charon had obviously done his research before coming, and we appreciate that. Nevertheless, there are a few areas that I just need to touch upon, in order to complete the story.

My dear friends, in the next few years, the Sri Lankan economy will reach a GDP value of US$100 billion, up sharply from the slow paced economy of about US $ 24 billion GDP in 2004. When that US$ 100 billion milestone is reached, and the per capita income rises above US$ 4,000, we would find that the structure and strength of our economy would change materially. While we are on course to achieve that goal, we still need to prepare ourselves for that new scenario from now onwards.

How many of our bankers have reflected on the vast impending changes that are going to take place as we march towards this goal? How many have prepared themselves for that new platform; for that new paradigm shift? How many have positioned themselves for this new emerging situation? I think these are surely the matters that should be addressed by each one of our bankers in their own corporate planning sessions, and I would urge you to do so, without delay.

The banking community

The President of the APB spoke about re-engineering, reinventing, and repositioning the banking community over the next few years. Well, I can tell you that those practices will be extremely vital, when we approach the future that is unfolding before us, at today’s phenomenal pace.

In the 1970s, Alvin Toffler wrote a book titled ‘Future Shock,’ which I consider as one of my all time favourite books. The theme of that book was that the future, even at that time in the ‘70s, was engulfing the present, before people could understand and come to grips with the pace of change. Toffler described that phenomenon beautifully, as the shock of the future which grips the present.

I have seen a telephone company using a similar theme today by saying, ‘The Future, Today’. Well, we must remember that this transformation taking place in the banking sector, more than in any other sector, as well as in many economies, including Sri Lanka. In Sri Lanka, this shift and impact may be even faster, wider and more visible than in others, because of our faster growth. We need to be conscious of that. The message is clear. If we want to be sustainable, in volatile conditions, we have to be conscious of these issues all the time. Otherwise, we will get left behind.

What then should we do? From the point of view of the Government and the Central Bank, we want to create and maintain a conducive platform for the economic stakeholders of our country, so that they are able to work through their normal course of business in a stable, safe and conducive environment. Already, we have done much to deliver on that need, but over the next months and years, in order to move towards that goal, we will be working on the new needs as well.

As a part of that effort, today, we are looking at the payment and settlement systems that we need to put in place; the type of supervisory approach we should implement; the framework of risk analysis and risk parameters that we should set for banks as well as for the economy; the economic policies that needs to be introduced when the country approaches a truly middle income nation status; the level of infrastructure and business practices that we must set up and maintain to compete with more advanced nations.

These initiatives and many other improvements are already being planned as well as being implemented, and that type of focused progress must surely give our growing stakeholder network a high degree of comfort. In addition, we are keen to ensure that financial inclusiveness takes place in our country in a meaningful manner, so that there will be continuous political stability.

Moving in the right direction

We have already seen Sri Lanka’s GDP being distributed better than the GDP distribution prior to 2005. At that time, the wealthy Western Province accounted for 50 per cent of the national GDP. But, today, the contribution of the Western Province to the national GDP has reduced to 44 per cent. That is not because the Western Province has gone backwards, but because the other provinces have begun to move forward, faster. That is a macro movement in the right direction.

In addition, we also want to create and maintain spaces and cushions within our economy on a continuous basis, so that it can absorb shocks that may arise from the outside world. That’s very important, if volatility is going to be addressed, and we are to be successful. One of the best ways of meeting unforeseen challenges, is to have the strength and space to absorb shocks. That is why, in vehicles, we have shock absorbers. Then, if the vehicle falls into a pot-hole, there will be the ability for the vehicle to absorb the shock and not transmit the shock to the passengers.

In the same way, in an economy too, we need to build spaces so that those act as shock absorbers. For example, if we have an eight per cent growth, we can temporarily take a reduction in growth to about seven per cent without a major upheaval. If we have low inflation, our tolerance to absorb some sudden global price hikes will be greater.

If we have foreign reserves that are in excess of what we need, we can afford to take an adjustment of reducing our reserves to acceptable levels, in an effort to maintain long term exchange rate stability and moderate interest rates. In such ways, in our economic agenda, if we develop the spaces to absorb shocks, we will be in a position to face new shocks when the next major worldwide shock hits us, like we faced the major shocks of the last six years.

Let’s also remember that there will be shocks in the future too. No one can stop that. We don’t know exactly when, what and how the next shock will hit the world and us too. But, whatever it may be, we will be in a better situation to face it and meet the challenge, if we are strong. That has been, and will be our philosophy to deal with shocks and volatility.

Principles

My dear friends, as a few final thoughts, let me try to enumerate a few principles that I would like to leave with you.

First, take a long term view. It is very difficult to progress with certainty in a technical “marked to market” environment, as practiced in today’s volatile world, without having a solid long term view. Every second, numbers and values change. I have the Reuters and Bloomberg screens on my table, and every split second there are different cross valuations being displayed. But, although forex and commodity traders may take short term views, we, as policy makers and institution leaders, have to take long term views. Planners and leaders who are managing banks, need to have a long term focus and a long term view.

Second, liquidity and cash is vitally important. Cash is key, and we need to address our cash availability in a very, very sound manner, and be in a position to ensure that we are never going to be in trouble as a result of not having sufficient cash. That is basic in banking. Safety is one of the most important factors.

Third, ensure that your banking business strictly adheres to the regulatory standards. Today, we read more and more unfortunate reports about various banks having serious difficulties because of various scandals due to wrong doing and falling foul of the regulators. Those lapses have damaged their reputations severely. That can also lead to serious long term setbacks, and cause tension in an institution. Remember, it takes a long time to nurture and develop goodwill, but it can be wiped out in seconds.

My dear friends, let me conclude by leaving a final thought with you. That is, always remember, in the grand scheme of things, it is the ‘quick’ that will survive, and not necessarily the ‘big’.

Thank you.