Sri Lanka - a great investment opportunity in 2021, says new research report

Despite global negativity, the Colombo Stock Exchange (CSE) has emerged the best performing stock market in the world as of January 19 due to local positivity. Analysts expect global equity market growth to move away from the US to favour the rest of the world. The capital flow into emerging markets can also be expected to flow into frontier markets while Sri Lanka has the potential to outperform other frontier equity markets during 2021 since it is trading at attractive valuations, according to the latest Economic & Market Outlook report of the Colombo-based Ceylon Asset Management (CAM).

Sri Lanka offers the highest negative correlation in Asia compared to India, the US and Japan while Malaysia is the 2nd highest in Asia compared to the same countries. The report reveals that the CSE’s negative correlation to US, India and Japan stock markets during the past 5 years offer investment opportunities to global investors.

Frontier economies such as Sri Lanka are experiencing credit distress reflected by a series of country rating downgrades by the international rating agencies. As a result, Sri Lanka International Sovereign Bond (SLISB) yields spiked to an all-time high level last year since the first issue during 2007. The 2030 SLISB yield of 9.1% before the pandemic (11 March) increased to 19.6% during May 2020. Currently, it has recovered marginally and trading at a yield of 15.5%. The 2030 ISB price declined by -37.8% during 2020. The 2022 ISB maturities still trade at yields above 30% reflecting global investor concerns over Sri Lanka’s ability to repay maturities next year given insufficient Reserves.

Despite the adverse economic environment, the research report highlights a ‘contrarian investment opportunity’ in the Sri Lanka International Sovereign Bond Market. However, global negativity towards Sri Lanka is strong due to existing external debt obligations, weak debt sustainability, insufficient foreign reserves and hesitance to engage with the International Monetary Fund. As a result, all other “CCC” rated countries trade below 10% while Sri Lanka trades at 18.5% p.a.

Foreign analysts are negative on the external debt repayment ability of Government of Sri Lanka over the next five years due to mounting adverse economic conditions. The absence of a credible debt repayment strategy by the Government of Sri Lanka has diluted foreign investor confidence despite the statements provided on the willingness and ability to settle the upcoming debt obligations.

Despite the negative impact of the pandemic on Sri Lanka and exit of foreign investors from the CSE, analysts observe a contrarian behaviour of local investors due to their confidence in the government policies and measures to reduce the trade deficit, a strengthening current account balance, arrangements of dollar SWAPs of US$ 2.5 billion to strengthen FX reserves to overcome prevailing challenges. In addition to the dollar SWAPS, the Government of Sri Lanka expects committed FDIs of US$ 2.5 billion during 2021.

The report understands the strategy and plan of the Government and Central Bank of Sri Lanka for 2021 as follows:

• Sri Lanka is confident of reporting a GDP growth of 5% in 2021. The Agricultural Sector to perform along with exports such as apparel, tea, and sea food.

• Export earnings have almost returned to pre- pandemic levels of US$ 1 billion a month.

• Restrictions on imports and tax concessions on several sectors are expected to boost domestic economic growth.

The Central Bank of Sri Lanka expects to reach a fiscal deficit of 8.9% in 2021 along with high deficits expected from other nations around the world.