List SOEs to elevate Sri Lanka to Morgan Stanley index
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Sri Lanka could attract nearly US$ 4 billion by getting the Colombo Stock Exchange (CSE) reclassified into one of the world’s most popular emerging markets equity indices, the Morgan Stanley Capital International (MSCI) Emerging Markets Index, industry analysts say.
And this can be easily done through going public with some State Owned Enterprises (SOE). In fact analysts said that some international funds are eagerly awaiting SOE to go public.
What’s the deal?
So to meet MSCI Emerging Markets Index classification criteria, at least three companies listed in CSE should have a full market cap of Rs. 1,269 million and listed stock market cap of $635 million and security liquidity of 15 per cent Annualised Traded Value Ratio (ATVR) calculated as the median value of shares traded daily in relation to the market capitalisation of the stock.
Now Sri Lanka is in the MSCI Frontier Markets (FM) Asia Index which captures large and midcap representation across three Asian Market countries. The index includes 22 constituents covering about 85 per cent of the free float-adjusted market capitalisation in each country in terms of country weightage among the constituents. What we need to aspire and work towards is to get into the next level which is the Emerging Markets status. This is what Pakistan did.
Pakistan stocks have a potential weight of 0.2 per cent in the MSCI Emerging Markets Index, Financial Minister of Pakistan Ishaq Dar had said in a statement. MSCI’s decision to elevate Pakistan to Emerging Markets status was as part of its semi-annual Index Review in May 2017. The subsequent removal of Pakistani constituents from the Frontier Markets (FM) Asia Index resulted in Sri Lanka improving its weightage to 11.12 per cent and the inclusion of Commercial Bank and Ceylon Tobacco. The index rebalance has also increased the number of constituents from Vietnam and Bangladesh 17.43 per cent.
Analysts say that getting into this higher index would be seen as a ‘better invest in CSE’ option for investors. “The CSE will be in the radar screens of better and bigger investors,” an analyst said.
MSCI Emerging Markets Index is tracked by investors managing $ 3.9 trillion of assets. “When Sri Lanka is in the index, MSCI Emerging Market Index tracker funds will be required to invest in Sri Lanka as they need to replicate the index,” Ravi Abeysuriya, President Colombo Stock Brokers Association told the Business Times.
Assuming Sri Lanka attracts a mere 0.1 per cent of the assets following MSCI Emerging Market Index, Sri Lanka will have $ 3.9 billion of portfolio investors investing in the CSE, he said. “This will increase the current stock market capitalisation as a percentage of GDP of Sri Lanka to 27 per cent from 22 per cent,” Mr. Abeysuriya said.
He said the government should persuade a large SOE or private company to list in the CSE that fully meets the MSCI Emerging Markets Index classification criteria. “Now the criteria calls for a full market cap of $1,269 million and listed stock market cap of $ 635 million and security liquidity of 15 per cent ATVR,” Mr. Abeysuriya noted. Ray Abeywardena, Chairman CSE agreed saying that there should be a holistic approach by all stakeholders for the CSE to get to a better notch at MSCI. “Those who track the MSCI will be attracted to the CSE more,” he added.
Analysts noted that in this respect, the CSE is reviving the ‘All Or Nothing Board’, a mechanism that is used on a buy or sell a (large) parcel in its entirety at an open auction. This board instructs a broker to execute the order or sell/buy the parcel wholly or to do nothing. So now the ball is on the government’s court.
Representations have been made to the Government to explore the potential of invigorating the capital market through the listing of SOEs with compelling investment propositions by the CSE and the Securities and Exchange Commission (SEC) last year as well as this year. SEC has said that entry by SOEs into the capital market involves less dependence on state financing whilst enhancing governance standards. “The CSE is encouraged to engage with private sector corporates in order to facilitate their efforts to tap the capital market to fulfill funding requirements,” an SEC official told the Business Times.
Rajeeva Bandaranaike, CEO CSE told the Business Times that the exchange is working in its own capacity to get into the MSCI. “We are ‘ticking boxes’ as we go along,” he said noting that this entails enhancing of infrastructure, capitalisation etc.
PPPs before CSE
The Public Enterprise Ministry is more than struggling to ‘restructure’ (before going public with them) certain SOEs. It received Cabinet approval for a number of restructuring efforts for state plantation companies namely Janatha Estate Development Board (JEDB), Sri Lanka State Plantations Corporation (SLSPC), Elkaduwa, Chilaw and Kurunegala plantations. At present they are more concerned about Private-Public Partnerships (PPP). The Ministry got approval by the Cabinet to go public with the Grand Hyatt Colombo and the Colombo Hilton which the state owns, sources said. But analysts say that political will must be stronger than all approvals. “Then the CSE will ‘fly’,” another analyst said.
In a progressive move, the Ceylon Chamber of Commerce’s National Agenda Committee on Infrastructure presented a set of recommendations on speeding PPP to the Minister of Finance and Media Mangala Samaraweera recently, and highlighted the need for a robust institutional and operational set up for the new PPP agency last month. The chamber in a statement said that this committee’s latest set of recommendations focussed on developing guidelines to ensure efficient collaboration between the PPP unit and line ministries; prioritization of projects through developing a robust project pipeline; ensuring a fair, transparent and well managed procurement process; as well as implementing an effective communication strategy were, well received by Mr. Samaraweera.
Analysts noted that this is a ‘start’, but at least some of these entities should go public this year.