CAPITAL MARKETS
SHORT TAKES
Compiled by Savithri Rodrigo
Deshan Pushparajah
Darshan Perera
Q: How would you describe the bourse’s role in the national economy?
Deshan Pushparajah (DP1): The market capitalisation to GDP ratio of the Colombo Stock Exchange (CSE) is much lower than that of its peers; yet, it plays a critical role. In the last few years, banks and finance companies have accessed the bourse to raise equity and tier 2 debt. Banks are a lynchpin of the economy and the bourse has played the role of an indirect enabler of economic growth.
Darshan Perera (DP2): The bourse plays a key role as a facilitator of raising capital both in the form of debt and equity. In a growing economy, banks and internally generated funds aren’t adequate to meet capital needs, and this prompts the need for a better functioning bourse. However, it is unfortunate that Sri Lanka’s market capitalisation to GDP ratio is one of the lowest in the region.
Q: Do you believe that index weightings should be revised to better represent the economy?
DP1 Indices track market movements and should therefore, represent the reality – i.e. that we don’t have enough companies listed from key sectors. Therefore, their composition is not fully representative of the economy.
DP2 Not all economic sectors – especially apparel and state owned enterprises (SOEs) – are represented by the CSE. A mere revision of index weightings based on a nonrepresentative sample of the broader economy would be futile.
Q: Has postwar Sri Lanka been successful in winning back investors?
DP1 Sri Lanka attracted many large foreign institutional investors in the postwar era. However, new funds have slowed down over the last few years as frontier markets largely fell out of favour with Western funds.
DP2 Bloomberg recognised the CSE to be among the best performing globally, and Sri Lanka rallied in 2010 as well as 2011. But corporate governance issues, unethical market practices, and retail investors losing funds and trust in the market have kept investors away.
Q: Are you concerned about the nation’s upcoming debt maturities?
DP1 The worst is behind us and we should be able to handle maturities for the next two years. Liability management will help the Central Bank of Sri Lanka tackle the bunching problem. The World Bank guaranteed new issuances, creating fundraising certainty – this is a positive for Sri Lanka.
DP2 The years 2019 to 2021 would be the peak debt servicing period. If a robust export strategy and prudent macro fundamentals are implemented, meeting debt obligations shouldn’t be a challenge. However, external factors or shocks beyond our control may pose risks.
Q: How have recent events on the national front impacted the risk premium?
DP1 There will be a negative impact amid the fallout from terrorism, leading to the addition of a risk premium. However, the involvement of ISIS could be a silver lining as it creates familiarity with the problem among foreign investors compared to a domestic issue that would be more difficult for them to understand.
DP2 The political uncertainty of 2018, a downgrading of the country’s credit rating, debt maturities at the beginning of this year and an overall economic slowdown impacted risk premiums negatively. But by the end of the first quarter of 2019, risk premiums eased with foreigners gradually re-entering rupee denominated bond markets.
Q: To what extent are exchange rate movements affecting the market?
DP1 They have a major impact on foreign investor appetite. Those who invested in early 2018 lost nearly 20 percent purely because of currency depreciation. Investors budget for depreciation but the extent witnessed last year impacted investor confidence negatively. This led to a higher risk premium.
DP2 The impact is twofold: the direct impact on existing portfolio valuations, prompting the need to cut losses and exit; and new investors possibly finding cheaper and more attractive investment opportunities particularly in businesses resilient to adverse forex movements.
Q: In what ways can the market promote private sector growth?
DP1 By creating efficient markets and putting capital flows to productive uses. Debt capital markets have remained active, creating a viable alternative for companies to access debt markets vis-à-vis bank loans.
DP2 Positive sentiment, liquidity and the participation of various investors, as well as market stability and decent valuations, could encourage new companies to list. This would bring about better corporate governance, transparency and access to diverse sources of capital funding.
Q: How can Sri Lanka kick-start the waning IPO culture?
DP1 Fundamentally, when equity markets struggle, IPOs won’t flourish. When markets improve, IPOs are likely to follow suit. However, policy measures such as SOE listings, and regulators moving faster and more proactively, will help.
DP2 Robust entities with growth potential need to be identified and brought to the market. Some SOEs could be listed after proper restructuring, supported by favourable macro policies and prospects, and improved liquidity.
Q: What can SMEs do to augment their presence in the capital market?
DP1 Given Sri Lanka’s relative scale, SME listings may be largely suboptimal – unless they are in major growth segments. Accessing debt capital markets by way of bank loans would be more beneficial.
DP2 SMEs could seek advice to improve their knowledge of capital market activity and prepare themselves. Alternatively, they could seek capital sources such as private equity as a precursor to a subsequent listing.
Q: Would you agree that the local market requires greater state intervention?
DP1 No! Rather, what we need is less state intervention. The only beneficial form of state intervention would be the listing of large SOEs. Apart from that, the state ought to focus on reforms and let the markets be.
DP2 To improve market cap and boost markets, a few identified SOEs need to be listed. The government must bring key state controlled funds back to the bourse with proper investment regulations and guidelines to improve liquidity.
Q: How can greater awareness of capital markets be created at the grassroots level?
DP1 Through educational programmes. Conversion will not happen overnight but when markets turn, investors will return. The objective is to ensure that when they do, they’re well-informed.
DP2 The Securities and Exchange Commission (SEC) and CSE conduct regional investor conferences, to improve awareness and education. But with market downturns and stockbrokers challenged to stay afloat amid below par performance, it’s a challenge to attract and retain investors.
