Dilshan Wirasekara, CEO, First Capital Holdings: Interview

Interview: Dilshan Wirasekara

How has domestic volatility impacted capital flows, and how can market players mitigate this risk?

DILSHAN WIRASEKARA: Sri Lanka 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% that led to major volatility in the domestic market. 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. This includes hedging the currency on forward rates in order to minimise the risks associated with foreign exchange fluctuations, and undertaking interest rate swaps to protect 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.

How has amending the Land (Restrictions on Alienation) Act encouraged domestic business and foreign direct investment (FDI)?

WIRASEKARA: Under the Land Act of 2014 the transfer of land title was prohibited if it was to a foreigner, a foreign company or a company incorporated in Sri Lanka under the Companies Act, namely companies with a foreign shareholding of 50% or more. Meanwhile, the new Land Act, which came into effect in April 2018, allows foreign entities to purchase freehold land in Sri Lanka if the entity is listed on the Colombo Stock Exchange (CSE). Furthermore, the restriction on 49% foreign shareholding companies has been removed, if the listed companies hold freehold land, thereby encouraging FDI. This will help the government to secure FDI for the Port City Colombo development and the divestment of non-strategic commercial entities through the CSE, while increasing the market capitalisation and the liquidity of the Sri Lankan capital market.

What is the outlook for the rupee in 2019?

WIRASEKARA: Sri Lanka’s currency has, on average, depreciated 4.3% over the last 15 years. During 2018 it depreciated almost 19%, and we expect it to depreciate by approximately 5% during 2019 as a result of continued foreign capital outflows amid the US interest rate hike. 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.

However, current political stability, combined with an improved outlook for emerging markets due to a slower pace of policy tightening by the US Federal Reserve Bank, will bolster the economic environment, and as the government and CBSL boost reserves by raising new debt via foreign currency swaps, Sri Lanka Development Bonds and bilateral loans, the rupee will begin to stabilise. As investor confidence improves and the IMF facility gets back on track, there will likely be more interest in international sovereign bonds. We thus expect that, after weakening, the rupee will stabilise during the second half of 2019.

What new products and services are set to drive growth among Sri Lankan investment institutions?

WIRASEKARA: Sri Lanka has taken several steps to enable and facilitate FDI, including an online one-stop shop to help investors obtain all official approvals. According to the World Bank, in 2017 FDI more than doubled from the previous year to $1.71bn, including foreign loans received by companies registered with the Board of Investment. Nevertheless, this leaves the country out of sync with regional and global production networks, which have diversified into the nearby product space, which provides the easiest and most organic investment opportunities. Therefore, a national innovation strategy needs to be adopted where corporations, start-ups and small and medium-sized enterprises work together to seek solutions to address this challenge.