Budget hailed for progressive capital market proposals
The coalition Government’s third budget presented by its new Finance Minister, Mangala Samaraweera, was hailed by Colombo bourse in the early trading hours on Friday with both indices turning green but they failed to sustain towards the end of trading.
The most salient proposal pertaining to developing the capital market were the proposals to shed state holdings in non-strategic enterprises to improve market and the listing of the two major state banks – People’s Bank (PB) and Bank of Ceylon (BoC). With the latter proposal, the government will allow the BoC and the PB to raise both debt and equity capital but not relinquish the controlling ownership. Mr. Samaraweera said adding that the Treasury is willing to allow the divestitures, provided that the depositors and the employee will be given the option of becoming shareholders. “This is a really positive proposal in that the state patronage in state banks will diminish,” Ravi Abeysuriya, President of the Colombo Stock Brokers Association told the Business Times. He noted that challenging the state banks to stand on their own in terms of raising necessary funds is a step in the right direction.
This time the banking sector was the main target for money spinning for the government with the budget proposing a 0.02 per cent tax (this is down from 0.05 per cent last year when it was first proposed) on banking transactions. This tax cannot be passed down to the customers.
In 2016, Rs. 106 trillion has been recorded as transactions, according to Central Bank data. The Government proposes to raise Rs. 20 billion from this, according to the budget. Mr. Abeysuriya added that this will be a start to repay the short term debt in 12 months. Also a Debt Repayment Levy to be paid by financial institutions on cash transactions (Rs.2 per Rs. 10,000 worth cash transaction) for three years was proposed. Analysts say that banks’ profitability will be boosted with increase in costs which shall not be passed to the customer.
Analysts say that the proposed SME Guarantee Fund in the budget will enable SME exporters who are in the CRIB but have the potential to export yet have no access to finance its operations, to access financing from banks utilising the SME guarantees. Banks and diversified financials will see increased clientele base leading to improved loan disbursements and earnings, they say.
Also the proposal to create necessary legal framework and the policy environment for the development of capital markets was hailed as positive by analysts.
The Cellular Tower levy of Rs.200,000 per tower per month was proposed by the budget to discourage the proliferation of such towers. So this time too, telcos will see a dent in their bottomlines, many analysts predict. They say that Dialog Axiata and Sri Lanka Telecom will get hit by this tax. Dialog may need to pay some Rs. 5 billion a year for its 2,100 towers.
The budget proposed a tax on liquor that will be structured according to the strength of alcohol. This would make listed firms such as Distilleries Corporation and other hard liquor manufacturers’ input costs go up while beer (Lion Breweries PLC) could get cheaper. With the proposal to remove imported excise duty on imported canned beer, other importers will be hit at a different level, analysts say.
The liquor licensing fee structure will be rationalised while the license issuance mechanism will be revamped. A tax file number will be one of the essential requirements when issuing these licences. This increased tax is set to lower demand for the mentioned liquor firms, analysts say. Addressing illegal liquor production and to monitor the production of liquor, an excise duty will be imposed on raw materials used for Ethanol production based on the quantity. Toddy will be taxed at Rs.5 per litre and Molasses/Maize/Rice/Fruits at Rs. 10 per Kg. This will further increase the already high input cost for legal alcohol manufacturers, analysts say.
Removing restrictions that limit the land ownership rights of listed companies with foreign ownership will facilitate foreign ownership and purchase in property. This will assist listed foreigners’ ability to purchase condominiums below the 4th floor. Analysts say that a positive growth in the real estate sector will be witnessed while expecting an improvement in interest for luxury apartments amongst high net worth foreigners and continuous demand for commercial spaces from both local and international corporations.
This budget did not tax Ceylon Tobacco PLC (CTC) directly but proposes to license other cigarette importers. While CTC products would face new competition, the company will gain as this proposal will reduce the number of counterfeit products.
The proposal on lifting restrictions on foreign ownership of shipping and freight forwarding will see increased competition for logistics business with entities such as Hayleys PLC, John Keells Holdings (JKH) and Hemas Holdings being affected in the longer run, analysts say. They say that local players would feel the heat given the expertise and economies of scale the foreign players carry. These firms will see business expansion in overall logistics sector with the proposal to establish a logistics hub which includes front end services, Multi Country Consolidation, Warehouses, Entreport Trading and Off Shore Businesses which have immense potential.
Amendments will be made consisting of the liberalisation of the existing investment regime with the inclusion of working capital, expansion of designated areas and introduction of updated operating guidelines.
The proposal to establish an excise duty of 50 cents per gram of sugar contained in beverages will hit the bottomlines in food and beverage sector firms such as Ceylon Cold Stores, Nestles PLC, Cargills Ceylon, etc, analysts say adding that the increase in costs will impact profitability of these firms.