*Increasing trend
*HSBC bullish on Lanka, says Asia Pacific Head of Corporate
*Too early for corporates to raise capital overseas, but economy moving in right direction
*Investors not overly concerned about policy reversals, expropriation law
Global banking giant HSBC is bullish on Sri Lanka with investors in China, India and Singapore increasingly approaching the bank for information on long term investment opportunities in the country.
"China, India and Singapore are increasingly interested in investing in a broad range of sectors and these investments are likely to materialise over the next 12 to 18 months," HSBC Asia Pacific Regional Head of Corporate David Morton told The Island Financial Review.
Morton was in the country for a brief visit, meeting clients and senior officials of HSBC Sri Lanka. He also took the time to visit tourist attractions down South, such as the wildlife sanctuary in Yala, ‘contributing to the economy as a tourist’.
"Sri Lanka has a very bright future," he told this newspaper in a brief interview on his first day here.
"There is a group of emerging tigers in the region and Sri Lanka is in that category. Sri Lanka has a well educated population. Intellectual capital is the first requisite of development. For example take the Singapore model, it has very little resources but the sheer drive of its people lifted the country to where it is today," he said.
Morton also commended the level of English proficiency in the country.
"It is the language of business and it is easier to start up a firm, such as a BPO or call centre, because you can attract the right talent here in Sri Lanka," he said.
Recent policy reversals and a controversial expropriation law passed in parliament last year drew some negative comments from sovereign rating agencies, investors and fund managers, but Morton said the type of investors dealing with the bank were not overly concerned based on the longer terms prospects of the country.
"The investors we deal with think of making long term investments, for 10, 20 and 30, years so they look at these issues in that perspective and through economic cycles. We are focused on attracting long term equity into the country. You do not want to see hot capital flow into the country, where these short term investors flip their capital, make huge profits and then withdraw their investments. We have seen this happen in other economies. This is not what Sri Lanka needs. The country needs patient capital and it will get it if it continues to show stability, have good people with strong work ethics and benign economic circumstances," he said.
Morton says the country’s corporate sector is probably not in a position to raise funds from global capital markets just yet, but the sector has a very bright future.
"Sri Lanka has a long established group of corporates which navigated through very difficult times and still grew. For them, the future is brighter than ever before because they are profitable and can raise capital. However, the economy is not at a stage where the corporate sector can raise funds from global capital markets.
"The government has started issuing sovereign bonds which is a first step toward creating a yield curve on which corporate debt can be priced. With time, the government would be able to issue bonds with longer and longer tenures, and this will help establish a yield curve for corporates to price their debt. This is where HSBC comes in because our differentiation is the global network.
"We can take local financial institutions to the global capital markets, which is the next step, and they then can use the benefit of that capital funding at lower rates, which reduces the costs to the economy, to lend at lower rates to domestic businesses. Then the next step is for the corporate sector to tackle global markets.
All this will take time and I believe Sri Lanka is on the right path.
"The entrepreneurial spirit is alive and well, and I have seen some well structured corporate transactions HSBC has supported over the past few years. We have assisted some infrastructure projects and I am quite impressed so far," Morton said.
"HSBC has been a longstanding supporter of the Sri Lankan textiles industry and its expansion onto the regional stage. We have been providing trade finance solutions to the industry for over 25 years and are now taking the best companies offshore to assist expansion," he said.
Morton said Sri Lanka was an emerging jewel in the international leisure sector with many magazines highlighting the beauty of the country. He said the leisure sector would provide a lot of employment opportunities, but said Sri Lanka should maintain the natural beauty of the country, which would be an ‘invaluable source of sustainable revenue as long as it was not spoiled’.
Commenting on the emergence of a balance of payments crisis, Morton believes the Central Bank acted early.
"Crisis is a too harsh word to use. When credit growth is excessive you know you are heading for a problem. I believe the Central Bank acted quite early in the cycle and adopted very sensible policies which put it ahead of the problem, this is what central banks are supposed to do after all," he said.
According to the Central Bank, Sri Lanka’s economy is expected to grow 7.2 percent this year, downgraded from an earlier 8 percent forecast.
The trade deficit ballooned 99.6 percent last year to US$ 9,743.2 billion while private sector credit growth was higher than what the Central Bank predicted it would be at 36.6 percent.
Around US$ 3 billion was sold from official reserves to keep the exchange rate stable from June 2011 until the Central Bank stopped intervening in the foreign exchange market early February. During this time, Rs. 300 billion was pumped into the banking system as the dollar sales were draining rupee liquidity already hit my high credit growth.
Economists had been warning of a balance of payments crisis during the latter half of 2011. The IMF had withheld the disbursement of a US$ 400 million tranche under US$ 2.6 standby facility programme as it was not happy with the country’s exchange rate policy.
Last February, the Central Bank gave up its hold on the exchange rate, allowing the rupee to float against the dollar, which saw the currency reach record lows. Credit growth was restricted to 18 percent and policy interest rates were increased by 50 basis points.
The government announced increases to domestic fuel prices and electricity tariff. Duties on vehicle imports, cigarettes and tobacco were increased to curb imports.
source - www.island.lk
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