Interview: Dilshan Wirasekara
Do you expect Sri Lanka to follow the downward trends that are hurting other emerging markets?
DILSHAN WIRASEKARA: Despite some negative elements, the markets are relatively shielded, as most investments are domestic. The anticipated rate hike and the Chinese economic slowdown have already had an indirect impact on Sri Lanka in terms of outflows in equity and bond markets. Foreign holdings in the bond market fell from 10.3% in June 2015 to 7.1% by the end of December. In Sri Lanka foreign participation in equities averages 25%, and in the bond markets it is capped at 12.5% of issued rupee government securities, limiting exposure to foreign holdings.
The equity market saw cumulative net foreign selling of over LKR6.3bn ($45.4m) since June; however, this is largely insignificant compared to the total foreign holding of LKR730bn ($5.3bn) in the Colombo Stock Exchange (CSE). The foreign sell-off was partly due to the anticipated depreciation of the exchange rate, which only happened in early September.
However, there was a shift in trading volumes following the floating of the rupee, and they are now concentrated on equities that have felt a positive impact from the rupee’s depreciation. We believe the present exchange rate is fairly valued as per real effective exchange rate and nominal effective exchange rate measurements, and this should ease the foreign sell-off in bond and equity markets. Furthermore, foreign participation in the market will rise upon the strengthening of the external reserves position and other macroeconomic indicators.
How much does trading volume growth depend on foreign portfolio flows?
WIRASEKARA: Average foreign participation is 25% of daily turnover, which indicates the significance of foreign portfolio flows. At the end of December 2015 the total number of unique depository accounts stood at 600,242, representing around 3% of the local population. There is substantial room for improvement in the domestic contribution at the retail level, which is expected to rise given the current low interest rate regime.
How has CSE growth evolved in the post-war era?
WIRASEKARA: Sri Lanka is a high-growth frontier market, and the CSE displays great potential in company performance. The post-war economy saw accelerated growth in volume and market capitalisation, supplemented with the listing of 61 entities through initial public offerings, introductions and offers for sale. The market capitalisation-to-GDP ratio rose to 31.7% by the end of 2014, up from 22.9% at the end of 2009, due to improved investor sentiment.
How does the CSE’s trading infrastructure compare to that of other regional exchanges?
WIRASEKARA: The CSE has continuously worked on upgrading its trading infrastructure, with recent upgrades being made to the front-office and back-office systems, as well as to the trading platforms. The CSE is also supported by the global proficiency that MillenniumIT offers in trading and post-trading infrastructure. The recent updates to the system permit it to scale up or down without limitation, and accommodate the trading of multiple asset classes.
The CSE is also one of the few exchanges in the region to have implemented hot-hot disaster recovery protocols, eliminating downtime within the trading infrastructure. A central counterparty system is being introduced under a joint initiative by the Central Bank of Sri Lanka and the Securities and Exchange Commission. This will set up the background and infrastructure required to implement a delivery versus payment system in cooperation with brokering houses, eliminating the current T+3 settlement arrangement and removing the default risk factor, which is a concern among foreign participants.
