Event Update Sri Lanka – Inward Investment SWAPs (IIS)

The Monetary Board of the Central Bank of Sri Lanka (CBSL), in order to encourage fresh foreign inflows to the country, decided to offer “USD / LKR Buy – Sell Currency SWAPs” for tenures beyond one year and up to two years to Licensed Commercial Banks (LCBs) under the scheme named “Inward Investment SWAPs Scheme (IIS Scheme)”. The IIS scheme’s objective is to facilitate LCBs to hedge the foreign exchange risk pertaining to foreign currency inflows that are directed through Inward Investment Accounts (IIAs). Operating instructions issued to LCBs indicate IIS scheme is applicable on Forex inflows directed through Inward Investment Accounts (IIAs). Although IIAs are used to facilitate investments in many instruments i.e. Equity, Govt securities, Debentures, 24 September 2020 Unit trusts, Bank deposits, etc., the State minister of Finance, Hon. Nivard Cabraal indicated to media that the said announcement is only applicable for investments in Sri Lanka Government securities as of now. Inward Investment https://economynext.com/inflows-to-sri-lanka-rupee-bonds-will-have-wide-positive- SWAPs Scheme effects-minister-cabraal-74135/ This announcement (operating instructions indicated as “Annexure A”) comes into effect at a time where Sri Lanka is expected to honor its ~US$1bn International Sovereign Bond (ISB) payment that is set to mature on 4 Oct 2020, amid a muted ISB market due to COVID 19. This move is likely to stimulate FII investments in the fixed income market with the total value of swaps capped at US$1bn.

Quantification of Recent Foreign Selling in Sri Lanka’s Fixed Inc and Equity Markets Net Foreign Selling (NFS) in the Fixed Income and FI NFS: US$344mn ; Equity NFS: US$176mn Equity markets between 11 Mar 2020 - 18 Sep 2020 NFS in the Fixed Income and Equity markets FI NFS: US$493mn ; Equity NFS: US$203mn between 01 Jan 2020 - 18 Sep 2020 Note: Sri Lanka’s COVID 19 cases commenced spiking up from 11 March 2020 Source: CBSL

However, extending the hedge towards the equity market would have resulted in a 10 year CAGR gain of +4.8% in the Colombo Stock Exchange (CSE), if the hedge was implemented during the past decade for CSE investments of this magnitude.

CSE -10 Year Performance (LKR vs US$ Terms

240 CSE - LKR CSE - USD 220

200

180

160

140

120

100 +4.8% annual hedging gain during 2010 Jan - 2020 Jan, if the investment in the CSE was hedged 80

Sources: CSE, Bloomberg, CT CLSA estimates

CT CLSA SECURITIES (PVT) LIMITED | A Member of the Colombo Stock Exchange 1 Event Update Sri Lanka – Inward Investment SWAPs (IIS)

On the assumption that the IIS Scheme is extended towards the equity market, to be entitled for the SWAP, CSE’s top 20 market cap companies indicated following minimum % holdings for a ticket size of US$25mn as at the closing of 23 Sep 2020.

Top 20 Listed Companies on CSE as at 23 September 2020

Market Capitalisation US$25mn as a % of Market Company Ticker (US$ Mn) Capitalisation (%)

John Keells Holdings JKH--N 980.2 2.6 Ceylon Tobacco Company CTC--N 966.4 2.6 DIAL-N 503.3 5.0 Distilleries Company of Sri Lanka DIST-N 459.8 5.4 Commercial Bank of Ceylon COMB-N 430.0 5.8 LOLC Holdings LOLC-N 346.6 7.2 Ceylon Cold Stores CCS--N 344.0 7.3 Nestle Lanka NEST-N 316.4 7.9 Sri Lanka Telecom SLTL-N 297.4 8.4 HNB--N 283.3 8.8 SAMP-N 276.8 9.0 Cargills (Ceylon) CARG-N 260.7 9.6 Lion Brewery Ceylon LION-N 237.7 10.5 HHL--N 224.4 11.1 Browns Investments BIL--N 217.4 11.5 MELS-N 214.7 11.6 Carson Cumberbatch CARS-N 212.2 11.8 Ceylinco Insurance CINS-N 179.8 13.9 C T Holdings CTHR-N 165.4 15.1 Richard Pieris and Company RICH-N 164.9 15.2

Sources: CSE, CT CLSA estimates

With Sri Lanka heading towards a new chapter in foreign investments as per the State Minister of Finance, it will be essential to revive both the fixed income and equity markets by introducing mechanisms of this nature. We estimate this announcement to be positive on the overall economy especially in reviving the fixed income market. We believe extension of similar hedging instruments to equity investors may assist a FII revival in capital markets in the near term. This type of Government policy support will help to attract much needed foreign currency flows into Sri Lanka, amid ambitious plans of a near term economic revival.

CT CLSA SECURITIES (PVT) LIMITED | A Member of the Colombo Stock Exchange 2 Event Update Sri Lanka – Inward Investment SWAPs (IIS)

Annexure A

Key Parameters and Operating instructions of the IIS Scheme

Key Parameters of IIS Scheme

Counterparties CBSL Vs Individual LCBs

Non-resident investors who are eligible to operate Inward Investment Eligible Investors Accounts (IIA) New foreign currency inflows to the country channeled through IIA Applicability with effect from 23 September 2020

Tenor of SWAP with CBSL Beyond one year and up to two years

Minimum Deal Size US$25mn per Non-Resident Investor

Pricing Mechanism between The same exchange rate for the near and the far legs of the SWAP CBSL and LCB between the CBSL and LCB (i.e., zero cost SWAPS)

Conditions of IIS Scheme

Prior to entering into a SWAP deal with a non-resident investor, the Availability limit availability under the IIS scheme should be checked by the LCB with International Operations Department (IOD) of the CBSL Prior to entering into the deal with the CBSL, an LCB should disclose Declaration of Sources of Funds the source of funds, underlying transaction/s and the details of the respective non-resident investor, to IOD of the CBSL Maximum SWAP Premium A maximum of 0.10% on the investment value may be charged as a Chargeable SWAP premium from a non-resident investor by the LCB • The CBSL does not encourage pre-mature unwinding of SWAP under "IIS Scheme“

• However, in an unavoidable circumstance, if a non-resident investor requests for a pre-mature unwinding of an IIS, in return, the LCB should terminate the SWAP agreement with the CBSL.

• In such a scenario, the "Settlement Exchange Rate" applicable for the settlement between the CBSL and LCB, shall be as follows:

Premature Unwinding of 1. If prevalent USD / LKR spot rate is higher than the agreed SWAPs settlement rate (i. e., LKR depreciated), the revised settlement rate should be the prevalent indicative USD/LKR spot exchange rate plus the "Penalty" 2. If prevalent USD / LKR spot rate is lower than the agreed settlement rate (in LKR appreciated), the revised settlement rate should be the near leg USD/LKR spot rate plus the "Penalty".

• "Penalty" should be 2% on agreed USD / LKR "Settlement Exchange Rate”

CT CLSA SECURITIES (PVT) LIMITED | A Member of the Colombo Stock Exchange 3 Research Trading & Sales Consultant / Sales

Sanjeewa Fernando Lasantha Iddamalgoda Rohan Fernando [email protected] [email protected] [email protected] +94 77 742 7439 +94 77 778 2103 +94 11 255 2297 +94 76 778 2101 Yasas Wijethunga Dyan Morris [email protected] [email protected] +94 77 053 2059 +94 77 722 4951

Deeshan Alwis Manura Hemachandra [email protected] [email protected] +94 11 255 2290 +94 77 261 4797

Kuhan Vinayagasundaram Ruwan Hetiarachchi [email protected] [email protected] +94 11 255 2290 +94 11 255 2290

Subecca Sothylingam Rosco Todd [email protected] [email protected] +94 11 255 2290 +94 77 262 7233

Shahana Kanagaratnam Dhammika de Silva [email protected] [email protected] +94 11 255 2290 +94 77 356 2699

Oshadha de Vas Gunasekara Arusha Michael [email protected] [email protected] +94 11 255 2290 +94 77 395 6765

Nuwan Madusanka [email protected] +94 76 858 9722

Ryan Jansz [email protected] +94 77 547 9233

Rajitha Weerakoon [email protected] +94 77 320 4939

Disclaimer : This document has been prepared and issued by CT CLSA Securities (Pvt) Ltd. on the basis of publicly available information, internally developed data and other sources, believed to be reliable. Whilst all reasonable care has been taken to ensure that the facts stated are accurate and the opinions given are fair and reasonable, neither CT CLSA Securities (Pvt) Ltd. nor any director, officer or employee, shall in any way be responsible for the contents. CT CLSA Securities (Pvt) Ltd. may act as a Broker in the investments which are the subject of this document or in related investments and may have acted upon or used the information contained in this document, or the research or analysis on which it is based, before its publication. CT CLSA Securities (Pvt) Ltd., its directors, officers or employees may also have a position or be otherwise interested in the investments referred to in this document. This is not an offer to buy or sell the investments referred to in this document. It is not intended to provide professional, investment or any other type of advice or recommendation and does not take into account the particular investment objectives, financial situation or needs of individual recipients. Before acting on any information in this publication/communication, you should consider whether it is suitable for your particular circumstances and, if appropriate, seek your own professional advice, including tax advice.

The markets in which CT CLSA Securities (Pvt) Ltd. operates may not have regulation governing conflict of interest over preparation and publication of research reports (including but not limited to disclosure of perceived or actual conflict of interest) as may be found in more developed markets. Please contact your investment advisor / analyst should you require further information over the relevant regulationand particular disclosure over perceived or actual conflict of interest.

CT CLSA SECURITIES (PVT) LTD A Member of the Colombo Stock Exchange

4-14 Majestic City, 10 Station Road, Colombo 4, Sri Lanka General: +94 11 255 2290 to 2294 Facsimile: +94 11 255 2289 Email: [email protected] Web: www.ctclsa.lk A CT HOLDINGS GROUP AND CLSA GROUP COMPANY A CT HOLDINGS GROUP AND CLSA GROUP COMPANY 4