Investor Forum – January 21, The Ritz Carlton, Millennia Singapore
Q : Dr Nalaka Godahewa, Chairman of The Securities and Exchange Commission of Sri Lanka, my first question to you Sir is Sri Lanka’s capital markets are relatively small compared to the regional counterparts. Can u please tell us what are the initiatives you have taken to grow this market and also have your taken any measures to enhance investors’ confidence?
Dr. Nalaka Godahewa:
Actually Sri Lanka’s stock market is not a new thing, of course, it’s a hundred years old. But what happened was because of the conflict that the country was going through, the market was stagnant for almost 20-25 years, and it is only after 2009 end of the war the market started picking up and in fact it picked up significantly. Initially, after the war, what we have done during the last 2-3 years is to put in place a 3-year strategic development plan which covers 3 main areas, firstly the market development and the infrastructure will only bring it on par with sophisticated markets in the world, and also strengthening the regulation. In fact Sri Lanka has quite a robust regulatory framework, we have looked at all the gaps we saw in the market, and we have plugged them right now. So essentially because of this 3-year market development plan which is currently being implemented quite successfully, we are now ready for the future.
Q : Balendra, Chairman of The Colombo Stock Exchange, if I can ask a question from you, now, although there are 289 companies listed on the Colombo Stock Exchange in terms of liquidity and scale, there are relatively few companies that would trigger institutional investment or interest. Is there any index that is representative of such stocks and that can be actually followed in Sri Lanka?
Krishan Balendra:
Yes, there is. We’ve until recently had 2 locally developed indices The All Share Price Index and the Milanka Index which is a blue chip index. But the complaint that we have often from foreign institutional investors is the lack of an index with internationally acceptable criteria for inclusion. So 18 months back, we brought in an S&P 20 Sri Lanka Index which is based on the internationally established S&P criteria and there are 20 of the most liquid large blue chip companies on that index, so there is now such an index.
Q : I would like to ask a question about the agriculture sector. You mentioned the growth in tea exports. Other than the government policies to specifically encourage the competitiveness of Sri Lanka in agricultural products and government intervention in labour, labour costs, are there any developments in the last 12 months and what are the plans for this year?
Dr Sarath Amunugama:
Actually that’s one area which is being focused particularly in the last budget. I think you are talking about commercial crops rather than paddy and so on. As far as domestic agriculture is concerned, I think there has been a spectacular growth. Regarding other commodities, firstly, they are trying to enhance production and to have greater productivity. There are many proposals in the recent budget to enhance productivity. And as you know, we have a very strong support scheme for commercial agriculture. Fertilizer is given at a subsidized rate. Earlier it was given for domestic agriculture, but now it has moved over to commercial crops. We also continue to have a strong relationship with commodity groups as you know tea, rubber and coconut. They don’t operate exactly on their own, they work in terms of a community of a producer. And Sri Lanka has expanded or increased its quota as it were within this community.
Then regarding tea, we have as you know different levels, we have Middle Eastern market, you have Eastern market, you have East European market and so on. So that greater differentiation is taking place. And today, our tea sector has become one of the most vibrant sectors in our economy, partly because of the management, you know that Sri Lankan commercial agriculture has been privatized. Most have been privatized, and we are now urging them, particularly those who are running those companies to increase productivity, where the last decade emphasis has been really to get a quick reward rather than investment in growth, and in the budget there were a lot of proposals to increase productivity. So there is potential and most of them are traded I think in the stock market, so we would also welcome a lot of investment there because we really need I think to now tone up and to increase our productivity and our marketing, so that we get a better return from what is obviously one of our greatest assets. I can remember many years ago, when Mr Goh Keng Swee, who is really the father of growth in Singapore, said, the one big difference between Sri Lanka and Singapore is that you have this huge asset, you have all these plantations, you really go ahead and make the best out of it. I wish we have this sort of things in Singapore and we will know what to do with it. This is an area which we are very concerned about.
Q : Would you have an update with regards to the Colombo Stock Exchange product development, what sort of investment products or vehicles we can expect, and also with regards to the previous talked about development of Sri Lankan futures and derivatives exchange for investment managers to hedge Sri Lanka’s risk and to some extent build more of a derivatives market on the back of the well-developed equity market? Is there any update?
Krishan Balendra:
The update is we are working quite closely now with the central bank and the securities exchange commission to develop a central counter party. That is the first step to having a derivatives market. And we have a timeframe now of about 12 months to have that in place. So once that is in place, we can start looking at futures and other forms of derivatives. One step we have taken apart from all these cash equities to develop a corporate debt market and as you have seen in the presentation, we have about 70 billion rupees or 600 million dollars’ worth of new corporate debt in 2013. But we are certainly looking at derivatives and we are working with the Central Bank and the SEC on that.
Q : Just a general question on macro-economics, Sri Lanka has a very impressive employment picture, the unemployment rate has been decreasing very significantly over the last 5-6 years, could you just explain what are the forces behind the employment picture and discuss what measures exist to pressurize on the labour costs and how that would affect the inflation.
Ajith Nivard Cabraal:
That’s a very interesting question. The last few years, the growth has been quite impressive as you have mentioned, and has attracted the employment of labour into those areas that have been growing quite fast. At the same time, we have now hit a kind of level which is making it quite an important factor for us to consider for the future, namely our unemployment levels have come down to about 4.5%, which means we have a challenge on our hands as to how to approach the next wave of development is going to take place in our country and who is going to be the people who are going to man it. We are also expanding our economy in the 6 new sectors, energy, tourism, maritime, aviation, commercial as well as education. So as a result we will need more and more people to migrate into those areas as well, that is why honourable minister mentioned there have to be a shift in our overall employment by employing the productivity levels is something we are concentrating upon. We are also having another challenge in our hands, namely, our per capita income has now risen to about $3300 and we are no longer able to attract cheap labour kind of situation, so they have to be better trained, they have to be better qualified, so that overall level of labour would be improving over the next 5 to 10 years. So that would mean a migration of labour from the current low paying jobs to higher level jobs which means the low paying jobs in order to be higher paying jobs within that industry itself would need a high element of productivity to be brought up, and those are all areas that we kept concentrating upon. I think the next 4-5 years will be extremely interesting in this change and transformation, and I can only tell you that there are teams working on each of those areas to ensure that it would be a fairly painless transition, because many countries have had serious difficulties in that transition. So we have taken that challenge on and in fact the last strategic retreat of the Central Bank focused on avoiding the middle income trap and moving forward in a seamless manner. And this is one of the key challenges that we have been grappling with, and I think the strategy that is being put in place now would ensure that it’s going to be dealt with in a fairly robust way, so that we’ll be able to manage both the unemployment levels without allowing it to be a burden on the new way of development that we have seen here.
Q : How would you manage the pressure on inflation that is going to cost labour costs
Ajith Nivard Cabraal:
Here again, the answer is productivity improvement. If you look at our roadmap that we announced on 2nd of January, in our monetary policy overall framework, we have factored in productivity as one of the key elements for the future. Because when a country is moving in a way that we are moving at fairly rapid pace, with changes occurring in almost every field, productivity improvement is going to be a very very important factor. In the Central Bank, we believe in a way we can make certain interventions to maintain inflation in the current benign levels, we have in fact factored that in, and we have in fact conversations with many of the ministries which are involved in productivity improvement as well as key sectors particularly the 6 sectors that I spoke to you about, which are the new sectors that are emerging in our nation. But those too now do some training and retraining and to pitch those industries at the very high level of productivity, so that we will benefit by that commencement of those industries itself.
Q : Can you give us a flavour of the real estate sector in Sri Lanka, both residential and commercial? And the ability for FDI investments to be made in this sector?
Panel:
In terms of foreign ownership of land, there are some restrictions, freehold ownership of land is not allowed for foreigners, but leasehold ownership is possible. In terms of apartment investment, foreigners can own apartment freehold above the 4th floor, that’s an old law, I think Singapore has a similar law foreigners can own above 6th floor, so in Sri Lanka, it’s above the 4th floor, and there is no restriction on foreigners buying apartments and on sale of apartments, you can repatriate the sales proceeds including the capital gain immediately. That is also a new liberalization that the Central Bank brought in recently wherein recent gain on sale of apartments can be repatriated immediately.
Panel:
Let me just add a bit to that. You see the point with regard to the 100% tax on land for foreigners is having a deep impact to the property prices. Many countries at the time when they were growing have had property prices shooting up very very rapidly and thereby creating certain bubbles, and in order to deal with that, we brought in this law, so that the foreign investment in properties, in land, is going to be discouraged to some extent. But if it is property which is purchased for business purpose, then there is no tax of that nature and freely you can buy without the tax. But overall it is to ensure that young people are able to buy property in the country, you have to have this law. I know in certain countries, when the property prices shoot up very very quickly, some of the young people who are entering the property market are unable to buy properties, and that causes a huge political unrest as well. So that has been addressed in Sri Lanka, and overall we believe that as a result of that policy, we don’t have any bubble formation and the banks are protected to some extent as a result. As the Chairman of the Colombo Stock Exchange mentioned, property can be purchased by foreigners without any taxes from the 4th floor onwards and ensure that the hub concept that we are having for commercial activities is also given some encouragement.
Q : You have strong passion for Sri Lanka as it comes out clearly when you talk, and I think you also have a very strong to connection to Singapore. Can you give us your observation on Singapore in general and their interest and support that they have for Sri Lanka?
Ferial Ismail Ashraff:
Well, I have been for the last 2 and a half years and I have seen an increase in interest Singaporeans have towards Sri Lanka, especially of recent time, I think the last 6 months or so, I see them wanting to go to Sri Lanka, invest in Sri Lanka, and also the tourists, I mean, I think, most of the Singaporeans have always been looking at the Far East for short time travel and spending weekends and so on, but now there is an interest because also I don’t think Singaporeans knew enough about the end of the war, and there was peace in Sri Lanka. But now there is clear evidence, they see more of it, they are talking about it and we also find that more and more investors coming into the mission with queries about Sri Lanka, and I am really happy that you are conducting this seminar out here because this answers all of the questions that are usually brought to the mission and we are unable to give such exact information about all matters. So I really do see a large interest, I mean, a growing interest of Singaporeans in Sri Lanka, for which I am very thankful.
Q : In the recent past uncertainty regarding the Sri Lankan rupee has been a key concern for portfolio managers, are you able to share your thoughts regarding this issue, and to reassure any perspective in this?
Ajith Nivard Cabraal:
I think the concern would have been in the distant past. Sri Lankan rupee has been one of the most stable currencies as was mentioned by Dissanayake who made the presentation from the research. That is mainly because we had opened up our economy as well as opened up the Sri Lankan rupee to be a lot more flexible in the open market. It did have some interventions made in order to ensure that short term elements do not have a huge impact on the Sri Lankan value of the rupee, , but overall we have found that it has behaved in a reasonably stable pattern, and we believe that it has helped everyone to have a very clear understanding of our economy. As you know, the rupee or the currencies are difficult to manager, because each has a different view of where it should be, importers want it at one price, exporters want it at another price, borrowers want it at one price, lenders want it at another, those who are remitting in money wanted it in one way, those are remitting out want it in another way, so each one has its own concerns as well as ways of looking at it. So the difficulty that Central Bank has is to manage it in such a way that is fair to all parties, may not be the way that each one looks at it, but I think overall it has had a good behaviour and we are happy that we have been able to maintain the stability. What is most important is to maintain its stability and I think going forward, the policy that we have put in place will ensure that the rupee will not be having a roller coaster ride but much more stable ride for the future as well.
Q : What is the mandate of the Central Bank in Sri Lanka and also, we have seen inflation numbers coming down in a systematic manner over the last few years, what is the strategy for bringing the inflation down?
Ajith Nivard Cabraal:
We have 2 key mandates, one is maintenance of economic and price stability, meaning to ensure that the economic agents are able to work in a stable environment and also that the price levels of the country is not increasing at a rate which puts pressure on the rest of the economy. And the second important fundamental objective that we have is maintenance of the financial system stability. So these are the 2 main objectives, and in order to manage inflation, we had to ensure that our 2 sides of the inflation coin, one is the supply side, which we do not have direct responsibility, but we have ability to intervene through the government in various ways in order to ensure that it is also moving in the direction that we like to see moving, the other is our ability to control the monetary aggregates. There was time when we had inflation at very high numbers, but we took some very stern measures at that time, so much so that we were one of the most unpopular institutions at that time, and many businessmen didn’t take very kindly to us. There were regular complaints that we were not doing our job properly. But that is because many people realize that situation only after some time, so there was a period at which time we had to control money supply, control some of the demands on the monetary aggregates and we did that. And as a result we were able to control inflation to where we are today. Today our job is made easier because many people realize that when you have inflation levels at benign numbers, it has a effect on the rest of the economy and many other factors make it much easier for them to do business as well and ensure that they have a predictable future and that is what we have to bring to the table, and I think in the last few years, we have demonstrated that we have the ability to do that, and also to ensure that it is sustainable. That is the most important part.
That concludes the formal and main part of this event.
Panel discussion with
Ferial Ismail Ashraff, High Commissioner of Sri Lanka to Singapore
Dr. Sarath Amnugama, Senior Minister for International Monetary Cooperation and Deputy Minister of Finance and Planning, Sri Lanka
Ajith Nivard Cabraal, Governor, Central Bank of Sri Lanka
Dr Nalaka Godahewa, Chairman, The Securities and Exchange Commission of Sri Lanka
Krishan Balendra, Chairman, The Colombo Stock Exchange
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