11th April 2011, www.dailynews.lk, By Ramani Kangaraarachchi
A vibrant corporate bond market is vital to the stability of the Sri Lankan economy because it will enable top corporates to borrow at low rates and invest in sustainable, long-term projects, thus meeting the desired growth potential of the nation.
Speaking to the Daily News Business, The Finance Company Chairman and Ram Rating (Lanka) Ltd. Director, Preethi Jayawardena said that prolonged fears over investment will continue, unless a secondary bond market is developed to encourage and invite investors.
The positive steps taken by the regulators will assist in developing such a secondary market, he assured.
In most developing countries one third of private sector investments are funded by corporate bonds, another one third by equity and the remainder through bank borrowings. With relaxed exchange control rules being implemented by the Central Bank of Sri Lanka, corporates are at an advantage in receiving funding from the bond market at very lucrative rates.
Jayawardena said that corporates should apply for ratings from one of the recognized rating agencies in the country.
If the rating received is of investment grade then they could easily borrow in USD or any other recognized currency and build on the investment for a durable period of 5-25 years.
Elaborating on the US market he said that the quantitative easing which is currently taking place in that part of the world, stimulates billions of dollars being pumped into the market.
These surplus dollars could be easily channelled into our country, offering a slightly higher interest rate. Today the US interest rate stands at 0.25 percent.
According to the MD of S&P Singapore, when a country opens its door to the corporate bond market for the first time, there will always be a gestation period of two-three years until the corporate bond market stabilizes.
Jayawardena also stated that the country’s last annual budget of 2010/2011 catered to bringing down the fiscal deficit by the year end. The steady progress of the IMF facility and the satisfactory implementation of monetary and fiscal policies have stimulated the positive and proactive manner in which the country’s economy is being administered.
He emphasized that the last annual budget kept the public sector investment at the same percentage as the previous year’s 2.8 percent of GDP, in order to cater strictly the preservation of infrastructure development of the country, primarily improving road development and building bridges, airports and highways.
The boosting of the private sector investment was also expected, given the desire to keep up with the desired growth rate of 8 percent. In view of this, the policy makers reduced the corporate tax from 35 percent to 28 percent and reduced the exposure to deem dividend tax from 25 to 10 percent of the total profits of the company. These measures were taken solely to provide corporates with the opportunity to have sufficient funding for long-term investment he said.
Jayawardena insisted that today Malaysia boasts of a corporate bond market of the value of US $ 89 billion, which is the third largest in Asia and Sri Lanka also should not take long to build the corporate bond market to somewhat closer proportions.
Related Info :
• Sri Lanka Allows Local Firms to Borrow Abroad for Working Capital, Investment, Restructuring or Settling Foreign Loans
• Sri Lanka Needs to Develop Corporate Bond Market as Investors Eye Asian Instruments due to US Quantitative Easing