Policy consistency, clarity key to SL’s growth
After a positive second half of 2017 Sri Lanka’s capital markets experienced considerable headwinds in 2018, with impacts of macroeconomic issues, political uncertainty, turbulence in global energy prices and moves by the US Federal Reserve.
As 2019 got underway foreign outflows continued, while bond spreads widened – both signs of challenges ahead, said The Report: Sri Lanka 2019, Oxford Business Group’s (OBG) latest publication on the country’s economy. “This left many key companies undervalued and demand for long-term bonds high, as investors looked for more secure havens in the country’s debt market. As the year progresses, many see prospects for a turnaround, particularly if moves to expand and deepen the market begin to take hold, and the overall economy grows within the government’s structural reform agenda,” it added.
At a roundtable organised this week by OBG themed ‘How can Sri Lanka enhance competitiveness in the age of disruption?’, Dilshan Wirasekara, CEO, First Capital Holdings called for policy consistency saying that the country has experienced significant shifts in interest rates and exchange rates, in addition to high levels of foreign debt and a debt-to-GDP ratio of almost 80 per cent that led to major volatility in the domestic market.
“Sri Lanka’s economic indicators show stifling growth,” he said noting that these conditions in 2018 were unfavourable for raising sovereign debt overseas, as rating agencies downgraded the country’s credit rating as a result of foreign outflows from both debt and equity capital markets.
Market players have an important role to play in identifying these risk factors and taking measures to minimise them, he said adding that hedging the currency on forward rates in order to minimise the risks associated with foreign exchange fluctuations, and undertaking interest rate swaps protects against rate volatility. However, due to liquidity issues and difficulties finding partners who are willing and interested, many companies face challenges in executing these remedies, he said.
Low foreign currency reserve positions, high foreign debt payments and foreign outflows from the debt and equity capital markets could further weaken the Sri Lankan rupee during the first half of 2019. “We have a US$ 11 trillion in debt. Half of this is in foreign currency and the other half is in local currency. The answer to better the indicators is bringing interest rates down,” he told the Business Times alongside the discussion. He added that the unwarranted expansion of credit growth took place when interest rates were artificially controlled. However, he added that it is getting better. “This year the Central Bank (CB) cut interest rates twice already.” The CB cut its benchmark rate by 50 basis points, to 7.5 per cent.
It also cut the standard lending facility rate offered to commercial lenders by 50 basis points, to 8.5 per cent.
The first since early 2015, this reduction of the benchmark rate is part of a proactive effort to stimulate economic activity by increasing credit to the private sector, which contracted during the first four months of this year.
The intervention is also intended to improve business sentiment following the April 21 bombings.
Investors need to be able to bypass banks and directly invest in projects, he said as an answer to cost of capital. For this, the country needs a robust capital market structure.
Mr. Wirasekara noted that the country has $8.5 billion in reserves. “Other businesses should venture out elsewhere like what the apparel and IT/BPO sectors have done to beat the low growth prospects.”
He pointed out that Sri Lanka has signed five free trade agreements and trading/ venturing to these parts of the globe is now easy for businesses.
“This means we have preferential access to more than half of the world population.”
He said that the capital markets in Sri Lanka have to be far more active in order for small entrepreneurs to do well in business. “How do we expand capital markets to see that all these flows trickle down to the start-ups? For this, we need a structural change. We need to have the interest rates at a manageable level for businesses to start then thrive. But this is long term. So the government needs to support the start-ups through loans.”