Private sector prospers from free flow of FDI

Updated 04 February 2014
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Private sector prospers from free flow of FDI

The end of insurgency has been a boon for the Sri Lankan economy as the island nation ushers in a new era of investments aimed at consolidating its reputation as a regional hub.
The end of the war in 2009 meant countless new opportunities for the Indian Ocean island nation and previously unexplored streams of business are opening up further.
The country has succeeded in establishing itself as a priority destination when it comes to investments and trading since the end of the Civil war in May 2009, paving the way for political, economic and social stability.
With the Sri Lankan government taking an aggressive stance with trade delegations, individual B2B businesses, and participation in trade fairs, and President Mahinda Rajapaksa himself making visits to other countries in search of trade partnerships, this is considered a true ushering in of a new era of unprecedented prosperity.
The flow of foreign direct investment (FDI) in the island state has gone up with many global corporate giants exploring the Lankan market for new ventures.
The credit for the surge goes to the Board of Investment (BOI), a government sanctioned body set up for the sole purpose of incremental investments.
Structured to function as a central facilitation point for investors for over 33 years, the BOI with its mandate encompassing the entire island has ensured this objective was met with a steady pace as the investment board, with clear set goals of increasing foreign investments and parallel economic growth, functions with the highest service levels ensuring flow of FDI.
Moreover, a high-powered cabinet sub-committee of inter-ministerial leadership has been constituted to serve as facilitator for investor’s assistance, which further strengthen the BOI, clear all bottlenecks and ensure speedy clearance of investment approvals so that investors can implement projects in a hassle-free atmosphere.
The BOI companies today employ about 500,000 workers and 65 percent of the companies represent Sri Lankan exports and, to be specific, nearly 90 percent of the country’s industrial exports.
The BOI, is therefore, a significant agent of change in the Sri Lankan economy with more than three decades of its existence.
It has radically transformed the island nation economically as well as socially, placing the country in a position where it can compete in an increasingly globalized world.
Sri Lankan economic experts believe that the most significant aspect of working with the BOI is that, when you sign an agreement with the board, the provisions embodied in the agreement remains valid for the life of the enterprise.
Successive governments cannot change these provisions, ensuring a degree of stability that few other countries can offer or match. Further, a contract with the BOI means concessions on taxes and duties, which are appropriated according to the level of investment.
Moreover, the BOI has established a series of Free Trade Zones (FTZs) and trade parks at strategic locations, which provide business owners the most conducive atmosphere for manufacturing purposes.
The island state has found traction in terms of investment flow from June 2009, with new opportunities in sectors such as water purification and supply, mini hydro power, mining, properties, the famed Sri Lankan teas (better known as Ceylon Tea), eco tourism, rubber, agriculture, gems and industrial raw materials.
Foreign investment has flowed more freely into the private sector.
The country enjoys a Free Trade Agreement (FTA) with both India and Pakistan, which provides distinct business opportunities. Investors can have the best of both worlds with, for example, access to India’s market and products and Sri Lanka’s advantageous location as a base.
Due to these reasons, the country has a reputation of being a strategic access point for other crucial markets as well.
The country’s environment also is a perfect fit for specialized industries such as electronics, light engineering, computer software with many new investors in these segments signing up with the BOI.
An often underrated investment opportunity is the agricultural prospects in Sri Lanka. The tropical climate and the renewed opportunities in foliage, cut flowers and exotic fruits and vegetables with an export-oriented market is paving the way for an influx of like minded investors into the country.
Specifically, the climate in the mountainous central district is deemed ideal for agricultural ventures.
The major factor that captures any investor’s eye is the phenomenal growth of stock market in the last five years as the market capitalization of the Colombo stock market improved from $5 billion to $20 billion.
The market capitalization and liquidity is expected to grow further in coming years with new listings and other forms of financing by existing listed entities.
With the expansion, integration and access of the northern areas, economic growth is expected to be at the range of 5 to 7 percent.
Interestingly, US Investment legend Jim Rogers has rated Sri Lanka and China with better investment opportunities than other countries in the region.
With security and stability assuring investors, the market has been on an all time high with returns far exceeding expectations.
The past year has seen a prolific increase in trade related visits by countries such as Belgium, the US, Iran and China.
China being a major partner, has stakes in developments of crucial areas such as power and energy (the Norichcholai Coal power plant is being commissioned by a prominent Chinese company).
Another sector experiencing a boom is the hotel and leisure industries, the recent signing of the Movenpick group to construct a star class hotel within the city is just one of many projects in the pipeline.
Catching onto the growing trend of eco-tourism, many groups are looking to initiate such tourism projects in the green zones.
The Cinnamon Lodge, Habarana and Heritance, Kandalama are two prime examples of successful star class hotels with every amenity and an eco-focused theme.
With tourist arrivals sky rocketing, this segment is proving to be a major money spinner.
Therefore, the country holds more space in one’s mind as the pearl of the Indian ocean (enchanting travelers from the time of Ibn Batuta) for its scenic beauty.
What truly sets apart Sri Lanka from other investment destinations is the efficiency and the smooth, streamlined processes that go with starting up a business in the country, and the lion’s share for this credo goes to the BOI that assists investors from the first boardroom discussion to the construction site.
Sri Lanka being ranked as one of the fastest growing trading hubs and an economy with the most liberal policies, investors to the country are provided with preferential tax rates, constitutional guarantees on investment agreements, exemptions from exchange control and 100 percent repatriation of profits and total foreign ownership available in most of the sectors.
With more concessions and specific benefits planned for foreign investors, the nation gears itself for another year with even greater growth in all key indicators.
So far as the manpower found on the island is concerned, the primary indicators are stronger than ever before. The literacy rate in the country is one of the highest in the world at 91.2 percent and most of the skilled labor have an apprenticeship or technical knowledge at the diploma level.
Ethical practices, which aim for the triple bottom line and ensuring the balance between employer and employee benefits, are maintained and form the foundation for a longstanding work force which rarely shifts organizations.
The government and subsidiary bodies conduct and encourage continuous training programs at specific industries aimed at sharpening the work force knowledge and vocational training.
Since the end of the civil war in May 2009 and prevalence of political and social stability, the country has bought itself onto the discussions of many global corporate giants across the world.
The country is one of the leading hubs for garment manufacturing.
Its companies have long-standing manufacturing contracts with brands like GAP and Victoria’s Secret.
When it comes to the FDI, BOI statistics show that Malaysian companies invested $150 million in the country in 2008-2009, making the country the biggest foreign direct investor in Sri Lanka during the fiscal year. India ranked second with $126 million as Bharti Airtel Ltd., the nation’s largest mobile-phone company, started operations in Sri Lanka. China was placed ninth with $27 million of investments.
With the current governments’ prudent investor friendly strategy, these figures are expected to soar in the future.
The end of the war also meant the channeling of the funds toward internal development such as highways and rebuilding or improving townships which in turn meant improved logistics and transportation capabilities.


Oil markets jittery over lower demand forecasts

Updated 18 November 2018
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Oil markets jittery over lower demand forecasts

RIYADH: Oil prices continued to nosedive last week over demand concerns amid an outlook of a slowing global economy. The strong US dollar weighed on both oil prices and the global demand outlook. Currencies weakened against the dollar, eroding their purchasing power.
Brent was down to $66.76 per barrel and WTI dropped to $56.46 per barrel by Friday. The former came close to its one-year low as both the International Energy Agency (IEA) and OPEC released monthly reports that articulated a darkening demand outlook in the short term. This increased fears of an oil demand slowdown. Market fundamentals also suggest that price volatility is likely to remain high in the near-term, although the oil market reached a balance in early October.
OPEC’s Monthly Oil Market Report (MOMR) arrived with bearish sentiments, revising downward its oil-demand forecast for this year and next, for the fourth month in a row. It forecast that global oil demand will rise by 1.29 million barrels per day (bpd) in 2019, 70,000 less than what OPEC expected last month. The MOMR also forecast increasing non-OPEC supply growth for 2019, with higher volumes outpacing the annual growth in world oil demand, leading to an excess in supply. The report was welcomed with open arms by the IEA, which had been at least in part responsible for driving sentiment toward a bear market. Surprisingly, OPEC warned that oil demand is falling faster than expected. Necessary action is a must.
Saudi Arabia is not sitting idly by while oil markets look as if they are heading toward instability. Markets were expecting severe US sanctions on Iran, which could have resulted in supply shortages once Iran’s crude exports went to zero. The unexpected introduction of waivers to allow eight countries to continue importing Iranian oil, was however an eye-opener. Now, as the world’s only swing producer, Saudi Arabia will have to take other measures to balance oil markets and drain excess oil from global stockpiles.
Despite what some analysts are claiming, there is currently no strategy to send less oil to the US to help reduce US stockpiles. Yes, some have claimed that Saudi crude shipments to the US are at about 600,000 barrels per day this month, which is a little more than half of what was being shipped in the summer months. But the reasons for this are related to seasonally low demand, the surge in US inventories and refineries heading into their winter maintenance season. Remember that November crude oil shipments were allocated to the US refiners last month before the US waivers on the Iranian sanctions were revealed. Also, keep in mind that Saudi Arabia owns the largest refinery in the US, which has a refining capacity that exceeds 600,000 bpd.

Lurking on the horizon is the massive US budget deficit and increasing rumblings that the US economic boom is over. 

It must be noted that there is a degree of financial manipulation underway in the oil futures markets. At the moment, there are few places where quick profits can be made, so some investors moved from stocks to commodities. Now, there are downward pressures on oil prices as some commodities market traders went long on oil futures, thinking that crude prices would rise. Then these same traders shorted natural gas, assuming that with a warmer winter, prices of that fuel would fall. Unfortunately for the traders, Trump’s sanction waivers on Iranian crude oil exports and cold weather on the US East Coast, caused exactly the reverse to take place. Oil prices fell and natural gas prices rose. Traders were therefore forced to sell their assets to cover margins, pushing oil prices lower. It is expected that some hedge funds and investment funds will also be moving away from going long on oil futures and this will cause further selling.
Lurking on the horizon is the massive US budget deficit and increasing rumbling that the US economic boom is over. The US federal budget deficit rose 17 percent in the 2018 fiscal year. It is now larger than in any year since 2012. Federal spending is up and amidst US President Donald Trump’s tax cuts, and federal revenue is not keeping pace. To make matters worse, the strong US economy and interest rate hikes by the US Federal Reserve have boosted the dollar.
A strong dollar makes commodities such as crude oil more expensive in international markets and reduces demand. Trump wants oil to be priced as low as possible to help bolster the US economy, which is clearly under strain, and to facilitate sales of crude abroad. But with a looming global oil shortage just a few years away due to a lack of upstream investment, it is incumbent on global oil producers to consider the long term in their output decisions.

* Faisal Mrza is an energy and oil market adviser. He was formerly with OPEC and Saudi Aramco. Reach him on Twitter: @faisalmrza