Are we there yet? 0 781

Are-we-there-yet

BiZnomics Research Team, being a body of professional Economic and business researches, felt it opportune to discuss national economic conditions including the country’s total debt stock (domestic and foreign borrowings), and the revenue-generating solutions including Hambantota port as an asset in stimulating economic growth takes the opportunity to speak to Dr. Kenneth De Zilwa, a business Cycle Analyst who has over 17 years of experience at all functional levels in senior management positions at banking and a senior consultant at the China Harbor Engineering as the subjects are very current and relevant to the ongoing discussions on the objective making the general public aware.

What is Sri Lanka’s  economic condition?

To answer this we need to understand the models of development used by the two governments.  Sri Lanka has witnessed two economic models in the past 10 years, namely, investment driven, local supply based and local enterprise driven economic model of 2010-2014 and a more liberal, external supply based consumption model ushered during 2015 to 2019. The resultant outcomes of these two are now in the public domain and could be compared and contrasted. In the 2010-2014 period the average GDP growth rate, which is the approximation used to indicate overall expansion of the country’s production, was at 6.78pct. The average growth rate in 2015-2019 was 3.70pct; indicating a 45pct decline from the earlier period. This implied a significant slowdown of real economic activity in the country. To put this in context we have to understand that the 2010-2014 growth was achieved despite the many global shocks, namely, we witnessed the food crisis, the second great depression of 2008 (second since the Grest Depression of the 1930s) which saw the global financial system collapse  and the global oil crisis. In contrast, in the past 5 years we had not witnessed any external shocks, apart from the depreciation of the Turkish Lira and its aberrations on global markets. 

Are-we-ther-yet-01Similarly, we find price volatility in interest rates and exchange rates. The commodity volatility had been passed on to the real economy, making input cost of production and consumables more expensive despite the dramatic fall in global crude oil prices. In fact it was observed by the Central Bank of Sri Lanka that the rupee depreciation by 18pct in 2018 viz a viz the US Dollar brought about a LKR 1,000 billion loss to the economy during 2014 to 2019 i.e. while during the last 5 year period, the total depreciation cost to the country was LKR 1,780.0 billion incremental debt servicing cost to the country. The erratic behavior of markets can thus be costly for the development agenda. Therefore we can argue that the free markets based model adopted in 2015-2019 was 

not conducive for the real sector development and economic growth. Going forward we envisage that a new business model will be introduced for Sri Lanka to kick start the economy with an emphasis on properly aligned macroeconomic policies which will stimulate local Agro-Industrialization and unleash the entrepreneurial activity across multiple sectors. This will lift the GDP growth rate to well above its historic average of 4.75pct.

 

How much is Sri Lanka in debt and what is the solution for this? Are-we-there-yet---03

Sri Lanka debt has been a talking point since 2014 and the reason for that was the rapid development that was undertaken during the 4-year period after the war. This clearly brought about an increase in the national debt stock. The country’s total debt stock (domestic and foreign borrowings) increased from LKR 4,590 million to LKR 7,390 million with significant amounts of funds utilized in the creation of balance revenue asset and capacity building, for the country needed to be integrated and the journey towards industrialization undertaken . Many of such capital intensive projects have a long term payback period and the cash flow from such projects was gradually building up, with less stress on the fiscal front of government business.  In 2015 however, the new government moved away from adding capital assets to the country’s economy and was focused on shifting economic policy towards less state led investment capital. They therefore, commenced disposing of already created assets via long term lease agreements to various foreign countries. Hambantota port is a classic example where the port’s revenue-generating business venture was leased back to the construction company at the cost of construction and not based on the discounted future cash flow method. The argument was that asset disposing was necessary given the country’s debt burden.

Similarly, we find price volatility in interest rates and exchange rates. The commodity volatility had been passed on to the real economy, making input cost of production and consumables more expensive despite the dramatic fall in global crude oil prices. In fact it was observed by the Central Bank of Sri Lanka that the rupee depreciation by 18pct in 2018 viz a viz the US Dollar brought about a LKR 1,000 billion loss to the economy. In fact during 2010-14 i.e.last 5 year period, the total depreciation cost to the country was LKR 1,780.0 billion adding to the incremental debt servicing cost and debt stock of the country.

Cont..

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Hyper-leap to a vibrant equity market 0 483

 

In this exclusive interview with BiZnomics Magazine, the Chairman of the Colombo Stock Exchange Mr.Dumith Fernando, discusses the digitalization of the Colombo Stock Market. He also touched on the future investment environment in Sri Lanka. Fernando is Chairman of the leading investment banking firm, Asia Securities Holdings Ltd, which he has led for the last six years. He also serves as a member of the Financial Stability Consultative Committee of the Central Bank of Sri Lanka. With 25 years of experience in international and Sri Lankan capital markets, Fernando spent much of his career in global financial centers in New York and Hong Kong with global banking giants JPMorgan Chase and Credit Suisse.

What role will the ‘hyper-leap to the future’ play in creating a vibrant equity market for Sri Lanka?  

The “hyper leap” to the future, what it refers to is the digitalization of the stock market. The Chairman of the Securities and Exchange Commission (SEC) called for a joint committee of the Colombo Stock Exchange (CSE) and SEC with the intent of digitalizing some of the core activities of market and market participants. The goal was to digitalize as many of the stakeholder touchpoints, enabling end to end connectivity electronically with interactive user interfaces and interactive user experiences so that the stock market can be accessible to anyone with a smartphone. Early on we converted a lot of the statements to electronic form, for instance, CDS statement is sent via email, and companies listed on the CSE were allowed to pay dividends directly into their shareholders’ accounts, electronically. In the second phase of the initiative, we introduced a mobile application. A CSE mobile app that allows anyone from anywhere in the country to open a stockbroking and Central Depository System (CDS) account without visiting a branch of a stockbroker physically. It helps broad-base the market and brings a lot more individual investors onto the market, which is a fundamental part of creating a vibrant equity market.

How has the market performed in the past few weeks?

The activity levels and market valuations have gone up considerably. In the past few years, after 2015, every single year the average daily turnover in the market was under a billion rupees. It was Rs. 710 million a day in 2019. Today we are probably doing over Rs. 1.5 billion of turnover per day. On the 14th of October, there was a turnover of Rs. 5 billion, and the number of actual trades in the market was the highest since 2011. Before the lockdown, there was very heavy foreign selling in particular, and when the market reopened for one or two days you had markets falling about 13 or 14%. From that time what we have witnessed is local investors, seeing very good value in the market and taking advantage of this opportunity.

How will the market face a second scenario?

The market was closed for about 7 or 8 weeks in March through mid-May, a big part of that was the lack of full confidence that trades could be settled, due to the trade settlement process. So with the current digitalization move, we’ve asked brokers to get on board as many of their customers for online settlement and online payment to bank accounts. This allows us to be much more confident about operating the market even during the unfortunate eventualities of a lockdown or a curfew. In terms of COVID management we have performed much better, the markets and companies are better prepared now to deal with the COVID situation. So that’s why I think even if there is a second wave of any sort, companies are much better prepared for that and we would expect to see companies and the stock market also performing in a much more resilient manner than before.

What role has interest rates played in boosting the market?

This was a fundamental catalyst for the share market performance. Since the reopening after the lockdown, there was a precipitous drop in interest rates. Interest rates falling has always been good news for equity markets for three reasons.

First for individual investors in particular, if you’ve been sitting on high-interest rate deposits for the last few years they might sometimes be getting double-digit returns on fixed deposits. That has now fallen considerably. For a lot of people, the return they are getting on their money from bank deposits is just not enough.

That has made them shift to the equity asset class particularly because valuations were so low by the end of the lockdown. Dividend yields in the equity markets are probably about 3% so that combined with the price appreciation that have been expecting will give them a better return. Secondly, when interest rates drop, the finance cost of listed companies go down,  and with that comes a boost in earnings.  This resulted in some of these particular companies being highly geared and a boost in their earnings, leading to their stocks performing quite well. Third impact will be for those who trade stocks on margin. Their margin interest cost also goes down, then they are in a better position to get into the market. There’s a high degree of confidence that you can make more money in the market than you pay in margin interest costs. That is also one of the positive impacts of low interest rates.

Will we be seeing more IPOs in the coming years?

When people come to the market to list, generally we would look at two or three different things. High valuation, high price to earnings multiples, and high price to book value multiples in the market. These factors would assure much greater investor engagement. Sentiment and confidence also plays a big role, because it’s not just a matter of placing your shares in the market, you want the share price to perform well. Now we’ve obviously gone through a period where markets have been somewhat challenged. Even as of last month the valuations of our market were the lowest among peer countries. That’s one of the reasons why I think a lot of companies in the last three years have not gone out for listing.

We want to see more companies tapping into the public share market to raise money; raise capital for their growth. With the COVID-19 lockdown I think there may be a number of companies who have survived on bank financing, some challenges of the COVID impact may mean that raising equity is the way out of any sort of balance sheet challenges. So we would expect to see some of those companies as well, now considering equity markets. State minister for capital markets Hon. Nivard Cabraal has challenged the CSE to look at getting to 500 listed companies in five years. We’re at about 300 at the moment and that 300 hasn’t really changed over the last few years. We have been having promotional campaigns and doing various things to get them to come into the market but we are definitely going to have to redouble our efforts to push towards some of those targets now.

What is the outlook for the Sri Lankan economy in the medium to long-term?

I’m generally positive. We should expect to go back to 5 percent or 5% plus growth as an economy. Even though there is a lot of noise around the current sovereign rating downgrade and international debt repayments I’ve never had doubts about our October bonds being repaid. I don’t have doubts about our July repayment. Clearly there are concerns and fears! I’m not trying to say that the future or the next year or two is going to be easy but, there’s a lot of free space between it being easy and not being able to repay debt and I think we will definitely find the middle ground in that space to do what we have done for all these years, which is, never default on a sovereign issue.

Outside of that we are in a very good position. There’s a lot of infrastructure investment that still needs to happen, the road network and the country being better connected, the two ports being expanded, the Hambanthota Airport now potentially getting more utilized, I think the logistics infrastructure is a fundamental necessity for economic growth and it is all falling into place. We’re also seeing potentially quite positive wins from some of the government focus to move towards local manufacturing. If you look at local manufacturing stocks on the exchange, they performed extremely well in the last few months

One sector that is seeing a bit of slowdown and will do so in the next 12 to 18 months will be the financial and banking sector in particular. But with other parts of the economy growing and strengthening the banking sector will pull through.

We don’t have the answers to when the tourism sector will bounce back, it’s not a massive part of our economy but contributes about 4-5 % of the economy. It’s a big foreign exchange earner and there are quite a few jobs that depend on it. There’s a lot of dependencies, not just economic dependencies, primarily health-related dependencies including travel bans been lifted, a vaccine for COVID, and treatments for COVID advancing. So there are number of things that are very hard to predict at this stage.

However we’ve seen exports bouncing back with about a billion dollars of exports a month, that run rate would make it possible to put us ahead of last year’s full year export number.

On the production and manufacturing side, I think we’re much better organized to operate even if there were a COVID second wave.

With that in mind, there will need to be much stronger capital formation across industries and that’s where we see a big opportunity for the Stock Exchange. With more companies raising capital through the CSE.  I am positive about our outlook! We have a game plan; we’ve been able to stabilize policy uncertainty which we had for the last few years, with a consistent government in place, good policy and solid public sector private sector engagement, I think we should get back to 5% plus growth.

Different Models of Developmental State 0 604

Development-Stage

To put it bluntly, there isn’t one economic theory that can single-handedly explain Singapore’s success; its economy combines extreme features of capitalism and socialism. All theories are partial; reality is complex

Development-Stage

Prof. Ha-Joon Chang

  • Former Consultant – (UNCTAD, WIDER, UNDP, UNIDO, UNRISD, INTECH, FAO, and ILO),
  • Former Consultant – The World Bank, the European Investment Bank, the Asian Development Bank.
  • Former Consultant for the Governments of Argentina, Brazil, Canada, Ecuador, Indonesia, Japan, Malaysia, Mexico, Namibia, Saudi Arabia, Singapore, South Africa, UK, Uruguay, Venezuela, and Vietnam.
  • Winner of the 2003 Myrdal Prize.
  • Winner (jointly with Richard Nelson of ColumbiaUniversity) of the 2005 Leontief Prize for Advancing theFrontiers of EconomicThought awarded by Tufts University.
  • Winners of the Prize include the Nobel Laureates Amartya Sen and Daniel Kahnemann as well as John Kenneth Galbraith and Albert Hirschman.
  • He was ranked no. 9 in the Prospect magazine’s World Thinkers 2014 poll.

The ‘classic’ developmental state is an ideal type derived from the East Asian – more specifically Japanese – experience between the 1950s and the 1980s. 

There were of course variations even within East Asia. Korea actually went further down the road than Japan did, although now it has moved to the opposite extreme, embracing neo-liberalism as if there is no tomorrow. Between the 1960s and the 1980s, the Korean state pursued some of the most market-defying selective industrial policies, using an extremely powerful pilot agency (the Economic Planning Board, or the EPB) and total state ownership of the banking sector, both of which were missing in Japan. The Taiwanese state may have intervened in the affairs of the private sector less forcefully and dramatically than Japan or Korea did, but that was in part because there were few no large private sector firms in whose affairs the state felt the need to intervene. The other side of the coin of the weakness of the private sector in Taiwan was that SOEs (especially in upstream intermediate inputs industries, where scale economy is crucial) and state-financed R&D played a more important role in Taiwan than in Korea or Japan. Singapore used yet another model, combining free trade, a welcoming (albeit carefully targeted) approach to foreign direct investment, and a massive SOE sector (one of the biggest in the non-oil-producing world, producing 22% of GDP, when the world average is 9-10%). 

Even the ‘classic’ developmental state was, however, not confined to East Asia. During the same period, under a similar political condition of nationalistic, interventionist rightwing hegemony, France used a very similar strategy of economic development, involving (indicative) planning by Commissariat Général du Plan (the planning commission), sectoral industrial policy (of course, somewhat constrained by the imperatives of European integration) led by elite bureaucrats, and aggressive use of SOEs (Cohen, 1977, Hall, 1986, Hayward, 1986, and Chang, 1994). There is even anecdotal evidence that Japanese bureaucrats stationed in France were reporting on French policy practice.

If we broaden our definition of the developmental state to include any state that deliberately intervenes to promote development, we could argue that the Scandinavian countries also practiced a variety of developmentalism, especially since the 1950s. 

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