Stock market to bring in more portfolio cash in the wake of ratings downgrades
On the back of country downgrades by Fitch Ratings, capital market stakeholders are gearing to carry out aggressive country promotions starting with Sri Lanka Investment Summit – Uncovering Opportunities in Asia’s Rising Gem’ on 15 March in Singapore, inustry experts said. Vajira Kulatilleke, Chairman Colombo Stock Exchange (CSE) told the Business Times that this ratings downgrade is a wake-up call to the industry and that it’s time to make the most of it. “With such ratings, the currency depreciation will follow which will strengthen the US Dollar and this (is) actually good for firms which export,” he said.
“So, for them this it’s an opportunity, but we must enhance exports as that base is still small,” he said. He added that it’s important at this juncture to attract more FDI. “This is what we should be focusing on.” Fitch Ratings downgraded Sri Lanka’s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) to ‘B+’ from ‘BB- reflecting increased refinancing risks on account of high upcoming external debt maturities, deterioration in Sri Lanka’s fiscal finances, depleting foreign-exchange reserves, and foreign-currency debt portion remaining high.
Rajeeva Bandaranaike, CEO CSE told the Business Times that the market has gone through worse times and that this is the time to engage in discussions with prospective investors to bring in funds. “We are geared up for this (Singapore) forum and we have plans for a few more in the coming months,” he said.
A top official of a conglomerate reminisced that the country has been through worse downgrades earlier, and it’s time to take stock of this situation. He said that most corporates will adopt a wait-and-see stance at this juncture. Jonathan Alles, Managing Director/CEO HNB told the Business Times that while these downgrades can be challenging, the bank will tour Singapore and Thailand to meet with prospective investors and will showcase the country along with HNB’s track record to them. “In April we’re off to New York,” he said. He added that the country requires external liquidity support from the IMF and other multilateral institutions. “If the IMF and the ADB which is due to come this week makes a firm commitment, we can get out of this situation in a shorter time.” Stockbrokers are also gearing to carry out their roadshows/ visits to their existing clients and prospective ones more aggressively. They said that meetings planned for this year will be dealt with more aggression and force. ”We need to get out of this rut,” a broker said
Rating downgrade increases risk to lenders to Sri Lanka
Sri Lanka’s ability to borrow from the international market over the short and long term will be greatly affected on account of worsening public spending and widening current account deficit, officials and economic experts said. The Fitch downgrading of the Sri Lankan sovereign to ‘B+’ from ‘BB-’ and assigned a Negative Outlook on 29 February 2016 will exert an impact on the country’s sovereign guarantee when seeking foreign borrowings, a senior government official who wished to remain anonymous told the Business Times.
Sri Lanka is also grappling with a wide current account deficit due to lowering in exports and a capital-intensive import bill following increased focus on infrastructure development in the country, he pointed out. If one consider the cumulative profits expatriated by the existing Board of Investment (BOI) companies and deduct them from the Foreign Direct Investment (FDI), the total FDI contribution of the BOI will be a “minus”figure, he said. As the total agreements signed this year to date is approximately US$35 million, then the real number can be even “minus $100 million” leave alone the cost of sustaining the BOI which can further run into millions more.
According to Fitch rating, Sri Lanka’s FDI remains below comparing the other countries in the region and this has resulted in an “unfavourable funding mix including short-term capital and debt financing, he added. Sri Lanka’s vulnerability to a shift in investor sentiment was evident when investors sold-off the equivalent of nearly US$ 2billion in local-currency government securities in 2015. A further outflow from treasury bills and treasury bonds, which account for about 31 percent of the country’s foreign reserves, could put more pressure on reserves.
Well-known economist Professor Sunimal Abeyratne of Colombo University told the Business Times, that the country should tackle present economic issues including the balance of payment weakening. He pointed out that Fitch ratings down grading will exert an impact on Sri Lanka’s businesses but the country could be able to overcome the present situation. Sri Lanka has faced a similar situation in 2009 where it was able to manage the economy through the IMF bailout package, he said adding that the then government had also borrowed from China for infrastructure and other development projects.
The country has bounced back from the 2009 economic situation with IMF assistance and similarly talks are under way with the IMF programme of assistance this time as well, he said. He expressed the belief that Sri Lanka will be able to get IMF support once again to gain a considerable economic growth with tight monetary and fiscal policy. Despite Fitch’s forecasts, the country can expect the economy to stabilise, growing up to a certain extent in 2016, and rising in 2017 with the renewal of EU GSP plus facility and support of the IMF and other foreign agencies like World Bank, the ADB etc, he said.