Interview: Dilshan Wirasekara
Which industries dominated by the private sector do you see booming in the short to medium term, and what role will the CSE play in this?
DILSHAN WIRASEKARA: Private sector credit growth, which has eased in 2017, is expected to stabilise and accelerate towards the second half of 2018, reaching a full year target of 16%. As a result, over the next year we hope to see private banks, especially the larger ones, perform more strongly and with improved return on equity, having increased their capital levels during 2017. The state owns the largest banks in the country, which also requires capital, and the government is moving towards encouraging these banks to list on the market in order to raise it. The CSE has already implemented the background requirements to facilitate the listing of these entities, which will further enhance the value of the stock exchange in the short term.
The rise in infrastructure and construction projects in the country is expected to increase demand for building materials. This falls under the material and capital goods sectors of the CSE, and over the coming year we predict cement companies will illustrate stronger growth, for example. Construction companies undertaking work in Sri Lanka are already benefitting from the stronger pipeline of projects. Automobile retailers with exposure to commercial vehicles servicing the construction sector are also likely to benefit from this upswing. However, the newly released Inland Revenue Act increases the tax rate for construction companies to 28% beginning April 1, 2018.
With the Generalised System of Preferences Plus and stronger export volumes in place, we continue to be positive about the consumer durables and apparel sector, with an emphasis on manufacturing firms at the forefront of the industry to generate greater volumes and earnings. In addition, growth in the trading sector has boosted transport and logistics service volumes and should continue benefitting firms with exposure to the segment, particularly in the capital goods sector.
How will the demutualisation of the stock exchange impact investments in the CSE?
WIRASEKARA: Demutualisation will make the bourse more profit oriented. This may lead to the fast tracking of modifications and reforms required to introduce new instruments and modernise the exchange, which will automatically assist in increasing volumes and turnover by propelling the CSE to an international standard.
The introduction of new instruments may increase liquidity in the market, making it more attractive for foreigners. With the listing of the CSE, the stock exchange will be subject to all the rules and required corporate governance regulations, which will, in turn, boost the confidence of foreign investors.
To what extent will the addition of a dollar-denominated board attract increased foreign direct investment to the country?
WIRASEKARA: This might be a good opportunity to attract the dual listing of foreign firms, especially from countries such as the Maldives. Furthermore, it may also attract dollar-earning local multinationals and entice more foreign entities, as they are not exposed to the country’s exchange risk. It also increases the possibility of creating higher demand among foreign equity investors, specifically those looking at frontier markets.
How has the government’s path to privatisation brought more liquidity to the CSE?
WIRASEKARA: The number of large companies with sufficient liquidity listed on the stock market is limited. The government has a number of large profit-making institutes that are non-strategic and therefore open for listing. These large companies, once listed, provide a significant amount of liquidity, which is attractive for foreign players. We have observed this over the years, with the stocks of People’s Leasing, for example. By simply listing our two state banks, the stock exchange is capable of increasing its market capitalisation by 6%.
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