Sri Lanka: A compelling place to invest
View(s):(The Invest Sri Lanka – Investor Forum, London, took place on May 30 in London and was an instant hit with all those who participated. Roshan Madawela, CEO of the Colombo-based Research Intelligence Unit (RIU)’s London office, reports exclusively to the Sunday Times).
If the Invest Sri Lanka roadshow in London is an index of country confidence, then we can be optimistic of some good times ahead. With the event taking place at the prestigious Savoy Hotel, Strand, London, the turn-out was excellent with up to 150 fund managers gracing the forum. Organised by the Colombo Stock Exchange (CSE) and the Securities and Exchange Commission of Sri Lanka (SEC), this was a good day that showcased the opportunities available in the capital markets of the island.
Dr. Chris Nonis, Sri Lanka’s High Commissioner to the UK, kicked-off the mornings proceedings with an introduction to Sri Lanka and a reminder that it was “particularly appropriate that this happens at this time, a week away from celebrating five years of peace in the country.”
Panellists at the discussion
The keynote address was made by Ajith Nivaard Cabraal – Governor of the Central Bank of Sri Lanka. He said that the Central Bank is responsible for inflation and price stability and financial system stability.
Inflation
He said that “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 per cent, 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 6 per cent mark and coming down”. He added that Sri Lanka was ranked as the best country in South Asia under the World Bank’s Doing Business Index (2014) but he was targeting to be in the top 30 of the world by 2016. It was claimed that Sri Lanka has emerged from a vicious cycle, “where 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 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”.
Next up was Alexander Justham – Chief Executive Officer, London Stock Exchange (LSE) who noted that the LSE had invested in Sri Lanka since 2009 when they started a project to develop a trading platform software. Today, this operation employs some 700 people in Colombo and remotely supports the operations of the LSE on every day of trading. He added the he sees “tremendous future for collaboration between the London Stock Exchange, our capital markets and Sri Lanka and our support today is to help further facilitate and build on that connection from a broader London Capital market perspective”.
Invest now
Representing the fund managers perspective, Gordon Fraser – Fund Manager, Member of the Emerging Markets Specialists Team, Blackrock, talked about his ‘enjoyable job’ as a professional tourist who has to travel to many dozens of emerging markets. He noted that “of all the countries that I have visited, and I say this to anyone that asks me, Sri Lanka is my favourite”. He said that now is an excellent time to invest in Sri Lanka and that he was very positive about the outlook of the economy. He argued that the best economic growth stories are supply-side led and argued that Sri Lanka’s infrastructure drive together with the additions to port capacity will serve to boost its position as a major player on the east-west shipment route. Additionally, the new power plants when they are connected to the grid will add to the economic potential of the island. He added that “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, it was noted that GDP is not the entire story. He said that equity performance takes place with company shareholder returns and here again Sri Lanka, with its strong corporate culture and focus on investors, scores well.
It was noted that in most other emerging markets 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, penetration of loans stands at just 30 per cent of GDP, which is well below emerging market norms; a typical emerging market country would have 70 to 100 per cent loans to GDP.
The Savoy hotel where the meeting was held
However, some caution was advised with regard to Sri Lanka’s twin deficits as many emerging markets have fallen into the trap of becoming dependent on foreign savings rather than domestic savings. There is also the issue of liquidity and the list of companies that offer sufficient ownership is comparatively restrictive. Therefore, any policies that will serve to improve this situation would help the cause. Currently, Sri Lanka is less liquid than Saudi Arabia, Nigeria, Pakistan and even Vietnam.
Further presentations were made by Chanakya Dissanayake, Country Head of Copal Amba who spoke on the valuation of the stock market whilst CSE Director Vajira Kulatilaka discussed the debt market.
On the sidelines throughout the entire day, the private companies present at the event were holding talks and making presentations on a one-to-one basis with potential investors and fund managers. The nine listed companies that participated at the forum were John Keells Holdings, Commercial Bank of Ceylon, Dialog Axiata, Hayleys, Access Engineering, Tokyo Cement, People’s Leasing and Finance, Laugfs and MTD Walkers. The Research Intelligence Unit (RIU), with its offices in London and Colombo, were present in order to help facilitate the process of stimulating interest and promoting local companies to interested parties in the UK. It was noted that this process cannot be limited to a one-day event as the achievements and success stories from the island need to be communicated in London on a continual basis. In this regard, Sri Lanka centric operations based in London like the RIU can play an important role in trade facilitation and FDI generation.
Upbeat
For the most part, the representatives of these companies, many of whom were very senior officials, remained upbeat in their discussions with prospective investors from London. Some of the officials present were showcasing extra-ordinary stories of growth and profitability that demonstrated the post-war story of economic turnaround in Sri Lanka. Some fund managers were concerned about how such growth rates, many exceeding 25 per cent per annum, could be maintained given that peace dividends cannot be expected to last beyond the short to medium term. Within the next few years, these companies would face normalization in their returns. Or would they? It seemed that the private sector was ahead of the game. Many of these companies had addressed this proposition early on and have started to invest in the Asia region and beyond in order to become regional players. Whilst the Maldives, India and Bangladesh were favourites, some companies were starting new operations in places as far off as Papua New-Guinea whilst others had offices in the UK.The diversified companies had also spent a great deal of time and effort in forecasting the movements of each market segment in order to shuffle their focus on the most bullish sectors whilst re-jigging those that were seen as potential slackers in the future due to do global or domestic conditions. Leisure continued to be a favourite area of continued investment for almost all the companies present, thereby underscoring the fact that this industry still has a long way to go before nearing its potential.
There were also happy stories about how sustainability reporting has been taken on board by some of the larger conglomerates that now report on their environmental practices as well as financial performance in their annual reports. One company said that they have got into renewable power and started to provide electricity to the remote villages from where they drew some of their labour force.
In this regard, one would hope that sometimes short-term goals of international investors and fund managers will be balanced by the more long-term needs of the population of Sri Lanka. Looking after the environment is foremost amongst these concernsand it must be remembered that Colombo was declared as one of the most people-un-friendly cities in the world by the Economist Intelligence Unit in a recent study. Taking on board concepts of social and environmental responsibility in investment practices, sustainable thinking can ensure that the populace will benefit from a long-term improvement in life quality whilst investors will make good returns on their investments in the short-term. It is also hoped that the improving corporate governance culture will be balanced by more widespread sustainability reporting that will help companies of all sizes to be more people and planet friendly. It also does them a world of good in the eyes of international investors!
Positive
There are enough reasons to feel positive about Sri Lanka as an investment prospect and the potential risks are far fewer than they have ever been in the recent past. The sheer task of organizing such an event and doing it so successfully was in itself a good advertisement for the young talent and potential that lies within the country and raises hope for the future.
(The writer can be reached at roshan@riunit.com)