Sri Lanka’s bourse: Ailing without partial remission in sight
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A December 2015 file picture shows Prime Minister Ranil Wickremesinghe flanked by senior officials of the Colombo Stock Exchange (CSE) when the bourse celebrated 30 years (1985-2015) in operation. Below: A 2015 file picture of (then) Central Bank Governor Arjuna Mahendran, SEC Chairman Thilak Karunaratne, Board of Investment Chairman Upul Jayasuriya (back to camera, left) and CSE Chairman Vajira Kulatilleke in conversation. The PM’s stout defence of the tainted, former Governor in a treasury bond scandal and the government’s policy inconsistencies are among the reasons for a dreary stock market questioned by brokers as to whether it’s worth their while and future to remain in this business and profession.
As Sri Lanka’s economy struggles to discharge from the ‘hospital’ after having a tough 2016 which saw its growth contract by 1 per cent, analysts say that the outlook for the country’s economy could get worse this year with a myriad of issues.
Couple this with the super cycle of instable government policies, the country’s stock market is done for, they warn.
The market took a hit last year, according to those in authority, which was primarily due to the overall tightening of monetary policy with the government borrowing and the overall need to curtail exchange rate depreciation, which led to the Central Bank (CB) hiking rates on the monetary policy side and the government hiking taxes on the fiscal side.
Analysts say that these actions while largely positive in settling the economy, is likely to slow down growth in 2017.
Two years ago, investors, stockbrokers and the general public were in fervent hope that a change in government will see a shift in economic policy, change in attitudes in governance, the Colombo Stock Exchange’s (CSE) indices will outperform, more investment will come into the country, and the wish list goes on.
But what happened?
All things in the stock market boils down to expectations. People expected growth and hype with the change in regime, but economic reality points out to the ‘hospital’ scenario and things are just so messy. Look at the situation for the past two years and you’ll know it to be true.
Where-oh-where are the new government’s promised Initial Public Offerings (IPOs), the changes to legislation, bringing culprits to justice, setting the CSE right, bringing more investment, selling stocks in State Owned Enterprises (SOEs) and so on, on the long list?
Instead what we saw were no IPOs; no changes to the Securities and Exchange Commission (SEC) Act; we just might forget about the culprits, the mafia brotherhood and the injustices; the CSE is as wrong as it can be; no mystery investor brought US$ 1 billion to defend the rupee as the Minister of Finance claimed; and instead of selling SOES, the sale by Bank of Ceylon (BOC) in Seylan Bank was reversed just last month in an unprecedented fashion challenging the status quo and shocking the stock market.
Damning data
The CSE All Share Price Index (ASPI) which significantly outperformed major global indices such as the MSCI World, Dow Jones, FTSE100 and DAX during 2010-2013 has seen a 10 per cent drop year on year from 2015 to 2016.
Okay, so the 2010-2013 market hype was mostly pump and dump thanks to the stock market mafia. What the mafia did was manipulate share prices. The mafia community has kept aloof of the CSE in the last two years. So without them can’t the CSE show how it can rise?
Now we see middle class Sri Lankans avoiding the stock market, largely citing a lack of funds to invest and with the economy in the quagmire an entire generation appears to be afraid of investing.
After the US economy showed signs of recession, the rate hikes by the US Fed along with the hard landing of the Chinese economy are all external factors that have no doubt impacted the share market.
But what analysts point out is the fact that the spill-over effect of external factors are reverberating throughout the global markets, not just in the Sri Lanka economy. They say that other Asian markets with worse case scenarios have done well.
During 2010 to 2013 there were 26 IPOs in the CSE and 15 outperformed the initial offer price. IPOs are popular during bull markets as companies are able to get the best valuation for their shares at the initial public offer. So it’s anybody’s guess as to how many firms will list publicly this year.
“In the world, there’re many countries where share markets have done well. Look at Bangladesh, and when Vietnam and Myanmar opened up, many foreigners flocked to the market,” an analyst noted.
He reiterated that the ASPI dropping by 10 per cent isn’t such a big issue compared to the low turnover levels from the best days of Rs. 3 billion a day turnover, two years ago to now when the CSE posts Rs. 300 million to Rs. 400 million a day. Except for a solitary trade of Rs. 12 billion in December in which the aggregate for that month shot up into billions, last year’s daily turnover dripping into this year’s is a tuppence.
The main concern this year comes from the political instability and bad policies. The CSE has been consistent on low turnover, while the government has been inconsistent on policy. This inconsistency has alarmed the foreigners, the high net worth investors, and also some retailers. “One is not sure in future when transacting with state controlled institutions as to where lies the ultimate authority,” a stockbroker said in reference to the Seylan-BOC deal.
In the government’s list of priorities, the development of the capital market seems to be taking a lower rank. What is bothering most analysts is that there’s little clarity in policy and many grey areas. Interestingly they all agree that whichever way you ‘spin it’, the signals to the share market by the government are negative.
Don’t shut the CSE down
They reiterate that a well developed capital market is capable of attracting funds even from foreign country and yes, foreign capital flows into the country through foreign investments. “The capital market is the barometer of the economy by which you are able to study the economic conditions of the country and it enables the government to take suitable action,” the analyst added.
At this point in time, there’s extensive lobbying by the industry to the Treasury mainly on the unclear taxation slapped during last year’s budget on the stock market, officials said. “We want the Treasury to leave the taxes as they are,” a CEO of an asset management firm dealing in debt instruments such as debentures and bonds, told the Business Times. On these debt instruments the Withholding Taxes (WHT) have been raised to 14 per cent from 10 per cent. This CEO argues that the savings accounts’ WHT is at 5 per cent. “Who will now in invest in debentures?”
However, if structural adjustments such as the sale of the Hambantota Port and the sale of non-strategic SOEs continue, sentiment can change this year leading to a re-rating of the country and its stock market, some hopefuls say. “The regaining of GSP+ and the signing of a good trade agreement with India and China can be further pluses,” a second CEO of a stockbroking firm said.
Political stability will however remain key in re-igniting sentiment, whilst external factors such as US Fed hikes will also need to be watched, he added.
The CSE has lost Rs. 80 billion last year. With the current political/economic backdrop, who knows how much more it’ll lose.