Lanka Free Library

An Analysis of the Pandora Papers and the Claims of International Consortium of Investigative Journalists (ICIJ) as well as the Anonymous Hacker Group

ECONOMYNEXT – Sri Lanka’s banks have sharply cut foreign borrowings over the past year, official data show as the country ran out of rating space after seven years of state expansion and monetary indiscipline.

State and private commercial bank borrowing heavily to abroad to buy dollar denominated Sri Lanka Development Bonds, give offshore banking unit loans to the government after 2015 which expanded from 17 to 20 percent of GDP over 5 years.

State-run Ceylon Petroleum Corporation also borrowed each time money was printed to suppress rates, under ‘flexible inflation targeting’.

Meanwhile some banks also bought discounted international sovereign bonds as foreign investors dumped them.

However as downgrades came swiftly during 2020 as money printing ratcheted up creating forex shortages banks lost the ability to borrow abroad and could not renew loans as counterparty funding limits were cut.

Short term foreign currency borrowings of banks had peaked at 4.6 billion US dollars in the third quarter of 2020, central bank data show and had fallen to 1,442 billion US dollars by the first quarter of 2021 in a steep correction.

Long term loans which were around 1.5 billion US dollars in the first quarter of 2020 fell to 1,072 million by the first quarter of 2021.

Short term currency and deposits of commercial banks went up from about billion US dollars in the first quarter of 2020 to around 4.3 billion US dollars by the first quarter of 2022.

Sri Lanka in 2020 introduced special deposit schemes also to draw foreign funds.

Meanwhile some who had invested in SLDBs had also started to pull out fearing a hair-cut.

Data show that foreign borrowings of banks ratcheted up in the 2015/2016 and 2018 currency crises which were triggered money printed to suppress interest rates under ‘flexible’ inflation targeting, a highly unstable monetary regime peddled by Western Mercantilists to third world countries with ‘fear of floating’.

Sri Lanka also has fear of hard-pegging.

Sri Lanka expanded the state from 2015 to 20 percent of GDP from 2017 after abandoning spending based consolidation (cost cutting) under revenue based consolidation despite having a bloated state and an oversized military.

Revenue based consolidation (expanding the state with a higher level of taxes) as well as borrowings have long been advocated by the Janatha Vimukthi Peramuna and is also generally followed by other leftists and American progressives.

During repeated currency crises under ‘flexible’ inflation targeting up to 2019, Sri Lanka also borrowed heavily through International Sovereign bonds as the country lost the ability to repay maturing debt in rupees, forcing foreign borrowings to go up at the gross financing level.

State-run Ceylon Petroleum Corporation also borrowed from commercial banks and suppliers as forex shortages from liquidity injections made under flexible inflation targeting created forex shortages making difficult for the CPC to convert rupees to dollars.

In 2019 as the impact of state expansion under revenue based fiscal consolation and the foreign borrowings under flexible monetary policy became clear, analysts warned that the country would soon run out rating space and to discontinue unrestrained monetary policy.

“Sri Lanka is a country that had mostly kept monetary stability in the worst years of the war with the help of the ideology then prevailing,” EN’s economic columnist Bellwether warned in December 2019 as money printing began around August with the rating at B.

“But now each new episode of monetary indiscipline is costing the country one notch in the rating scale.

“Sri Lanka will soon run out of rating space to tap capital markets if the flexible exchange rate/call money rate targeting continues in the next recovery space.

“Sri Lanka will face credit downgrades and possible sovereign default of dollar debt unless the highly unstable discretionary ‘flexible exchange rate’ is restrained and some monetary discipline is brought in.

“Pakistan, whose central bank also prints money with a peg, and frequently runs to the IMF now has a B- rating. But B- is barely above CCC.

“From two levels below investment grade in 2005, Sri Lanka is now a little above CCC, which is a distressed debt level. It is not a place to take monetary risks in particular.

“The central bank and others are talking about the need to get down interest rates,” the column which was written before the 2019 elections but money printing through outright purchases had started around August of the year said.

“That is not re-asssuring.

“It is doubtful whether China will give loans like earlier to boost growth as it is having its own troubles. China’s flexible exchange rate is taking a toll, as are state owned enterprises. However China may give debt relief to Sri Lanka.

“If rates are cut further and money is printed, the recovery in 2020 will be short-lived or not at all, and another currency crisis will be generated and downgrades will follow.”

ECONOMYNEXT – The International Federation of Red Cross and Red Crescent (IFRC) has made an international appeal to raise 28 million Swiss francs (28.9 million dollars) for urgent humanitarian assistance to help 2.4 million most vulnerable Sri Lankans affected by the economic crisis.

“The effects of the economic crisis are being felt in every single sector. The economic crisis is plunging those most vulnerable – some 2.4 million people already living below the poverty line into despair,” IFRC’s Special advisor for Humanitarian Crises and Emergencies Maryann Horne said.

“With no income, people are barely able to cope and are now selling their assets, getting into debt, being forced to cut down on food while many children are not able to go to school.

“The emergency appeal will allow the most urgent humanitarian needs to be met. It will help prevent those most vulnerable at a time people have no cash, no jobs, and no fuel.”

IFRC through the local Red Cross representative SLRCS has provided over 10,000 dry ration food packs and 4000 cash grants in 25 districts and 5000 school packs have been given out in 10 districts.

It has also provided ambulance services to over 1000 people in the recent protests.

“…It’s even worse for single-parent households, and millions who cannot work or send their children to school because of the fuel crisis,” Sri Lanka Red Cross Secretary General, Mahesh Gunasekara, said.

“We need international support now to help millions of people pull their lives back together and avoid the worse. We need to act early to ensure lives can be saved.” (Colombo/July22/2022)

ECONOMYNEXT – Chinese President Xi Jinping expressed his willingness to the government of Sri Lanka’s new president Ranil Wickremesinghe to the best of his ability for the island nation’s leader and its people. 

Jinping’s congratulatory message, the first from a foreign country, came as the new president was widely condemned for his ordering the island nation’s military to attack and remove the protesters from the main protest site near the presidential secretariat. 

“I attach great importance to the development of China-Sri Lanka relations, and am willing to provide support and assistance to the best of my ability for you and the Sri Lankan people in your efforts,” Jinping said in a statement.

“I believe that under your leadership, Sri Lanka will be able to overcome temporary difficulties and advance the process of economic and social recovery.”

“It is hoped that the two sides will carry forward the traditional friendship, consolidate political mutual trust, and push forward the strategic cooperative partnership of sincere mutual assistance and ever-lasting friendship between two countries.”

Wickremesinghe has been elected as the president by the parliament for the rest of the tenure of former leader Gotabaya Rajapaksa who fled the country and resigned from Singapore. Rajapaksa fled after three months of the protests for his failure to address economic crisis, which later turned into a political crisis.

The same protesters who forced Rajapaksa to flee were attacked by the military under the state of emergency declared by Rajapaksa.

China has invested billions of dollars, but pressure from India and the West has been a deterrent for successive Sri Lankan government deal with China, which is accused of dragging Sri Lanka into a debt trap.

India and the United Stated have raised concerns over increasing Chinese presence in Sri Lanka which they say could be a security threat for Indian Ocean. China has said its interest in Sri Lanka is only commercial. (Colombo/July 23/2022)

(NDTV / The Hindu): The Indian Government has told the all-party meeting on the situation in Sri Lanka that “fiscal prudence and responsible governance” are the lessons the country has to learn from the crisis in the neighboring country and that there should not be a “culture of freebies”. Addressing the meeting on Tuesday (19), India All-Party meet heats up on Sri Lanka Crisis

(NDTV / The Hindu): The Indian Government has told the all-party meeting on the situation in Sri Lanka that “fiscal prudence and responsible governance” are the lessons the country has to learn from the crisis in the neighboring country and that there should not be a “culture of freebies”. Addressing the meeting on Tuesday (19), India All-Party meet heats up on Sri Lanka Crisis

ECONOMYNEXT – Sri Lanka’s parliament elected Acting President Ranil Wickremesinghe as the 8th Executive President on Wednesday (20) with 134 lawmakers in the 225-member parliament voting in favour of the government-backed candidate.

The new vote came after the former leader Gotabaya Rajapaksa fled the country and resigned last week from Singapore, plunging the country into deep political crisis after months-long protests against him.

The protests came after Rajapaksa’s wrong economic and agricultural policies hit the country with dollar shortages following the Central Bank printing of trillions of rupees while maintaining a soft peg against the currency.

The country is still facing shortages of fuel, cooking gas, and medicines while it is also facing a looming food shortage.

Wickremesinghe was appointed as a PM of the country for the 6th time in May although he had only one seat in the parliament. He came to parliament on a residual vote total after his party had a humiliating defeat in 2019 Presidential elections.

At the election, 223 MPs cast their votes with two abstaining making the total count of valid votes at 219.

Candidates Dallas Alhahepperuma got 82 votes and Anura Kumara Dissanayake got only three votes.
(Colombo/Jul20/2022)

ECONOMYNEXT – Sri Lanka’s upcoming election in parliament for an interim president has effectively become a two-horse race with two strong contenders emerging following the last minute dropout of  opposition leader Sajith Premadasa.

The candidatures of Acting President Ranil Wickremesinghe, ruling Sri Lanka Podujana Peramuan (SLPP) MP Dullas Alahapperuma and National People’s Power (NPP) MP Anura Kumara Dissanayake were proposed and seconded in parliament Tuesday July 19 morning.

Parliament called nominations for the vacancy left by the resignation of former President Gotabaya Rajapaksa who fled the country on July 13 following massive protests demanding his resignation.

Wickremesinghe’s name was proposed by Minister Dinesh Gunawardena and was backed by Minister Manusha Nanayakkara amid some hooting from the opposition benches.

Opposition leader Premadasa, who had previously announced that he was contesting, proposed Alahapperuma’s name which was seconded by SLPP Chairman and parliamentarian G L Peiris.

NPP MP Vijitha Herath proposed the name of party leader Dissanayake for the position, seconded by his colleague Harini Amarasuriya.

With Premadasa’s Samagi Jana Balavegaya (SJB), the main opposition, backing Alahapperuma and the NPP only holing three seats in parliament, Alahapperuma’s chances against Wickremesinghe are now looking better.

At least 105 SLPP members have met Wickremesinghe and discussed their grievances, particularly regarding new housing in place of their homes that were burnt by angry mobs on May 09. SLPP general secretary Sagara Kariyawasam has said the SLPP will back Wickremesinghe, a statement later contradicted by party chair Peiris.

Sri Lanka’s parliament has 225 members. Over half a dozen members are abroad and may return today for the vote tomorrow.

The Sri Lanka Freedom Party (SLFP), which has around 15 members, has said they will stay out of the vote in a bid to push for a consensus candidate. But at least 10 may break ranks, reports said.

SLFP chief ex-President Maithripala Sirisena has claimed that large sums of money was being offered to buy legislators.

Sri Lanka is going through its worst economic crisis since Independence, with a crippling dollar shortage resulting in long queues for fuel, cooking gas and other essentials.

The country has also seen much unrest in recent weeks, with protests intensifying and leading to confrontations between protestors and security forces.

While activists and opposition lawmakers accuse the government of overreach and violent suppression of peaceful protest, the government claims that “fascist” elements within the protest movement are deliberately engaging in violence seeking to destabilise the country. (Colombo/Jul19/2022)

 

 

 

ECONOMYNEXT – Sri Lanka’s central bank has spent 222.73 million US dollars defending a peg and engaging in monetary financing of imports in June 2022, three months after apparently ‘running out’ of reserves, official data show.

Sri Lanka defaulted in April 2012 after two years of money printing to suppress interest rates combined with tax cuts in the worst currency crisis triggered by the central bank in its history.

At the time officials said the country had run out of reserves.

In March the rupee collapsed from 200 to 360 to the US after a botched attempt at floating (suspending convertibility) with a surrender rule (forced dollar sales to the central bank) and too low policy rates to curtail credit.

However the central bank continued to intervene in forex markets in both sides of a peg (now around 360 to the US dollar).

In June the central bank had bought 68 million dollars from banks, which are experiencing severe forex shortages due to a dysfunctional peg, down from 76.6 million US dollars a month earlier, putting pressure on the peg.

The central bank then sold 222.74 million dollars to defend the peg, engaging in monetary financing of imports.

The central bank gets deferred payments from the Reserve Bank of India and spends them on monetary financing of imports getting deeper into debt.

After giving dollars for imports, a pegged central bank then sterilizes the intervention injecting new money to maintain a policy rate and prevent reserve money from shrinking, effectively monetary financing imports by replacing lost rupee reserves in banks.

Related

Sri Lanka imports surge to US$2.2bn in Dec 2021 after reserves sales

However June reserve money growth slowed amid high interest rates, and is appearing to be shrinking in July as the economy is smashed by high interest rates and forex shortages.

In Sri Lanka there is a strong belief among economists who have rejected classical theory and also the business community that reserves should be used to finance imports and help the country live beyond its means due to the rejection of classical economics.

There were widespread calls for monetary financing of imports in Sri Lanka despite the country running low in early 2021 and imports having shot up over 2.0 billion US dollars by December after three months of sterilized interventions between 300 to 400 million US dollars a month.

Interventions are sterilized with the acquisition of government securities in banks, not private securities unlike in the days of the classical greats when central banks operated a floating policy rate against bankers acceptances, and it appears as budget financing to later observers. (Sri Lanka, world’s poor suffers from Fed’s accidental discovery)

After printing money to create forex shortages Sri Lanka’s economists in authority also have a habit of importing fuel on credit further boosting imports and getting state enterprises in to debt.

However after a default in April 2012 the time honoured tactic of indebting the CPC is no longer possible and oil imports have been settled quickly line any other import.

Sri Lanka also tried to get 6.0 billion US dollars of ‘bridging finance’ for imports and other spending in 2022 after defaulting in April 2012.

Since defaulting in April and running out of reserves, 337 million dollars had been spent on interventions with energy sector officials in particular pressing the central bank for money to import oil via pegging (weak side convertibility).

Clean floating central bank do not give a cent for imports.

Economists in authority Sri Lanka got the ability to create currency crises on August 28, 1950 with the creation of a money printing soft-peg after abolishing a hard peg that had kept the country stable for almost 70 years.

Analysts had warned that contradictory policy and a botched float would lead to continued monetary instability and high interest rates with damaging effects on the banking system unless a working monetary regime is established. (Colombo/July18/2022)

Market cycles are indelible features of any modern economy. An upturn promises short-term gain, while a downturn presents lucrative long-term opportunities for savvy investors. No one can escape economic cycles, but a fair and robust market can give investors significant returns in the long term, help enterprises raise capital for growth and elevate the rest of the economy.

Dilshan Wirasekara assumed office as new CSE Chairman in June 2022 as the economy continued to sink deeper into crisis. However, Wirasekara and his team are determined to continue developing the exchange into a modern capital market and unlock opportunities for investors and companies despite the economic downturn. Wirasekara has served on the Board of the CSE since 21 November 2017 and is the Director/Chief Executive Officer of one of the leading investment banking firms, First Capital Holdings Plc.

In this interview, he shares insights on the economic challenges and their implications for investors and companies looking to raise capital and how the CSE can fulfil its role as a growth facilitator, now more than ever.

What is your outlook for the economy and the equities market?

The economic and even the equity market outlook is quite daunting and challenging. If you look at how the equities market has behaved over the last couple of months, after reaching a high at the end of 2021, we had close to Rs5.5 trillion market cap and the All Share Price Index peaking at around 13,000 points in January 2022. The market has fallen 40% since, with the ASPI down to 7,500 points in mid-June and market cap declining to Rs3.2 trillion on the looming default, steep currency depreciation and steep 700bps policy rate hike in March. The depletion in forex reserves has precipitated an acute shortage of essentials and energy, dragging the economy deeper into crisis. Even listed companies are struggling to cope with the fuel and gas shortages and the power cuts.

The economy is heading for a sharp contraction, with the GDP forecast to decline by 5-7% in 2022. In this context, a challenging environment for equities is expected in the short term. The equity market reflects the broader economy, and the health of companies listed on the CSE will get challenged by rising interest rates, record high inflation, depreciation in the currency and shortages.

Anticipating a staff-level agreement with the IMF, we have pre-emptively rolled out a series of corrections by increasing fuel prices, removing subsidies, introducing formula-based pricing, tightening policy rates, reversing tax cuts, and allowing the currency to depreciate.

There may be a few things left. One is pricing utilities fairly, especially electricity. A tariff hike is currently on the cards, and with that, we could meet a good 75-80% of what would have been IMF conditions before we even reach an official bailout agreement. Other reforms will follow, including restructuring loss-making state-owned enterprises that continue to drain the public coffers, further fiscal consolidation and making debt sustainable via debt restructuring.

So immediately, the outlook is a bit negative, and we expect things to remain challenging in the next three to four months. However, towards the end of this year, the economic challenges will begin to ease and therein lies the equities opportunity. Once we reach a deal with the IMF, hopefully before the end of this year, that will be the catalyst for other bilateral lenders and friendly nations to come on board and offer to help us out, so we are moving in the right direction.

In the March 2022 quarter, total corporate earnings reached an all-time high of Rs286 billion, up 134% from a year earlier. Naturally, company earnings could decline as the economic crisis deepens and the tax reversals take effect.

Nevertheless, if you look at valuations, they are at historic lows. If you look at multiples for the entire market, we are trading below book value at an affordable 0.8x price-to-book multiple, and on trailing earnings, we are something like less than 5x the PE ratio. Investors will not find more attractive valuations.

Developed and more liquid markets are in the region of 15-20x price-earnings and 1.5-2x price-to-book multiples. The CSE has some brilliant companies that would remain profitable during these challenging times. There are also defensive counters like export-oriented and dollar-earning companies that can still do well in this environment. Therefore, I believe the longer-term prospects for the CSE are still exciting.

A question often asked is – with the interest rates at 20%+ would investors not shift from equities to fixed-income assets? That would be natural, but with inflation at 40%, the negative real returns from fixed-income investments are substantial. Equities could be one hedge against inflation, provided you take a three to five-year view on your investment portfolio. Investors need to focus on what those companies are. If you pick sectors like banking, most large-cap banks are trading at less than half their net asset value, some as low as 0.3-0.4x, and 2-3x PE, so those are real bargains in the long run.

Where do you see inflation, interest rates, and the currency heading?

Inflation would remain elevated around the 30-40% mark for at least another three to four months, especially with the electricity tariff revision on the cards. However, these are all one-off adjustments we made starting from the currency depreciation when everything imported went up in price: we also had issues with food production because of the fertilizer fiasco. Therefore, towards the end of the year, inflation should come down but will still average around 15-20% into 2023.

Interest rates have eased to 21-23% since peaking at 25% in April-May 2022, and we expect rates will hold out at those levels for the rest of the year. Currently, elevated interest rates, even in the ballpark of 22-23%, are significantly high, so I do not think raising rates any higher would address inflation. Especially, as it’s seen as supply-side-led inflation as opposed to demand-driven.

Towards the end of the year, when we have the IMF programme, we expect foreign inflows to improve with investors and bilateral lenders taking a more positive view of Sri Lanka. The currency has depreciated more than it should have. If you take the real effective exchange rate, I think the rupee should be trading somewhere between Rs300-320 against the US dollar, whereas now the currency is trading between Rs360-370. So, a slight appreciation is possible by the end of the year.

You are taking over the reins as Chairman of the CSE during a daunting period for the economy. What are your plans for the exchange?

The primary role of the CSE is to conduct a free and fair market to facilitate capital formation effectively. Despite Covid-19, 2021 was a record year in the number of listings and value of the capital raised. However, a slowdown is inevitable under the present economic conditions. Over the last 20 years, we have had multiple challenges, from civil conflict to political unrest, natural disasters like the tsunami, the Easter bombings, and the pandemic. We have always been resilient and bounced back stronger. The current market downturn will be no different, harder to negotiate than before, but possible to overcome. We will continue to focus on our strategic objectives because we are not looking at it from a year’s perspective.

We have a long-term view of where the capital market should be and will build towards that. A big issue we have had is that our market has been a dual product market, we have equity which is a cash market, and we have listed debt or the debenture market. So, one area of focus is product diversification, and about two years ago, we put this strategic plan in place to introduce new products to broaden the investor base. We introduced REITs, brought in the SME board, and got approval to have a US dollar-denominated board where companies can list and raise foreign currency in the country. We are looking at commodity-backed products, stock borrowing and lending and regulated short selling. There are a whole lot of new products that we are currently working on that will be introduced in due course. The stock market is not just about buying and selling equities; you will soon have different asset classes that you can invest in through the Colombo Stock Exchange.

Another focus for us is to look at our infrastructure, primarily IT. We want to build a world-class exchange. The CSE has been far more advanced than our regional peers in embracing technology, even though we are a much smaller market. We were one of the first to move into CDS and scripless securities, and after the Covid-19 outbreak, we digitalized the entire exchange to enable remote operations. Another initiative on the infrastructure side was to move to DVP (delivery versus payment), as opposed to the previous T+3 basis. Also on the cards is the CCP (central counterparty settlement) system, elevating the bourse to the level of sophistication of most global exchanges and boosting investor confidence further.

Thirdly we are looking at how we can broaden our investor base by creating awareness, even working with the Ministry of Education to build capital markets into the national curriculum. Financial literacy is a problem. Many Sri Lankans are unfamiliar with the equities market, and digital technology can improve access and financial inclusion. Investing in technology is another prong in our growth strategy by elevating investor convenience and experiences. Out of the 650,000 CDS account holders (from an eligible population of 15 million), only 65,000 trade at least once a year. We will endeavour to grow the number of CDS accounts to a million over the next few years and increase active trading by introducing new products, enhancing efficiency, and creating more awareness.

These are the fundamentals of our strategic plan to help the exchange ride these challenging times and unlock opportunities for investors and enterprises. The CSE was fortunate to have had two good years of robust earnings that helped us build enough reserves to take care of rising costs and ensure we execute our market development strategies unabated.

What can the CSE offer investors and companies struggling to survive this crisis?

Companies may be reluctant to raise capital via listing because valuations are pretty low, but that has been a challenge for us in this market for a long time. For companies needing to raise capital, the CSE is the best option because debt financing is much more expensive now. With the current elevated interest rates, debt financing will be a daunting exercise if not an unviable option. Banks will not lend below the risk-free rate, so you are looking at 25%-plus borrowing costs. Our SME or Diri Savi board can enable smaller companies to raise capital on more favourable terms. That is also true for companies wanting to list on the main board.

Even from an investor perspective, you need to ride these phases out. A mistake many people make is selling out in a depressed market, but if you look at successful investors who made money, they bought in a depressed market and booked profits when markets recovered. Now is a good time for accumulating portfolios for people who have that risk appetite, who can ride this crisis out because these shares are ludicrously cheap and could lead to windfall returns three to five years down the line. It is hard not to lose confidence and avoid feeling depressed. But getting through this crisis and emerging stronger requires us to focus on the good things as individuals, companies, and a country.

We are grateful we have functioning capital markets where valuations offer attractive long-term potential. While it looks bleak now, I think the economy will begin to see some improvement before the year ends.

My message to investors and the entire market is to remain positive. If you keep that positive mindset, keep going, trying to achieve something more than what you had yesterday, I think we will move forward as a country.

Whether it is a company getting listed to raise capital or an investor coming in, my advice is to take a medium to long-term view, talk to us and see how the CSE can help you in that journey. We have an Investor Relations and Marketing Acquisition team continuously looking at potential companies for listing. Our teams would go and encourage these companies, talk about the benefits of listing, and sometimes, even jointly with other investment banking firms in the country, promote equity listing. We also have a team that can assist companies with the corporate governance standards, helping them understand the listing rules and the various compliances and regulations governing listed companies.

I remain optimistic about Sri Lanka and the Colombo Stock Exchange. We have seen the worst of times before, and although the next few months will be challenging, we believe that things will start getting better, and we will be on a path to recovery.