Rating Sri Lanka’s investment prospects

by FS

(May 31, Colombo, Sri Lanka Guardian) How does Sri Lanka rate internationally as an investment centre? Have we put the war behind us? Are foreign investors, keen on Sri Lanka, concerned more about good governance or how quick they get a return on investments, or vice versa?

Is Sri Lanka’s economy and development in the hands of a military-styled administration? Are the fundamentals in place? Is the new tax structure working? Is the budget deficit on track? Will the Government be as ‘disciplined’ as (it should be) under the IMF-guided reforms when the IMF ends its programme at the end of the year (December 2011), and when there is no ‘monitor’ to ensure the country stays on track?

And, irrespective of the current perspective relating to what some may call “the IMF’s cosy relationship with the Government vis-à-vis budget fundamentals”, the fund’s role in guiding financial discipline in expenditure and revenue is a good one and welcomed now, and in the past, by local economists.

These are among many of the issues, one would assume, being examined by a two-member team from international rating agency Standard & Poor’s during a visit this week to Sri Lanka pursuant to the Central Bank’s request for an upgrade of the country’s rating status.

Why is a rating important? A ‘good certificate’ or the higher the ‘stars’ (one to five star) provides confidence to the outside world interested in Sri Lanka in terms of investment, trading or in the case of the trio of multilateral agencies - World Bank, IMF or the ADB, a reason to ramp up funding. Though these agencies have their own, well-laid out mechanisms of analysing a country’s risk and governance structures, ratings are also a plus point.

While the move to seek an IMF Stand-by Arrangement (facility) in 2009 was to prop up foreign reserves which fell sharply owing to the global financial crisis, another reason is that an IMF programme in a country is considered a ‘good certificate’ and a positive for foreign investment. Sri Lanka’s foreign reserves have since then improved tremendously and according to the Central Bank Governor Ajit Nivard Cabraal there is no need for another IMF programme when the current one ends in December. “Our reserves position is very strong,” he says.

Referring to the rating agency process, Cabraal says rating agencies are quick to pounce on unfavourable developments and are not as sensitive or positive on favourable developments. “So it is in own interest to somehow convince them that with the positive features in the economy, the rating needs to be revised upwards,” he says, adding that the global financial markets perceive Sri Lanka as doing much better than what the rating agencies perceive.

So while the Central Bank and the Government say Sri Lanka has done well in economic terms, is that the real picture? Does transparency and governance come into the equation?

According to rating experts, issues of transparency and governance vary among potential foreign investors. “If it is a short-term investment, an investor would be more concerned about his or her return. In the case of long-term investments, these issues (governance) are more prominent and also that of political stability,” one expert noted.

Transparency is a big problem for the current administration. Take the recent Colombo land deals involving leisure group Shangri-La, China National Aero-technology Import and Export Corporation (CATIC) and the former Commercial Co. property opposite the Beira Lake. Figures mentioned in various press releases vary at times. The Beira Lake deal is yet to go through and trying to get information about its progress, in the public interest, is near impossible. Furthermore the public is unaware at what cost (interest rates) the huge ‘commercial’ loans from China have being obtained at. There is nothing called ‘public interest’ in this administration. Everything is secretive – as good as ‘military secrets’.

Then, again, take the compulsory training for university entrants at military camps. There was no public discussion or even a discourse with universities on this scheme.

Sri Lanka is ideally positioned to take off on a new, growth-filled, development path after the end of the conflict. Pro-government supporters argue that political stability is also a plus point with major elections not expected until 2016 and President Mahinda Rajapaksa backed by his brothers – Basil and Gotabaya – firmly in control to ensure that things happen.

However some economists believe that despite the vision of development via the Mahinda Chintana, there are few policy reforms taking place while there is talk and action in terms of infrastructure, roads and power stations.

“For example, what are the returns and when will it come in terms of the new harbours and airports? These are huge investments,” one economist said adding also that Sri Lanka is still running on the 1977 policy reforms combined with the peace dividend. “Our post-war focus is still on domestic agriculture growth which cannot be sustained at expected 8-10% growth,” he said.

Government spending is on the high side and there is the occasional tinkering and ad-hoc policies like the recent move to lift taxes on some categories of vehicles and re-impose it a few months later, which doesn’t provide any consistency and discipline in governance.

Treasury Secretary P.B.Jayasundera is under pressure to give in to wage demands from public sector workers while on the other hand reducing expenditure to keep up with budget deficit targets. At a recent meeting with academics when the question of a salary increase arose, the President turned to Jayasundera and asked him to explain (to the academics) why such a high increase was not possible.

Ever though the UN and the Western lobby are involved in a tit-for-tat fight with Sri Lanka over alleged war crimes, the country has an excellent chance to improve on its rating if the authorities are also more transparent and accountable among other matters.