Local companies are to be allowed to raise dollar-denominated debt and equity on the Colombo Stock Exchange shortly. The relevant regulations have been approved by the Monetary Board and are expected to be presented to the Public Accounts Committee of Parliament. The banking sector is expected to create gold-backed trading products on the market shortly. The instruments will trade on the multi-currency board of the Colombo Stock Exchange (CSE).
CSE, CEO Rajeeva Bandaranaike said that the Delivery vs Payment system was an initial step with further plans to introduce a Central Counterparty System to allow for the creation of new and complex financial products. Bandaranaike was speaking recently at the 9th Capital Markets Conference organized by UTO EduConsult. The stock exchange is also allowing primary dealers to interface with the corporate debt market to create repurchase agreements on the asset class. Retail traders remain restricted from accessing the trading system of the corporate debt board through online portals.
Real Estate Investment Trusts are to be implemented within the year. Bandaranaike said, “Promoters are there and the tax concessions have been gazetted.” Over the long term, the market aims to create mortgage-backed securities as well.
Bandaranaike cited the exchange rate volatility and economic conditions as being a key driver of the market. He further added that capital markets could play a larger role in economic growth. He said, “Markets play a different role in different jurisdictions. Some markets play a pivotal role in attracting foreign investment. If you look at our market we have had our ups and downs. We have had our successes. Capital markets can play a role if they are used and harnessed effectively.”
Sri Lanka has been classified as a frontier market in the MSCI Market Classification. Bandaranaike said, “We belong in the frontier markets sector and we compete with Bangladesh and Vietnam for foreign funds.”
Pakistan might be downgraded to a frontier market soon. Bandaranaike showcased figures detailing how the foreign outflow trend began in 2018.
The major economies in the Asian region are classified as Emerging Markets. On Sri Lanka’s inability to be classified as an Emerging Market Bandaranaike said, “It is better to be a big fish in a small pond than a small fish in a big pond. If you look at Emerging Markets in Asia you have to compete with Thailand, Taiwan, Malaysia etc. Our place is good enough because it is where we can compete for foreign funds.”
Stock Exchanges are classified as Capital Market Infrastructure Providers. Sri Lanka makes up 3 of the 250 Globally recognized Capital Market Infrastructure Providers. Of the 47,919 listed companies globally, Sri Lanka makes up 285 off that total. Sri Lanka’s market cap makes up US$ 18 billion of the global market of US$ 109 trillion.
Bandaranaike noted the massive involvement of the Central Bank in driving recent increases in turnover on the stock exchange. He said, “We have seen a considerable increase in liquidity. Turnover volatility has doubled between 2019 and 2020 and almost doubled again in between 2020 and 2021.”
He further added, “We have the potential for pension reforms with money that can come to long term investments. We have a low-interest-rate environment and low valuations which makes us attractive from a regional perspective.”