Bourse bets big on IMF package for recovery

CSE Chairman says bourse will take off if divestment of loss-making SOEs included among IMF conditions 

By Chandeepa Wettasinghe
A standby facility with the International Monetary Fund (IMF) could boost the Colombo bourse as such an arrangement would likely to push the state towards divesting its interest in some of the bleeding state-owned enterprises (SoEs), a top Colombo Stock Exchange (CSE) official said.   

“The government will say yes to the IMF coming in with their own list of requests, which will include divesting of SoEs. Then, we will take off,” Colombo Stock Exchange (CSE) Chairman Vajira Kulatilaka said at the 4th Capital Market Conference organized by UTO EduConsult.

The new regime has already expressed its intentions to list some of the SoEs on the CSE to put a stop to the appalling practice of using tax money to run them.    

Also, Prime Minister Ranil Wickremesinghe in a policy statement before the November budget said the government would divest non-strategic investments in some of the listed companies which included Lanka Hospitals, Hilton Hotel owning company etc. Economists have said that an IMF facility would provide Sri Lanka with breathing space to conduct necessary economic reforms to achieve a sustainable and export-oriented economy.

Some of them already have pointed out that the conditions that would be put forward by the IMF this time would be harsher than the conditions imposed during the 2009-2011 bailout package. 

Instead of promoting productive, private sector-led growth, the past regime had browbeaten the private sector and nationalized companies—including listed entities—through the draconian Revival of Underperforming Enterprises and Underutilized Assets Act. The past regime had also bloated up the public sector by 50 percent to provide non-productive jobs to public university graduates having entitlement mindsets.

Kulatilaka said that since the government currently owns 60 percent of the banking sector, 90 percent of transport, 80 percent of the land, and most of the country’s energy generation, the local bourse cannot represent the entire economy, as it usually should.

“The Colombo Stock Exchange (CSE) is not representing the whole economy. It’s representing about 30 percent of the economy. The problem is that most businesses are still with the government. So if the government doesn’t list SoEs, the stock exchange can’t grow,” he said.

Kulatilaka said that without large listings, the CSE hasn’t broken the 11-year initial public offering record of Rs.8.5 billion set by Dialog Axiata.

Investor education is key 

With the CSE driving towards the creation of multiple new boards, KPMG Sri Lanka Managing Partner Reyaz Mihular said that investors must be more educated than ever.

“We need more informed decisions than herd mentality from investors,” he said.

A lack of education, and trend following among retail investors, coupled with other factors had allowed the stock market mafia to thrive in the past decade. The majority of the public’s ownership of equities is currently very low, which had prompted the Securities Exchange Commission to introduce a minimum public float regulation to make the marketplace more vibrant. The move has yielded negative results.

Mihular said that during a time when global capital markets are in turmoil, Sri Lankan investors should learn lessons and not depend on government intervention.

“There’s a practice in capital markets we need to move out of; of having the government bail us out.

It is important that we develop our own strategies. Strategies that will drive us forward,” he said.

However the government appears keen to bail businesses out, pledging to bail out finance companies during the recent budget by providing guarantees for deposits.

The CSE is planning to open a small and medium enterprise board, dollar denominated board and a real estate investments trust board by end-2016 or early 2017, Kulatilaka said.