September 15, 2013, 8:58 pm - The Island
Securities and Exchange Commission of Sri Lanka Chairman Dr. Nalaka Godahewa’s speech at the recent ‘Invest Sri Lanka 2013’ forum in Hong Kong.
During the last couple of years, the interest of global fund managers has started shifting towards emerging and frontier markets. Of course, recently, there have been certain changes that are happening, but these are ups and downs. We have to make use of these opportunities. One of the problems that Sri Lanka is facing currently is that we’re not yet known in the world so that is why we want to make use of opportunities like this - to come and tell you that story.
Sri Lanka as a country is one that was very well known in the ancient world. Because of the fantastic geographical locationthat you can see here, it was known by almost all the ancient trading nations who were traveling from East to West and West to East. The Greeks, Arabs, Romans, Chinese, everybody, used it as a stopover, so it was a thriving trading port at one point. In fact, in the second century, Ptolemy’s world map, which you are all familiar perhaps, Sri Lanka, in those days it was called Taprobane, was shown bigger than the Indian continent, that shows to what extent this country was known in the Asian world.
Now we are in Hong Kong, next to China, there was this famous Chinese explorer, navigator,Zheng He, who some people argued saying he travelled round the globe before Columbus. Out of his seven voyages, six times he stopped in Sri Lanka and in fact, erected a tri-lingual inscription in Sri Lanka during his second visit. But unfortunately when you look at the last century, particularly the last 30 years, Sri Lanka was known not for positive things, but for a war. A brutal terrorist group was fighting a war with the Sri Lankan government and we were fighting that war for 30 years and Sri Lanka’s economy got somewhat stagnant because of this. The growth opportunities that other Asian countries saw, we couldn’t capitalize on during this period.But fortunately for the country, the war came to an end in May 2009 and now complete peace has arrived in Sri Lanka. A new era has started. An in fact, today, we’re in a position to very confidentially say that Sri Lanka probably is one of the most peaceful countries in the world.
So what has peace or the end of the war has given us? It has given us political stability and undivided focus on economic development. The money that was spent on the war for the last 20 years is now available for infrastructure development. Also, Sri Lanka is ready with highly trainable educated workforce to work on Sri Lanka’s economic development activities. Today, almost everybody who visits Sri Lanka is talking positively. Everyday on papers we see somebody coming into the country talking positively. I see this last week, the new World Bank director was talking very positively about Sri Lanka and talking about the investment potential in the country. The Sri Lankan government after the war, has made up its mind very clearly to focus on economic development. The government believes that its primary task was to build infrastructure. So using this infrastructure, the private sector can start building their businesses.During the last four years since the end of the war, so much work has been done in the infrastructure development area. In addition to our existing international airport, a new airport has been built in the South and in addition to our existing Colombo port, a new port has been built. Both are nowcompleted and the existing airport and existing ports arebeing expanded. Power plants are being built, highways are coming up, irrigation projects are getting completed, so in every sense infrastructure developments are happening at a much faster pace than they have been ever. In fact, if you look at the HSBC global researchreport that came out last February, it says despite being one of the smallest economies in the region, Sri Lanka’s commitment to infrastructure development is better than some of its regional counterparts. So that is what the government has been doing.
We believe that with all these things that are happening in the country, we are now poised to regain perhaps our ancient glory once again. We believe we are now getting ourselves equipped to become once again an economic hub in the region. In fact, we have great potential to become a logistics hub, exploiting our fantastic geographical location, being more or less in the centre of the world connecting East and West. With the infrastructure developments that are happening in the ports and the airports, we can be a transportation and logistics hub for both naval and aviation.
We also have the potential to become a commercial hub. With one of the highest ranks in doing business in the country,with one of the best developed telecommunications infrastructure, with some of the most qualified people, some of the most dynamic business people, we have the potential to once again to become an economic hub. The legal framework is there, the banking regulations are robust and all those things, that’s another potential. Also, Sri Lanka is one country that is always known for its high literacy rate, 92 percent plus literacy rate. IT literacy rate is fairly high now,it is about 30, 40 percent and expected to reach 70 by about 2016. With all these things, and now also, the country opening up for higher education institutes; Sri Lanka has the potential to become a knowledge hub catering to not only regional needs but also perhaps the world. For so many years, Sri Lanka has been exporting professionals ,doctors, engineers, lawyers, accountants, to the world and we can continue to do so.
Sri Lanka also has the potential to become an energy hub. We are currently exploring the possibility of oil and gas around the country. We started this exploration work couple of years ago in 2001 and have already found evidence of gas, which calls for new exploration. If the gas turns out to be more or less reality and we find oil, it will completely change the name of the game for Sri Lanka in this sphere.
When it comes to tourism, Sri Lanka is one countrywhich is always known for tourism, you saw how beautiful the country’s product that is on offer. After the war, during the last four years, tourism arrivals have doubled and it is fastest emerging, perhaps the fastest emerging tourism destination in the region.
It’s a country good not only for doing business but also for living. People who come to the country say that it’s one of the cleanest countries in the whole of South Asian region. The fantastic legal system, improved telecommunications, education, healthcare, with all these facilities in place, people cannot only do business, people can live there.In fact, from my personal experience, most expatriates who come to the country, not wanting to go back, looking for opportunities, sometimes not their companies, but even in some other companies, to stay in the country.
If we look at the economic front, we can already see these dividends. The economic numbers are fast improving compared to what had been there the past several years. I’m sure the Central Bank Governor will go into greater details. GDP has doubled during the last five years, inflation is coming down, and the growth rate has been quite good during the last two to three years and is expected to reach about 8% next year. Unemployment is comingdown, you can see how fast it has been coming down. In 2012 it had come down to 4 percent from about 15 percent ten years ago and by mid this year it had come down to about 3.6 percent. Poverty levels have come down from 22.7 percent in 2002 to the currently about 6 percent.
You all know what is happening with international ratings all over the world. After the global financial crisis, rating agencies have been very conservative and have been downgrading countries all over. With that kind of a scenario, we are proud to have sustained our ratings and seen improvement in other areas. If not for the global crisis, it would have been a different story. We believe that we deserve something better than what we see today from the rating agencies. Look at the rankings. We have been continuously improving in a global competitive index, ‘doing business’ index, global economic index, and human development index, and in addition to the continuous improvement that we are seeing, if you compare us with our regional counterparts, we are ahead of most of them in almost all areas that we are talking about.
Now let’s come back to the capital market because that is the area of interest. Sri Lanka’s securities market is not very big, it’s still only about 18 billion US dollars and within that it’s primarily an equity driven market, 98 percent equity and 2 percent debt. There are historical reasons for this pattern because of what was going on in the country, the government was borrowing, interest rates were high and all these things, there are reasons for this pattern. The market infrastructure didn’tdevelop in the last two years, so it is mostly equity and a little bit of debt. There are only 288 companies in the market out of probably 10,000 registered companies. There are so many large companies not yet listed that are currently considering entering the market. In this market, what we saw in the last two years, a very interesting phenomenon after the war, particularly, a lot of foreign investors have started seeing opportunities. In 2010, foreign participation in the market was onlyabout 10 percent. It has grown by now to about 40 percent which is a good sign and shows that foreign funds are seeing the potential in the market. The PE ratios are quite attractive, as you can see, and even though there have been fluctuations, the market has been growing. During the last 12 months it has given an 18 percent return to investors.
Coming back to regulations, Sri Lanka’s Securities Act is about 25 years old and the SEC was formed in 1987. The Act was amended a couple of times during the last 25 years and a major amendment, something like a new act, is to be introduced by end of this year or early next year. We’ll be on par with almost all the modern day requirements in legislation.We are a member of IOSCO and alreadywe meet almost all the requirements of IOSCO and whatever limitations that are in there will also be addressed by the changes that are coming forth.
When it comes to the activities of the SEC, we see two functions: On one side the regulatory function, on the other side the market development function. For a sophisticated developed market, the SEC’s responsibility will primarily revolve around regulation but we have gone slightly ahead in our situation because we’re still a market which has to grow and which has great potential, and we’re working with the Colombo Stock Exchange on market development activities, which is why we’re participating in events of this nature.
For Sri Lanka’s securities market and the capital market development, we have now come up with a fast track action program which has ten project initiatives. Thisten project initiative revolves around seven areas of importance. As I mentioned earlier, because of the war, for about 20 years, we couldn’t do much in this market, the focus was elsewhere. Now we’re trying to fast track and put things back on track, so that we are ready for the promising future that we see for the country, starting with the infrastructure. There are a lot of improvementsthat we are currently working on. For example, we are in the process of introducing a central counterparty system with the Central Bank which should be in place by end 2014, latest by early 2015. Along with that, a lot of changes we can do in this area. The product portfolio will be expanded with the introduction of a lot of things, and with CCP coming in to play a lot of new products will be possible. The Colombo Stock Exchange will be demutualized, the demutualization bill is ready to be submitted very soon. Market liquidity is still a concern, the public float is about 25 percent, but we are taking a lot of action to improve thisarea, inviting new companies to get listed, private as well as government, and in fact, considering a mandatory free float requirement probably by the end of this year. Other areas like improving awareness and improving global participation are of great importance and in fact, we believe that with the developments that are taking place in the country, the foreign investment is an important area, and of course, the foreigners would want to invest in the country and we want to make use of the capital market for this purpose.
I don’t want to take too much time beyond this because there are other speakers to speak. Essentially, the message that I want to give you is that Sri Lanka is now ready to take off. We fought a war for almost 20 years, then for the last four years we were laying the foundation, and now we’re ready to take off. The opportunity is in timeto come and we invite you to now positively look at Sri Lanka and do your own research and understand the country and see how best you can make use of these opportunities yet to come. Thank you very much.