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Friday January 27th, 2023

CSE: Reimagining Sri Lanka’s Capital Markets

Colombo Stock Exchange Chief Executive Rajeeva Bandaranaike discusses the outlook for equities in 2023 amidst the unfolding economic crisis and the impacts of the reforms programme the debt restructuring process would unleash. He also highlights the CSE’s ongoing efforts to develop the market with robust rules, product diversification, technology and enhancing governance structures for a modern, more accessible, investor and stakeholder-friendly, best-in-class capital market.

How did the CSE perform in 2022?

The All Share Price Index declined by 30.6% as of December 31, and the S&P SL20, which includes the largest, most liquid, and most traded stocks, showed a decline of 37.7% in the same period. Most equity markets globally declined during the same period, but the stock market in Sri Lanka has some redeeming factors.

One is that the market activity levels were quite favourable, though not at the same level as in 2021. The total market turnover was approximately Rs638 billion, averaging around Rs3 billion daily, which is satisfactory. The market also saw a net foreign inflow of about Rs51 billion, a reversal of the net outflows we have seen in the last few years. So, these are a couple of the encouraging highlights of the market during the year.

What factors contributed to the net foreign inflows, and do you believe it will continue into 2023?

We believe foreign investors were attracted by market valuations, with selective buying of stocks with strong fundamentals and growth potential despite the unfolding economic challenges. The trend may continue if there is an improvement in the economic climate in 2023 which will then attract more foreign inflows into the capital market.

We believe that 2023 will be a better year for equities despite the downturn in 2022, for several reseasons. With improvements on the macroeconomic side and once the economic reform process gets going, with external funding lines getting activated, we may see improved investor sentiment, resulting in better performance in the equity market. A lot will also depend on how the listed companies perform: their financial results at the end of the year and their earning projections for 2023, and we are hopeful of improved performance in the coming year.

Market valuations are attractive because our market PE is lower than some of our peers, particularly when compared with other emerging and frontier markets, which makes the Sri Lankan capital market attractive. However, the country’s sovereign credit rating is holding back investors to a degree. If we can persist with the economic reforms agenda, we believe foreign investors would be ready to take on the opportunities offered by the low valuations.

Can you take us through the ongoing capital market development agenda spearheaded by the CSE?

It is important to mention some of the challenges we faced while recovering from the Covid-19 pandemic: we faced severe economic challenges with galloping inflation, crippling fuel shortages, power cuts, unsettled conditions in the country, declining dollar reserves, supply chain interruptions, import restrictions, and other factors.

From a business perspective, the high-interest rate regime and dampened investor sentiment are some of the negatives. During the latter part of this year, the country stabilized with the new President taking over. With all these challenges, we still achieved good headway during the year in terms of development.

At the CSE we managed to put into motion two major developments that are scheduled to go live in 2023. One is the commencement of the project to introduce a central counterparty system, or a CCP, which is the second logical step following the DVP that we implemented last year. This will strengthen the profile of the CSE, minimize settlement risk, improve risk ratings globally and also act as a catalyst for introducing new products.

The necessary regulatory approvals for the framework to establish a CCP are already in place, and we have awarded the system development contract to the London Stock Exchange Group, and they have commenced the development work. Meanwhile, we have already begun the stakeholder awareness process and also the development of the rules has begun. So, the project is well underway. We are hopeful that we can go live next year.

The second major development that we initiated in 2022 is the introduction of a new capital market product. That is Stock Borrowing and Lending (SBL), and Regulated Short Selling (RSS). Once again, the regulatory approvals are in place, and the system developments and rules development are happening as we speak. We conducted several rounds of stakeholder sessions for SBL and RSS. Further, we will commence an investor awareness campaign, and we are confident that this product will have good traction in the market, and we are hoping to go live before the end of the first half of 2023.

Another landmark project was the completion of the entire set of Stock Exchange Rules and CDS Rules to be in line or conformity with the new SEC Act. We are awaiting the final approval from the regulator to implement those rules.

On the technology side, we completed a critical piece of infrastructure, namely the migration from a legacy data centre to the new data centre both at the production site and the backup site without any loss to trading. This will help us to continue to provide best-of-class trading, clearing and settlement services for stakeholders. Incidentally, we also completed our third and final phase of digitalization of the CSE in 2022.

What are your plans for 2023?

Firstly, we are looking into product diversification. That is going to be a key focus area during the year. We are focusing on expanding the number of new products. There has been a joint committee between the SEC and the CSE that has been set up under the purview of the SEC to fast-track some of the new products to the market and at the CSE we are also looking to strengthen our resources in that area.

The second development plan is about market expansion by further digitalizing the market for greater accessibility and convenience to stakeholders.

Over the last two years, the number of active investors has tripled, and we are continuing to work to broaden the market’s base; we have plans to open more regional branches during the year.

On the capital raising side, we have expanded the listing criteria and the listing rules to enable separate boards for small and medium companies. As for local companies raising foreign currency-denominated capital for their overseas expansion, we are working with investment banks to encourage those companies to make use of these opportunities.

Certain regulatory approvals have already been got and we are continuing to work on the regulatory front to close any other gaps that exist in potential dollar-denominated capital raisings.

To accommodate state-owned enterprises to list, we are amending and changing our rules to facilitate such listing.

We are also looking at strengthening the governance structure of the CSE through a process of Demutualisation of the stock exchange, converting it from a guarantee company to a company limited by shares. The primary objective of this is to separate ownership from management. We are working with the 15 member firms to assist the regulator in demutualizing the exchange, and we are hopeful that this will be completed during 2023.