Sri Lanka opened the economy, ended the war, unleashed an infrastructure development drive and beautified Colombo to raise our economy to the middle-income status, but we never had real investment liberalization that could unlock the value of Sri Lanka to investors.
The recent legislative reforms to introduce a new Inland Revenue Act, Foreign Exchange Act, Securities Exchange Act together with a business-friendly budget has set the legislative stage for Sri Lanka to join the first world. Following the sale of Hambantota Port, the government intends to list several State-owned enterprises on the Colombo Stock Exchange to unlock new opportunity for investors.
The reforms have enabled the government to raise tax revenue, create a transparent foreign exchange management regime that will support foreign investment and enable a well-regulated capital market to facilitate the listing of some large SOE companies.
Colombo Blossoms as a regional service hub
Colombo is experiencing an economic revolution. From being walled up with army check points eight years ago, Colombo joins the lifestyle and real estate plays enjoyed by other cities in Asia.
Being a garden city reclaimed out of a marsh by the colonial powers, Colombo has beauty unmatched in South Asian cities, with vast greenery and water bodies which surprised us all, once the walls were demolished after the war. Colombo beautification has won the admiration of our South Asian visitors. In time, foreign investors will recognize the vast opportunity of Colombo re-emerging as part of the shipping silk route and invest in Colombo’s real estate opportunities.
The government has embarked to position Sri Lanka as a regional service hub of South Asia. Singapore and Dubai also had similar uncertain beginnings with a host of issues, which they resolved along the way to reach the hub status in shipping, tourism and finance. RIETS (Real Estate Investment Trust) listed on the Singapore and Hong Kong stock markets have driven property booms for decades bringing profits to investors as well as liquidity for real estate developers.
Hambantota Port and the Listing of SOEs on the CSE
While many Sri Lankans debate the merits of capital expenditure incurred on the Hambantota Port, the Chinese Government that is building connectivity to Middle East and Africa recognizes the potential of Hambanthota in their One belt one road global project. The China Merchants Port Holdings paid $ 1.12 billion to silence critics of this project.
Another potential boon for Hambantota would be the still remote but growing future possibility of a shipping route emerging through Thailand’s proposed Kra Canal, which by-passes the crowded Singapore port and connects Sri Lanka directly with China and Vietnam. With the emergence of a new King in Thailand, the probability of this project has improved.
The World Bank recently commented on the vast foreign debt repayments that Sri Lanka, and being exposed to global credit markets and rising dollar interest rates, in the absence of FDI (Foreign Direct Investment). The Governor of the Central Bank responded that the disposal of SOE’s will help finance the foreign debt repayments.
The listing of SOEs on the CSE will energize the capital markets and offer some exciting new opportunities for foreign investors to return. Meanwhile the SOEs will gain access to investor capital for growth and improve profitability by adopting a robust corporate culture.
Economic Opportunity vs. Political uncertainty
The current political instability has deterred investment in Sri Lanka. The FDI inflow and stock market valuations remain poor. However, with elections in 2020, we can expect the political uncertainty to subside.
The current valuation of the CSE at a Price Earnings ratio 10.6, was last seen in July 2009, and is less than half the valuation of Indian stocks. The low stock market valuation and attractive real estate prices outside of Colombo could give Sri Lankan investors the confidence to invest, hopefully before foreign investors return to exploit regional valuation disparities.