Reforms to increase market capitalisation vital

by Sanjeevi Jayasuriya

The Colombo Stock Exchange needs to work with all stakeholders diligently on reforms to increase the market cap to GDP ratio which is about 30% today to around of 50% of GDP by 2020, a capital market expert, CFA Candor Group CEO and Director, Ravi Abeysuriya said.

“This is certainly not a stretched target when we compare with India’s 75% market cap to GDP ratio. With proper reforms, we could reach around US $ 110 billion by 2020, thus we should have a market cap of around $ 55 billion by 2020,” he said.

At present, Sri Lanka’s total market capitalisation stands at approximately US $ 22.7 billion.

Therefore, market capitalisation needs to grow by about 4.4 times from 2015-2020, for Sri Lanka to achieve the US $ 100 billion target, he said. According to a Securities and Exchange Commission presentation in 2013, the channels by which the set objective was to be achieved included increased investments (from foreign and local sources), increased liquidity in the market, developing the corporate debt market, developing new products (derivatives and commodity market), growing the unit trust industry, education and awareness programs. Promoting the Colombo bourse alone is unlikely to get us there, he said. Currently, the market cap to GDP ratio stands at nearly 30%.

To achieve the targeted market cap of US $ 100 billion, the GDP has to reach US $ 200 billion by 2020 from its current US $ 76 billion.

This needs an economic growth rate of nearly 22% annually which is unrealistic.

If Sri Lanka is to achieve a realistic target, concerted efforts of the government, regulators and market intermediaries and market participants are imperative to broaden the depth and breadth of our capital market.

A Government policy change is necessary in certain areas. “We have to get Sri Lanka into the MSCI Emerging Market Index, which could be a major catalyst to attract foreign investors to our capital market.

This can be achieved by listing two large profitable State institutions and establishing a public float of over 20%. US $ 9.5 trillion in assets is estimated be the benchmark to move into MSCI indexes,” Abeysuriya said.

When Sri Lanka is in the index, MSCI Emerging Market Index tracker funds will need to invest in Sri Lanka as they need to replicate the index. Further, making the Colombo bourse a regional bourse for the SAARC region would be another catalyst.

Companies in the region could be encouraged to list their debt and equity in the CSE by promoting the cost effectiveness of listing in the CSE. Such efforts will move Sri Lanka into the radar screens of global investors, he said.