In order to showcase the opportunities available in the capital market of Sri Lanka the Colombo Stock Exchange (CSE) and the Securities and Exchange Commission of Sri Lanka (SEC) held an Investor Forum on 30 May 2014 at the Savoy Hotel London.
The forum, which was organized in association with the London Stock Exchange (LSE) and Bloomberg, received an unprecedented response. Over 150 fund managers attended the forum.
The Keynote Address was delivered by Central Bank of Sri Lanka Governor, Ajith Nivard Cabraal where Macro Economic outlook and development potential of the country was outlined during his presentation.
Copal Amba Country Head, Chanakya Dissanayake presented the valuation of the Stock Market whilst Director (CSE) Vajira Kulatilaka conducted a presentation on the Debt Market.
A special feature of the forum was the presentation by an independent fund Manager, Gordon Frazer of Black Rock Inc, a leading International Fund. Gordon shared his personal experience in investing in the Sri Lankan Capital Market.
The panelists, Governor of the Central Bank Ajith Nivard Cabraal, Sri Lankan High Commissioner to the United Kingdom, Dr. Chris Nonis, SEC Chairman, Dr Nalaka Godahewa, CSE Chairman, Krishan Balendra and CSE CEO, Rajeeva Bandaranaike addressed various aspects of the economy, liquidity, governance and future outlook on the capital market of Sri Lanka.
The Chief Executive Officer, London Stock Exchange plc Alexander Justham also addressed the Forum.
Many countries have the challenge of ensuring, that there is growth while containing inflation; Sri Lanka has been able to get that balance right. In the past four years we have had growth of about 7.5%.
In the growth model that we have envisaged for the country, the industry sector has been increasing and the service sector has also been improving. So from a US$ 24 billion Economy in 2005, it has now increased to US$ 67 billion and in the next three years we expect the Economy to reach a US$ 100 billion mark. Per-capita incomes have also risen quite significantly. In the last few years we have grown rapidly to the US$ 3,280 mark and we would move to the US$ 4,000 per-capita mark by 2015. Unemployment has come down to 4.4%, and we are keeping a very close tab on it.
Merchandise exports and imports have also been strong; particularly this year (2014). Every single month has seen more than US$ 1 billion of exports. Workers' remittances and services exports have also been rising quite rapidly; we are happy to see the US$ 1,550 million in 2005 rise to US$ 4,500 million in 2013. Additionally our external current account deficit is also shrinking and now it has shrunk to 3.9% of GDP and it is expected to shrink further in the coming years. FDI's have shown a rapid improvement. The average in the last few years has been about US$ one billion and now we are moving towards about US$ 1.5 billion. The BOP surplus is now becoming quite clear and in the next few years Sri Lanka would see constant BOP surplus. Depreciation of the currency has been very low in the last few years and we have been able to manage it around three per cent in the past 8 years, but going forward we see that being managed at a much more stable rate.
The financial sector, I won't go into. However, the assets sector has been growing quite rapidly from Rs 3.1 trillion to about Rs 10 trillion now, and is expected to rise much further in the next few years. While that has been done the banking sector has seen major strides.
Sri Lanka's debt levels have also been managed very prudently and from a very high level today it has been brought down very gradually. Again significantly our average time of maturity to our debt portfolio has also doubled in the last few years and we now see an overall yield curve which goes up to 30 years. All these developments and trends have given rise to a new paradigm for Sri Lanka.
That vision for the Sri Lankan economy envisages a growth of about eight per cent per annum on a sustainable basis. For that to happen, an investment level of about 33% of GDP is targeted. However there is a balancing act where we need to decide how much of the necessary investment should come from outside and how much of it must be local and how do we manage that process.
We have created multiple avenues for investments to come in, but at the same time there must be takers within the economy, so that those investments can be absorbed within the economy. Investments cannot work in a vacuum; there is a vital framework that needs to be put in place. Firstly we needed to bring peace into the country and that took an enormous amount of effort. Thereafter we restructured the economy and we have worked on ensuring that the country's entire infrastructure was developed to a much higher level than what it was.
The forum, which was organized in association with the London Stock Exchange (LSE) and Bloomberg, received an unprecedented response. Over 150 fund managers attended the forum.
The Keynote Address was delivered by Central Bank of Sri Lanka Governor, Ajith Nivard Cabraal where Macro Economic outlook and development potential of the country was outlined during his presentation.
Copal Amba Country Head, Chanakya Dissanayake presented the valuation of the Stock Market whilst Director (CSE) Vajira Kulatilaka conducted a presentation on the Debt Market.
A special feature of the forum was the presentation by an independent fund Manager, Gordon Frazer of Black Rock Inc, a leading International Fund. Gordon shared his personal experience in investing in the Sri Lankan Capital Market.
The panelists, Governor of the Central Bank Ajith Nivard Cabraal, Sri Lankan High Commissioner to the United Kingdom, Dr. Chris Nonis, SEC Chairman, Dr Nalaka Godahewa, CSE Chairman, Krishan Balendra and CSE CEO, Rajeeva Bandaranaike addressed various aspects of the economy, liquidity, governance and future outlook on the capital market of Sri Lanka.
The Chief Executive Officer, London Stock Exchange plc Alexander Justham also addressed the Forum.
"This was one of the best investor forums I attended. I was able to understand the growth potential of Sri Lanka and its capital market. I will be positively looking at investing in CSE in the near future" commented a participant attending the forum.
On the conclusion of the main forum fund managers had one-on-one meetings with listed companies. The nine listed companies that participated at the forum were John Keells Holdings PLC, Commercial Bank of Ceylon PLC, Dialog Axiata PLC, Hayleys PLC, Access Engineering PLC, Tokyo Cement PLC, People's Leasing and Finance PLC, Laugfs PLC and MTD Walkers PLC.
Below are the transcripts of several speeches delivered at the forum.
Gordon Fraser – Fund Manager, Member of the Emerging Markets Specialists Team, Blackrock
I am glad to have a very enjoyable job, not the one described in the bio in front of you, but as a tourist; where I visit countries with frontier and emerging capital markets. Of all the countries that I have visited, and I say this to anyone that asks me, Sri Lanka is my favourite.
It is only in the past 18 months that we have put serious capital to work and that is why I would say now is an excellent time to invest in Sri Lanka. I am very positive about the outlook of the Sri Lankan economy; in my opinion the best economic growth stories are very supply side led. Here Sri Lanka can excel adding infrastructure where it did not exist before. Sri Lanka is adding port capacity to leverage its position on east-west shipment routes, developing itself into a transhipment hub, and working on more efficient and powerful power capacity – these very simple improvements will have a very large impact on the productive potential of the economy.
When the supply side potential is combined with a favourable economic cycle, it is the best time to invest. After a few years of slow credit growth and lower GDP growth and the necessary depreciation of the Rupee, Sri Lanka looks set for an upswing.
However GDP growth is not the whole story. There are a number of academic studies that show low correlation between GDP growth and market performance; some even show negative correlation. However, to create equity performance what we really need is focus of companies on shareholder returns, and here I am very pleased to say; Sri Lanka scores very well with a strong corporate culture and a focus on investors.
For instance, the last time I visited Sri Lanka I had 100% fulfilment of my meeting requests that has never happened to me before. Disclosure is generally strong and corporates take their CSR very seriously; I would not normally call out on a company, but John Keells 20 page report in its Annual Report is on environmental impact and business ethics is quite impressive in emerging markets. We find valuations in Sri Lanka quite attractive. For instance, banks are a very good prospect. In most other emerging markets you will find that banks have been a good way to get exposure to the economic development of a country over time, so long as they are run prudently.
In Sri Lanka, I think the investment case is even more compelling. Penetration of loans stands at just 30% of GDP, which is well below emerging market norms. A typical EM country would have 70% to 100% to GDP. Banks in Sri Lanka trade at cheap multiples, as shown earlier. Therefore in our opinion, banks are a cheap way to get exposure to Sri Lanka's development.
However, there are some issues. Sri Lanka has some large twin deficits, and it must be careful to avoid the trap that many other emerging markets have fallen into by becoming dependent on foreign savings rather than domestic savings, to grow.
The more pressing issue for us however is liquidity, and despite a plethora of theoretically interesting investments, the list of companies that offer sufficient ownership is fairly restrictive. Liquidity however will improve over time and anything that can be done in this regard will be very welcome.
Finally, if you just compare Sri Lanka with some of the other frontier markets, it is certainly less liquid, compared to Saudi Arabia, Nigeria, Pakistan and even Vietnam and it is also a little more expensive on earnings multiples, than some of these other markets. However I believe that the long term prospective is among the most attractive in the Frontier Universe. Therefore we view Sri Lanka as a compelling place to invest on a relative basis but also on an absolute basis and consequently Sri Lanka is a large overweight on our funds.
Keynote Address by Ajith N. Cabraal – Governor of the Central Bank of Sri Lanka
Let me give you an overview of what we are going to do and why we think that what we are going to do will work for the future of Sri Lanka.
There are two core areas that the Central Bank is responsible for; inflation and price stability and financial system stability. Therefore let me speak a little on inflation.
In the case of price stability, Sri Lanka had not done very well in the past. Historically we have been a high inflation country with inflation at around 12% for 30 years. That is not a very good position to be in, but that has changed and now for the last 63 months we have been able to have inflation at around the six per cent mark and coming down.
However, this has not happened by accident. There have been favourable supply-side changes that have been made and there is also the demand that has been contained. There is a clear path that we have chartered for the economy and we can say that in the foreseeable future Sri Lanka would enjoy mid-single digits, sometimes even lower than that. That has also anchored the inflation expectations which are a vital part of inflation management.
Gordon Fraser – Fund Manager, Member of the Emerging Markets Specialists Team, Blackrock
I am glad to have a very enjoyable job, not the one described in the bio in front of you, but as a tourist; where I visit countries with frontier and emerging capital markets. Of all the countries that I have visited, and I say this to anyone that asks me, Sri Lanka is my favourite.
It is only in the past 18 months that we have put serious capital to work and that is why I would say now is an excellent time to invest in Sri Lanka. I am very positive about the outlook of the Sri Lankan economy; in my opinion the best economic growth stories are very supply side led. Here Sri Lanka can excel adding infrastructure where it did not exist before. Sri Lanka is adding port capacity to leverage its position on east-west shipment routes, developing itself into a transhipment hub, and working on more efficient and powerful power capacity – these very simple improvements will have a very large impact on the productive potential of the economy.
When the supply side potential is combined with a favourable economic cycle, it is the best time to invest. After a few years of slow credit growth and lower GDP growth and the necessary depreciation of the Rupee, Sri Lanka looks set for an upswing.
However GDP growth is not the whole story. There are a number of academic studies that show low correlation between GDP growth and market performance; some even show negative correlation. However, to create equity performance what we really need is focus of companies on shareholder returns, and here I am very pleased to say; Sri Lanka scores very well with a strong corporate culture and a focus on investors.
For instance, the last time I visited Sri Lanka I had 100% fulfilment of my meeting requests that has never happened to me before. Disclosure is generally strong and corporates take their CSR very seriously; I would not normally call out on a company, but John Keells 20 page report in its Annual Report is on environmental impact and business ethics is quite impressive in emerging markets. We find valuations in Sri Lanka quite attractive. For instance, banks are a very good prospect. In most other emerging markets you will find that banks have been a good way to get exposure to the economic development of a country over time, so long as they are run prudently.
In Sri Lanka, I think the investment case is even more compelling. Penetration of loans stands at just 30% of GDP, which is well below emerging market norms. A typical EM country would have 70% to 100% to GDP. Banks in Sri Lanka trade at cheap multiples, as shown earlier. Therefore in our opinion, banks are a cheap way to get exposure to Sri Lanka's development.
However, there are some issues. Sri Lanka has some large twin deficits, and it must be careful to avoid the trap that many other emerging markets have fallen into by becoming dependent on foreign savings rather than domestic savings, to grow.
The more pressing issue for us however is liquidity, and despite a plethora of theoretically interesting investments, the list of companies that offer sufficient ownership is fairly restrictive. Liquidity however will improve over time and anything that can be done in this regard will be very welcome.
Finally, if you just compare Sri Lanka with some of the other frontier markets, it is certainly less liquid, compared to Saudi Arabia, Nigeria, Pakistan and even Vietnam and it is also a little more expensive on earnings multiples, than some of these other markets. However I believe that the long term prospective is among the most attractive in the Frontier Universe. Therefore we view Sri Lanka as a compelling place to invest on a relative basis but also on an absolute basis and consequently Sri Lanka is a large overweight on our funds.
Keynote Address by Ajith N. Cabraal – Governor of the Central Bank of Sri Lanka
Let me give you an overview of what we are going to do and why we think that what we are going to do will work for the future of Sri Lanka.
There are two core areas that the Central Bank is responsible for; inflation and price stability and financial system stability. Therefore let me speak a little on inflation.
In the case of price stability, Sri Lanka had not done very well in the past. Historically we have been a high inflation country with inflation at around 12% for 30 years. That is not a very good position to be in, but that has changed and now for the last 63 months we have been able to have inflation at around the six per cent mark and coming down.
However, this has not happened by accident. There have been favourable supply-side changes that have been made and there is also the demand that has been contained. There is a clear path that we have chartered for the economy and we can say that in the foreseeable future Sri Lanka would enjoy mid-single digits, sometimes even lower than that. That has also anchored the inflation expectations which are a vital part of inflation management.
Many countries have the challenge of ensuring, that there is growth while containing inflation; Sri Lanka has been able to get that balance right. In the past four years we have had growth of about 7.5%.
In the growth model that we have envisaged for the country, the industry sector has been increasing and the service sector has also been improving. So from a US$ 24 billion Economy in 2005, it has now increased to US$ 67 billion and in the next three years we expect the Economy to reach a US$ 100 billion mark. Per-capita incomes have also risen quite significantly. In the last few years we have grown rapidly to the US$ 3,280 mark and we would move to the US$ 4,000 per-capita mark by 2015. Unemployment has come down to 4.4%, and we are keeping a very close tab on it.
Merchandise exports and imports have also been strong; particularly this year (2014). Every single month has seen more than US$ 1 billion of exports. Workers' remittances and services exports have also been rising quite rapidly; we are happy to see the US$ 1,550 million in 2005 rise to US$ 4,500 million in 2013. Additionally our external current account deficit is also shrinking and now it has shrunk to 3.9% of GDP and it is expected to shrink further in the coming years. FDI's have shown a rapid improvement. The average in the last few years has been about US$ one billion and now we are moving towards about US$ 1.5 billion. The BOP surplus is now becoming quite clear and in the next few years Sri Lanka would see constant BOP surplus. Depreciation of the currency has been very low in the last few years and we have been able to manage it around three per cent in the past 8 years, but going forward we see that being managed at a much more stable rate.
The financial sector, I won't go into. However, the assets sector has been growing quite rapidly from Rs 3.1 trillion to about Rs 10 trillion now, and is expected to rise much further in the next few years. While that has been done the banking sector has seen major strides.
Sri Lanka's debt levels have also been managed very prudently and from a very high level today it has been brought down very gradually. Again significantly our average time of maturity to our debt portfolio has also doubled in the last few years and we now see an overall yield curve which goes up to 30 years. All these developments and trends have given rise to a new paradigm for Sri Lanka.
That vision for the Sri Lankan economy envisages a growth of about eight per cent per annum on a sustainable basis. For that to happen, an investment level of about 33% of GDP is targeted. However there is a balancing act where we need to decide how much of the necessary investment should come from outside and how much of it must be local and how do we manage that process.
We have created multiple avenues for investments to come in, but at the same time there must be takers within the economy, so that those investments can be absorbed within the economy. Investments cannot work in a vacuum; there is a vital framework that needs to be put in place. Firstly we needed to bring peace into the country and that took an enormous amount of effort. Thereafter we restructured the economy and we have worked on ensuring that the country's entire infrastructure was developed to a much higher level than what it was.
That economic momentum has continued and a high growth path has been achieved. We are far ahead of our peers and regional countries in terms of Global Prosperity Index, as well as the Human Developed Index.
Sri Lanka was ranked best in South Asia in the Doing Business Index (DBI) 2014, but we are not satisfied. We want to come into the top 30 by 2016. At the same time our concentration on infrastructure has also been extremely important, to ensure that people who come in to do business can do business without any trouble at all. This is set out in the Mahinda Chinthana concept of the five hubs for Sri Lanka. As I said earlier in order for investments to come in there has to be capacity built in the economy. In order to channel these investments we identified five areas; commercial, aviation, maritime, energy and also knowledge hub.
The external financing gap will now be able to bridge the savings gap. As time goes on the amount that we have to rely on from outside will definitely be less, because we will have to rely on less from outside the country. BOP surplus of around US$ 3 billion is expected by 2016, as a result of all these new developments. We are also aiming at ensuring that Sri Lanka, going forward has high growth but low inflation.
We have created a new virtuous cycle from what we had in the past, where we had a vicious cycle, when we had high inflation resulting in high interest rates, resulting in low investor confidence, resulting in sluggish investments, to low growth, to high debt levels and high fiscal deficits, which has been shifted. In our new virtuous cycle we now have low inflation, higher growth and lower debt levels. All this will help us to move through into a new phase of our country, where Sri Lanka becomes a truly middle income country.
Sri Lanka was ranked best in South Asia in the Doing Business Index (DBI) 2014, but we are not satisfied. We want to come into the top 30 by 2016. At the same time our concentration on infrastructure has also been extremely important, to ensure that people who come in to do business can do business without any trouble at all. This is set out in the Mahinda Chinthana concept of the five hubs for Sri Lanka. As I said earlier in order for investments to come in there has to be capacity built in the economy. In order to channel these investments we identified five areas; commercial, aviation, maritime, energy and also knowledge hub.
The external financing gap will now be able to bridge the savings gap. As time goes on the amount that we have to rely on from outside will definitely be less, because we will have to rely on less from outside the country. BOP surplus of around US$ 3 billion is expected by 2016, as a result of all these new developments. We are also aiming at ensuring that Sri Lanka, going forward has high growth but low inflation.
We have created a new virtuous cycle from what we had in the past, where we had a vicious cycle, when we had high inflation resulting in high interest rates, resulting in low investor confidence, resulting in sluggish investments, to low growth, to high debt levels and high fiscal deficits, which has been shifted. In our new virtuous cycle we now have low inflation, higher growth and lower debt levels. All this will help us to move through into a new phase of our country, where Sri Lanka becomes a truly middle income country.
We are working on taking this momentum into creating better investor confidence in the country and the SEC and CSE have been working on this, to ensure that there is a level playing field and there are good norms, good regulatory action taken to ensure that all of you are protected when you come into the country and invest.
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