Sunday Nov 24, 2024
Sunday Nov 24, 2024
Wednesday, 10 September 2014 00:00 - - {{hitsCtrl.values.hits}}
After the end of our country’s unfortunate internal conflict, we began a round of reforms and this forward march. During that 30-year period we lost a lot of ground and policymakers knew that we had to leapfrog and they came up with strategies and plans in very adverse world economic conditions.
The Colombo Stock Exchange and the SEC knew that the forward march of the country depended on the capital market and we employed a reputable agency to do a strategic study on what we could do to bring the capital market up to world standards and the recommendations are now being implemented in the areas of IT infrastructure development, regulation, new instruments and also knowledge building, awareness building and institutional building in the capital market. That is a bit of a short history of how we started in 2009.
Snapshot of the economy
Let me give you a snapshot of the economy; interest rates have come down drastically. We were used to having interest rates in the 20s and it has now come down to the single digits. The yield curve has totally shifted down and international reserves have improved.
We were in a very bad state in 2009 just after the end of the war and the IMF came and helped us at that time. However, now we have a totally different situation and reserves are going up because exports are improving. Money supply is under control and debt to GDP, which was a major concern for Sri Lanka, is gradually coming down. The budget deficit is also coming down and the balance of payments in all components is improving.
The country’s risk rating has remained stable and if you look at the premiums that we are getting from the new issuance, it clearly shows that in the minds of investors, the ratings have improved and we are expecting the rating to improve very soon. Therefore it is a country about which we can say very proudly that it has achieved economic stability, political stability and social stability – and is therefore a very attractive destination for investment.
Sri Lanka’s capital market
Now, focusing on the capital market, two of the main products offered on the market are equity and debt. In the equity market, the market size is $ 22.5 billion and 295 companies have listed in 20 sectors.
Sri Lanka has performed much better than most of international indices; similarly, if you take regional markets, Sri Lanka has performed much better than the other regional markets.
It is very important for portfolio management to consider correlation; if you take Sri Lanka, the correlation to world markets is very low – this is an important aspect which will help you to diversify your risks.
Again, on the fund raising side the debt market has helped to raise 230 billion from 2010 to 2013, through the market. Further, market capitalisation is 28%. We think these elements show opportunity, because it clearly shows where the capital market can grow. Further, in PE (Price Earning) values, Sri Lanka is very much more attractive than the PE (Price Earning) values of the region.
With relation to the debt market, there are three areas where Government bonds can be tapped – Sri Lanka development bonds, sovereign bonds and corporate bonds. International bonds are done by banks; the main issue here is the lack of scale. As I said, the premium over the risk free rate has come down during the last four to five years, therefore in the minds of the investors the rating has improved.
The important aspect to note in the Government bond market is that we have increased the yield curve and also corporate bonds have become very active after the Government gave capital gains and coupons all tax free after the 2012 Budget.
To give you a snapshot of what is happening in the Treasury bills and bonds sector, foreign fund managers can own up to 12.5% of the outstanding bills and bonds of Government bonds. There is another change happening; we are working closely with the Central Bank to improve the transparency of the corporate bond market and to take trading into the corporate bond market.
Ease of investment
It is very easy to invest in Sri Lanka; you have to come through an SIA account and invest in Government bonds, corporate bonds or shares, by a single account. You can come to the country and take it back with capital gains or dividends; therefore, as you can see, a very easy process has been put in place.
Another area that is growing is the unit trusts or mutual funds, which has come to about Rs. 75 billion and is developing very fast.
With wealth coming in, a number of individuals and corporates now want alternate investment plans. With interest rates coming down, everyone is looking at the alternative investment opportunities. Unit trusts are made more attractive by the fact that returns on unit trusts have been made tax-free. Further the 12.5% limit on Government bonds is not applicable if you come through the unit trusts.
If you are entering into the Sri Lankan capital market, it would be a good strategy to enter into the Government bonds and bills market and thereafter diversify into the equity market.
