Sri Lanka expropriations will hurt investment: Fitch

Nov 16, 2011 (LBO) - Sri Lanka's new law to expropriate 37 businesses would discourage investment and hurt growth, despite the state promising that it would be a one-off measure, Fitch Ratings has said.
"While the Sri Lankan government has said that this is a one-off measure, and the list implies that the Act is limited in scope, there is a risk that it will set a precedent for further expropriation and will be applied to a broader range of businesses and assets," Fitch Ratings said.

"This would be a disincentive for both local and foreign investors."

Fitch said a barrier to investment would be negative for growth which has been strong around 8 percent in 2010.

Attracting higher levels of non-debt capital like foreign direct investment would help Sri Lanka rely sell on debt and also improve overall competitiveness. Last year Sri Lanka had received 478 million US dollars in FDI Fitch said.

Fitch had rated Sri Lanka 'BB-', three levels below investment grade.

Strong growth with an improvement in the investment climate and private sector capital spending and increasing state revenues and better used of money would help the rating, Fitch said.

Fitch said the expropriation law, as well as concerns over exchange rate management, required the policy developments to be watched closely as they could hurt the economy, which had improved over the past 18 months.

A second rating agency Mood's warned of the negative fallout of expropriating business assets earlier.

Central Bank Governor Nivard Cabraal said bill would be explained to rating agencies and investors.
http://www.lankabusinessonline.com/fullstory.php?nid=1338565887

Source: http://www.lankabusinesstoday.com/news/economic/729-fitch-warning-?utm_medium=twitter&utm_source=twitterfeed

Sri Lanka’s new law that enables the government to take control of businesses could hinder investment in the country, although much will depend on the scope of the law, Fitch ratings agency said.

Meanwhile, Sri Lanka's Supreme Court yesterday (15) refused to grant leave to proceed with six different Fundamental Rights violation petitions challenging the Expropriation Bill titled ‘an Act to provide for the vesting in the State identified Underperforming Enterprises and Underutilised Assets Act’.

Rating agency Moody's also said that "the government's seizure of assets creates ambiguity around the protection of private property in Sri Lanka,”

Fitch's Statement

Earlier this month, the Sri Lankan Parliament passed the Revival of Underperforming Enterprises and Underutilized Assets Act, identifying 37 business or assets that can be brought under government control.

While the Sri Lankan government has said that this is a one-off measure, and the list implies that the Act is limited in scope, there is a risk that it will set a precedent for further expropriation and will be applied to a broader range of businesses and assets.

This would be a disincentive for both local and foreign investors. A barrier to investment would be negative for growth, which has been strong in Sri Lanka since the end of the country’s civil war in 2009. Real GDP grew 8% in 2010 and is likely to grow at a similar rate in 2011.

Coupled with recent IMF concerns about how Sri Lanka is managing its exchange rate, the new law highlights the need to watch policy developments closely as they could hurt the economic outlook, which has improved significantly over the past 18 months.

We currently rate Sri Lanka BB ,With a stable outlook. A sustained period of strong economic growth, particularly if accompanied by an improvement in the investment climate and private sector capital spending, would be supportive for the rating.

Continued focus on boosting fiscal revenues while reforming the shape of spending would also support the ratings.
The ability to attract non-debt capital inflows, specifically FDI, would help reduce Sri Lanka’s reliance on external debt and could improve the overall competitiveness of the economy.

Sri Lanka’s strong economic growth has though come despite weak foreign direct investment, which totalled just USD478m, or 1% of GDP, last year.

The private property rights should be protected by the constitution.
'(Otherwise we should scrap this capitalist system and go to fully communism.)

If there is any room in the constitution for taking over of private property ,it must be closed by amending the constitution.The rulers may do such amendment it before the elections to protect their properties in case of change of power.
Already deleted vowed to take back the properties taken over.This can make a bad cycle.

It is not only the companies taken over by the GOVT will suffer, business is about networking and what about the companies that do business with these companies? Does not business activities get disrupted? This has resulted in panicking and is evident to all.

There was a story yesterday about JKH has a BOT agreement with a Singaporean firm whose land has been expropriated. It may be one of the reasons for its share price to drop. However JKH has denied that they have any business with them.

I am just curious to know about companies that have got land or assets from the GOVT in the past and utilized the given assets properly according to the GOVT definition?

Fitch Ratings yesterday warned that Sri Lanka’s new law that enables the Government to take control of businesses could hinder investment in the country, although much will depend on the scope of the law.

Earlier this month, the Sri Lankan Parliament passed the Revival of Underperforming Enterprises and Underutilised Assets Act, identifying 37 business or assets that can be brought under Government control.
While the Sri Lankan Government has said that this is a one-off measure, and the list implies that the act is limited in scope, Fitch warned that “there is a risk that it will set a precedent for further expropriation and will be applied to a broader range of businesses and assets”.
Fitch joins…
“This would be a disincentive for both local and foreign investors,” Fitch said, noting a barrier to investment would be negative for growth, which has been strong in Sri Lanka since the end of the country’s civil war in 2009.
Recalling that real GDP grew 8% in 2010 Fitch said economy is likely to grow at a similar rate in 2011.
“Coupled with recent IMF concerns about how Sri Lanka is managing its exchange rate, the new law highlights the need to watch policy developments closely as they could hurt the economic outlook, which has improved significantly over the past 18 months,” Fitch said.
“We currently rate Sri Lanka BB- with a stable outlook. A sustained period of strong economic growth, particularly if accompanied by an improvement in the investment climate and private sector capital spending, would be supportive for the rating. Continued focus on boosting fiscal revenues while reforming the shape of spending would also support the ratings,” Fitch said.
It pointed out that the ability to attract non-debt capital inflows, specifically FDI, would help reduce Sri Lanka’s reliance on external debt and could improve the overall competitiveness of the economy. Sri Lanka’s strong economic growth has though come despite weak foreign direct investment, which totalled just US$ 478 m, or 1% of GDP, last year.
Fitch’s warning comes a day after Moody’s on Monday in its Weekly Credit Outlook stated: “Despite authorities’ statement that this is a one-off move and that further expropriation will not occur, the measure may undermine the predictability of future policies and increase investor uncertainty, which would make it credit negative for Sri Lanka. The Government’s seizure of assets creates ambiguity around the protection of private property in Sri Lanka.”
Whilst noting that the Supreme Court has ruled the bill wasn’t inconsistent with the Constitution, Moody’s said the stated purpose for seizing the assets is that they are either underutilised, idle, have had no ongoing business operations for many years or that their use contravened the public interest. Two of the seized land assets were held by companies listed on the stock exchange.
“It is unclear, however, whether the assets will be managed by the State or resold to other investors and how performance will be revived. The use of the fast-track procedure, which we believe limits public scrutiny, largely reflects the tendencies of the current Government to exert strong and direct influence over the economy,” the rating agency pointed out.
Moody’s also said that maintaining investor confidence was key to Sri Lanka’s ability to continue to collect the peace dividend.
“The authorities have embarked on a broad-based effort to review and reform regulations hindering investment to attract more private sector participation in the economy. But an unintended consequence of this expropriation measure may be that it casts a cloud over the investment climate. If so, it would be credit negative for Sri Lanka,” the agency added.

http://www.ft.lk/2011/11/16/fitch-joins-chorus-says-nationalisation-law-could-hinder-investment/

Main problem of this government is they do not know correct path to implement a new law or anything.
Remember what happened to pension scheme for private sector workers.
See how they increase the fuel price.
They do not know how to things to be get done.