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Sunday Nov 24, 2024
Monday, 30 March 2015 00:41 - - {{hitsCtrl.values.hits}}
Q: What do you see as the impact of the mini-Budget? Do you think we are going to get some sense of policy direction soon?
Mihular: In my role as the Managing Partner of the KPMG, I get to meet a lot of investors and one of the key concerns of them is the policy direction. The inconsistency in policy direction is one of the key issues that worries and upsets investors. We have had a lot of inconsistencies all 
these are issues that worries investors coming to the country. I wouldn’t look for the mini-Budget for direction, because it is merely a ‘stop gap measure’. I think a direction would come soon after the election and I’m looking forward for that. That’s when we will have an idea about the long-term.
When investors ask me ‘what about the Super Gains Tax?’ I keep on saying that’s a one-off tax and don’t look at that as a direction. You would see greater clarity with regard to the future. We need to get the elections done and dusted soon. The more level of uncertainty is going to be there, the more it worries the investors. There are many investors waiting to see how political instability would settle in for them to see which policy directions would take place for them to invest in the country.
Goonewardena: I agree with Reyaz to the fact that you can’t read anything in this mini-Budget. The bottom-line is, there is a filthy message there about what is possible in Sri Lanka and I think that it should never be forgotten. If by chance you talk to local entrepreneurs, I’m not talking about people who are running on other people’s money (I mean banks), those people can make statements and that’s fine, but large scale local entrepreneurs who own their companies are extremely unhappy about what the mini-Budget means to them.
Rs. 1,000 million is a lot of money by your profits. If the UNP could do it, you can just imagine what the JVP and the rest of the political parties could do in going forward. With regard to elections, the message is very simple. The definition given by the Minister was quite right – you’re basically dealing with one category of money and dealing with another category of voters. But the message of consistency and all that entrepreneurs who are forking out the money are deeply disappointed.
Bandaranaike: Consistency in policy is very critical for capital markets and foreign investors. I think any government should strive to ensure that consistency of all of the important policy measures are maintained. When we do have policy changes, it becomes tough for market participants to keep on facing their investors and it affects the entire markets as well. As far as the mini-Budget and some of the comments that were made are concerned, I think we have ushered in a new political culture. As you know, markets hate uncertainty. I think as markets, we need to be patient and give it some time for the Government to settle down. Hopefully we will see some consolidation and stability in place after the elections are held.
Theagarajah: I think it is still a 100-day program rather than a medium term program. Recognising the feelings of what Naomal said about the entrepreneurs, I’ve a different view. While representing the banking industry, which of course manages other people’s money, as CEOs, I think our fundamental responsibility is to the owners ultimately. I must say that when this initiative came out, I had the opportunity of engaging a whole range of domestic as well as foreign institutional owners of the bank, including those who own my own bank. When asked whether this is one-off initiative to keep people awake at night, the consistent answer which I had across the board was ‘no!’ This is from people who are taking medium to long-term front on the stock. But the repeated comment has been that it was a one-off initiative, it doesn’t bother people. However, if it is going to be preceded, then it would be certainly viewed as disruptive. So far what we can do is believe and have faith in those who have made firm and open statements as this is a one-off initiative and hope that those who made those statements will walk the talk, which we will know in the near future.
Q: What is going to happen to the consolidation of the banking and finance sector?
Theagarajah: I’m a firm believer of consolidation. I think for a market of our size which has around 30 to 35 banks and if you look at the top five banks’ assets based on 2014 numbers, it’s around 65% to 67%. With that if we compare ourselves, I think we are in middle of two extremes. 
India is around 40% and the United Kingdom and China around 90% to 91%. I think we are already halfway there and we have the opportunity. Comparing the top five banks and the balance 30 in relation to past 10 years, when country was facing a different challenge, it was fine to have pools of capital floating around. But today, when the country is aspiring for renaissance in one economic direction, there is less room for pools of capital not playing their roles.
Secondly, I think there is a core-relation between the scale and stability of profits. If you look at the top 10 banks other than the State Bank of India (SBI) and look at the profit pool between the period of 2004 to 2014, the top 10 banks showed movement of return on assets (ROA) between 1.3% to 1.1%, whereas the rest showed variation from 150 basis points to 70 basis points. There was a much larger variation in the smaller banks. Based on empirical evidence, you can see the correlation in terms of stability. There are some other factors also that we need to bear in mind. The smaller the organisation is, the cost of building a national brand is something that one needs to bear in. Today, given the regional and global financial crisis, the key tagline of safety and security in banking is very important. So, investing in brands also involves capital. In Sri Lanka, I think with the upsurge in economic activity, there is a huge war for talent, not just within banks but within the entire economic system. So there is again the relative lack of ability to attract good talent into smaller institutions. Also the cost of sharing the infrastructure and the ability to participate meaningfully in the real economy. Especially the sunrise industries like energy, infrastructure development and so forth. The smaller the organisation, lesser the ability.
Mihular: Taking the NBFI sector for example, we have some 50 odd non-banking financial institutions (NBFI) companies. Having being involved in some of the investigations, particularly with the one that collapsed, that was 0.012% of assets. But that caused a lot of concern among the people. You can always say that the Central Bank should regulate, but you can’t go down and see what each guy is running in. Therefore, the move to consolidate the NBFIs into a smaller number was the most sensible thing that was done, because we cannot afford to have small boutique window type of things running all over, with all the attendance danger of collapsing. As you know the whole finance industry runs on confidence. If there’s lack of confidence, there is a run and even the biggest banks will crash. Hence, the move of consolidation was an absolutely timely initiative and I would recommend whoever is in power to ensure that financial consolidation is seen through. However, I’m not advocating any methodology to follow, but consolidation principle has to be done.
With regard to the banking sector, I think we have too many banks. Malaysia has only five to eight banks and they also went through a consolidation process. I have another view on this; we in this country are heavily cashed base. One factor of development would be how much are we moving towards a cashless society. We are still cash based and we complain about fellows in full-face helmets going and robbing banks. If you are going to move into a cashless environment, that’s an investment. If you’re going to get that infrastructure and support that infrastructure for a cashless economy, that needs investment and small banks cannot afford that investment. So, at least from that point of view apart from all the other benefits, I think one important factor is for the country move to a cashless or much lower cash base economy. That will need investments and therefore it makes a case for fewer larger banks that can make that investment to reach that level in the economy.
Goonewardena: Reyaz explained the rationale for the consolidation. But what is the state of the consolidation? And what has happened from the beginning? These are the more relevant questions we must discuss. The first thing is that everybody who complied was punished. What’s the message it gets across? The people who fulfilled the requirements on time to get their consolidation done, well on the stage of getting the entities merged, were punished. But people who didn’t do anything, they got away. Hereafter, whenever it is required to be done by the government, everybody will wait until the last day and expect not regime changes but at least if somebody changes, the directive will change. What’s the message it delivers? I like what the minister said about consistency. Eventually the policy goes as the Government of Sri Lanka. By some chance the wrongdoers are rewarded and the people who did the right thing are punished in a corporate sense, in my view the wrong message has been given and this was one of the classic examples which I think was neutral from the areas of the new Government. There would have been at least one plus point to say that at least consistency was maintained.
Bandaranaike: From a risk perspective it’s better to have fewer but strong banks and finance companies. When the Central Bank made it mandatory for finance companies to list, there were 50 odd finance companies and not all of them qualified for listing and we had serious concerns when some of them wanted to list on the CSE. Fewer stronger companies would be beneficial for all the stakeholders.
Q: What are your views on interest rates and the rupee’s stability for this year?
Bandaranaike: Unfortunately we have seen the interest rates creeping up. There is a correlation between the interest rate and the All Share Index (ASI). Whenever interest rates keep rising, the markets suffer. I think going forward we may see some pressure on interest rate. We might see a gradual increase in interest rates compared to the historical low interest rates we saw in the recent past. I also see some pressures on the exchange rate and the Government may settle with a higher import bill. As far as markets are concerned it may be a negative factor because it may either prevent foreign investors coming in, might wait for devaluation or possible stabilisation. If the foreign investors foresee an exchange rate risk, they may even exit. These are some of the impacts the markets can have as a result of the pressure on exchange rate. The only positive factor is that the oil prices are declining.
Mihular: I always believe that the low interest regime is not sustainable. If you look at our country, we don’t have super valuation schemes. People who retired from the private sector do depend on this for their investments. That’s how these finance companies were making all the money because they were offering all sorts of interest rates which are not sustainable. And people just followed that incentive. They were just depositing their money without checking the reliability. Having done with some of these investigations, I’m surprised how people could even think of putting their money in those companies. These are all fairly intelligent people.
Firstly, it didn’t give proper interest rates for senior citizens. Secondly, it never benefited the business sector as well. Only the ‘blue-chip companies’ or the top companies got the 8-9% interest rate, while all the others had to pay the 12-14% interest rate. The low interest rate didn’t even help the economy to drive through availability of credit at lower rates. That’s the normal norm. Cheaper credit can be used for investment, which leads to greater production, but we didn’t get that also. I think in the short term there will be a rise in the interest rate. I’m not advocating that we go back to the 20% interest rate we had before. That was another unsustainable extreme. In the short term I think there would be a rise in the interest rates which is more sustainable than the rates that are trying to maintain. I’m not a banker, I’m looking at it purely as a professional who has seen and spoken to businessmen who have used credit and who has seen people get into trouble by trying to eat out on returns.
Theagarajah: I take a slightly different view to Reyaz. In terms of the sustainability in the medium to long-term, the policy rates can be sustained, but there are couples of issues. Firstly, how successfully this Government is able to maintain the type of revenue collection in terms of targets is important. Secondly, in these 100 days there were a number of goodies which were promised. The potential saving in the oil prices have factored in, what is important is timing mismatch between the handouts going out and the collections coming in. The issue regarding the super annotation yes, there is some truth in it but I think overall it’s a short term initiative.
As we move on in a single digit interest environment you will see and we were seeing individuals starting to reallocate their savings wallet. There was a gradual shift from the traditional deposit base into other class of assets. If we look at our own bank, the strategy we took intelligently was instead of allowing deposits going out from the group, to make sure whatever went out of the bank as a deposit was captured from the wealth management part or in terms of the mutual funds as a strategy to minimise the leakage and that’s something that will come with time.
The issue pertaining to SMEs to getting access to finance, I think for that there is some correlation to that and capital market development. With the development of the capital market and the Central Bank point of view, frowning more on larger corporates and encouraging more access to the capital market will naturally push banks to look more objectively at the SME sector. The more and more larger corporates are allowed to go to banks and the banks keep on going to the regulator asking for variations on their single borrowings, you will not achieve what we really want to achieve for SMEs. There are some policy consistencies necessary, with that sort of adjustment in policy and also getting the export diversification. It is imperative to get the proper diversification in exports, which is not a short-term thing. With FDI we can certainly achieve single digit interest rate, but it’s not a short-term view.
Q: Where is the stock market headed for the year?
Theagarajah: If I pick up a couple of statements the Minister made, first there is a need for more companies to be listed. I’ve been saying this for some time. I think we have 290 companies in the market. I’m not sure if you grow at the rate of 30% to 50% per year, that this market will have enough listings to truly absorb the capacity of the CSE can do in terms of infrastructure. I think we are fast missing the boat. You saw what DIFC did few years ago in Dubai. India just announced the recreation of an equivalent of DIFC. So that’s going away from us, which means we are fast losing the opportunity of becoming a regional listing hub.
However, we still have the opportunity with two large markets around us, which are operating in conditions just perfect than us, which provides us a chance to tap into those markets like Pakistan and Bangladesh. They are much larger markets, much bigger opportunity, going through trauma in terms of their capacity and I think we should exploit that as soon as possible because these 300 companies are really not going to give the liquidity and the excitement in this market.
I think the Minister made an interesting comment about getting the SOEs, but I hope that message comes across from the Government and not just one party, because one part of the Government is saying no. As long as you have different thoughts on this, you’re not going to achieve this. The answer to that may not be not complete privatisation, but some of us has been advocating even partial distinct at least 10% of these SOEs will create two things – the type of liquidity and enhancement of the market capitalisation, which will make a huge difference to the stock market. Secondly, the difference it will make in terms of transparency and governance and in terms of quality in terms of financial reporting and accountability.
Now if you look at the banking sector itself 40%-45% of the sector is in the hands of unlisted entities and then you go towards policy advocacy whether it is IFRS, SLRS, Basel III you name it. When I look at India and Sri Lanka the difference is here you may have the private sector banks driving some of these policy advocacies. If you look back 10 years as to how the ICIC and HDFC in India were pushing an initiative, what they did intelligently was they engaged SBI, which is still owned by the Government of India, only about 10% is listed. When that came into play, they take advocacy seriously. When a bank of that size gets involved in policy advocacy, you truly are able to then make an impact on systemic changes. This is what we need to get right here. Getting the bulk of industries listed where accountability becomes more critical to also have a positive impact on the market.
Bandaranaike: The Minister made some excellent comments and I wonder if he had reviewed the CSE strategic plan. Particularly his comment made about SOEs listings were sweet music to my ears and many of you here. Key issues in going forward in our market is the lack of listings. If we have large companies we can offer investors, it will allow us to have a larger pool of investors. Second is the issue of liquidity. Of course all the markets in this region have this issue of liquidity, but particularly ours. If you really talk about investable stocks, how many stock do we have? We have put in a lot of infrastructure initiatives, brokers are updating their systems, and we are addressing the settlement of risks. But I think to really take the market forward we need a catalyst and I think SOEs perhaps provide the answer.
In Sri Lanka we have a quite a number of large SOEs that are ready to be listed on the CSE and that will immediately propel us to a different size and different dimension altogether and give us the impetus for the real capital market that we are talking about. With that there will be market intermediaries which will help us to take the market to a whole different level. One important aspect is the fact that we should encourage the larger corporates to access the capital markets, while encouraging SMEs to access the banks. In fact we were recently asked to look at separate boards for SMEs. We believe that SMEs are the ones that should be accessing the banks and larger corporates accessing the capital markets. Let’s hope that proper policy prevails, allowing the market to move in the right direction.
Blue-chip companies should be encouraged to access capital markets more often. We are not astrologers to predict the future of the capital market, and anyway these days the astrologers won’t be giving their numbers right either. I think markets are volatile, particularly sensitive to political and economic factors. We have a situation where there’s uncertainty in the market. As I said earlier, markets hate uncertainty. We have a fairly dull market at the present budget time, we have these fluctuations. But I would think that the launching prospects are good. Particularly in the second half of the year I think the market will catch up on the lost time and lost volume.
Theagarajah: The Minister said that our market accounts for about 28% of GDP. If we are aspiring to be anything close to 70%-80%, we need to have a very clear vision; with the type of companies we have here, will we get to that level? If not, how do we aspire to make the capital market reach that level? I want to make a simple analogy. I hope there are officials from the Board of Investment (BOI). Now we go all over the world, calling manufacturing guys to come in here saying best in class infrastructure, labour, talent, and so forth. My question is, why can’t we go to a few neighbouring countries which have much larger market access and say best in class company secretaries, accountants, clearing systems, settlement, brokers, custodian players to come and plug and play? Why are we not promoting?
If we are recognising that whatever we do to grow the domestic market to increase its contribution to the GDP is not going to materialise in five years, don’t we think that we are doing ourselves an injustice by sitting here and saying we don’t know where we are going? I personally think that Rajeeva should be supported at policy level. People who are able to think bigger, think out of the box and see how to bring this capital market to contribute to more than 50% to 60% of the GDP. What else have we got to do to promote Sri Lanka’s capital market to the outside world? Just trying to bringing people to invest in this 300 stocks, frankly I don’t think is going to push that contribution anywhere. This is my personal view.
