Budget fails to boost Bourse

November 29, 2013  

• Colombo stock market loses Rs. 20 b in value post-2014 Budget week
• Sound macroeconomic fundamentals aimed for next year and beyond as well as host of progressive proposals fail to ignite investor
• confidence and activity

A week on since the unveiling of the 2014 Budget by President and Finance Minister Mahinda Rajapaksa, overall investor sentiment doesn’t appear bullish as the Colombo stock market has lost over Rs. 20 billion in value.
On the day of the 2104 Budget, i.e. 21 November, market capitalisation was Rs. 2.413 trillion, whereas yesterday it was down to Rs. 2.393 trillion. The market saw a marginal rebound yesterday whilst on Wednesday its value was down to Rs. 2.30 trillion.
The All Share Index and the S&P SL 20 Index has dipped too – ASI from a 2.8% year-to-date return on 21 November, yesterday it was down to 1.94% and S&P SL 20 from 3.79% to 2.54%.
Some link the widespread bearish mood to lack of confidence overall and the Budget not being emphatic in terms of kick-starting a fresh wave of optimism and growth. Another was the slew of debenture issues with attractive fixed returns diverting investor interests and liquidity from equities.
However, those who have described the 2014 Budget as progressive are baffled by the lack of enthusiasm by investors.
From a macro perspective, the 2014 Budget has what investors would like – a lower regime of mid-single digit inflation, lower deficit, a downward interest rate regime and stable exchange rate, apart from aspiring to increasing GDP growth to 7 or 8% level.
The 2014 Budget also has far-reaching proposals to boost import-competitive domestic industries/sectors, from where there are several listed companies.
Agriculture/food, dairy and cement are some of the frontline sectors which stand to benefit from the 2014 Budget.
Other analysts said originally the lack of confidence largely stemmed from the 2% Nation Building Tax (NBT) on the financial sector as investors feared banks would be hit. However, the Treasury has confirmed that the new tax won’t impact intermediation cost.
The Government aims to rake in around Rs. 3.6 billion only via this tax, which is insignificant given the banking industry’s total profit before tax (after VAT) of Rs. 116.3 billion and after tax profit of Rs. 82.3 billion in 2012. Another concern for banks was the heavy emphasis of directed lending in the 2014 Budget.
The expansion of the VAT coverage by reducing the threshold to Rs. 250 million per quarter from Rs. 500 million previously was also seen as negative though the larger listed firms viewed the move as welcome as it levels the playing field. The imposition of 15% upfront tax on lease of State or private lands to foreigners was also seen as denting Sri Lanka’s attractiveness globally for business and investments.
Another concern is the upward pressure on inflation following the slapping of higher duties on select food imports. The Government justified the move as a firm support to domestic producers as well as to make local manufacturers more competitive vis-à-vis imports.
Investor expectation of higher cost of living is despite the Budget targeting a 5-6% inflation rate, thereby extending the near five years of single digit inflation further.
The 2014 Budget also gave a direct boost for the Bourse by extending tax incentives to firms keen on listing. This would mean investors will have a wide choice.
This particular proposal saw the Securities and Exchange being quick to commend the benefits though the Colombo Stock Exchange, while the Colombo Stock Brokers Association hasn’t yet commented though a week has passed since the 2014 Budget was unveiled.
Dr. Nalaka Godahewa, the Chairman of the SEC, which has over the past one year endeavoured to make the capital market more buoyant, commended the President and the Secretary to the Treasury for the capital market development oriented budget, for the second successive year.
“Last year too, a number of concessions were given to the industry. The unprecedented growth of the corporate debt market and the significant growth in the unit trust industry were direct results of the concessions given through last year’s Budget. The capital raised from the corporate debt market grew by 330% while the unit trust industry witnessed a growth of 77%,” Godahewa said.
“The 50% tax reduction for three years for companies listing on the Colombo Stock Exchange is a great opportunity offered in this year’s Budget. It will definitely encourage more IPOs in the future. I hope many companies will make use of this window of opportunity. As it is said, the faster you move, the greater your benefit,” the SEC Chief added.
First Capital Equities said Budget 2014 has limited impact on the economy as well as stock marketwhilst some of the targets are ambitious.
The Colombo Bourse year-to-date had remained lacklustre despite a significant vote of confidence on prospects for equities and the economy by foreigners, judging by the Rs. 23 billion inflows.
Acuity Stockbrokers in an analysis of Budget 2014 noted the markets through 2013 have mirrored the overall sluggishness in the macro-economy. Activity on the CSE has been mostly subdued, with markets hitting a Y-T-D high (6488.85 points) as investors factored in the Central Bank’s dovish policy stance.
Since then though, markets have been largely on a downtrend. Very recent trends in the market appear to show signs of a marginal pick-up. Since hitting a low in September (5605.3 points), the main share price index (ASPI) has been indicating a very gradual uptick.