Chief Economist & Political Strategist, CrossASEAN Research

Prasenjit K. Basu

Chief Economist & Political Strategist

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Macroeconomics

<ul>
<li>Dissanayake, representing the communist JVP (which has never won more than 10% of any nationwide vote) has 48% support in the latest poll before today's presidential election. </li>
<li>IMF's EFF is Sri Lanka's economic lifeline. Via it, President Wickremasinghe has restored 5% real GDP growth, lowered inflation, swung the current account to surplus and rebuilt FX reserves. </li>
<li>External debt is 10x FX reserves, so Dissanayake's plans to cut tax rates, eliminate VAT on food/health/education would jeopardize the IMF program. Hopefully the election outcome differs from that poll. </li>
</ul>


Dissanayake, representing the communist JVP (which has never won more than 10% of any nationwide vote) has 48% support in the latest poll before today's presidential election. 
IMF's EFF is Sri Lanka's economic lifeline. Via it, President Wickremasinghe has restored 5% real GDP growth, lowered inflation, swung the current account to surplus and rebuilt FX reserves. 
External debt is 10x FX reserves, so Dissanayake's plans to cut tax rates, eliminate VAT on food/health/education would jeopardize the IMF program. Hopefully the election outcome differs from that poll. 


Sri Lanka: Election Could Jeopardise Hard-Earned Economic Gains, but Hopefully Won't

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<ul>
<li>
<a href="https://www.smartkarma.com/entities/axiata-group-berhad" target="_blank" data-smartkarma-citation="entities:944:1" rel="noopener">Axiata Group (AXIATA MK)</a>'s NAV discount and implied stub are around their lows since the <a href="https://www.smartkarma.com/entities/celcomdigi-berhad" target="_blank" data-smartkarma-citation="entities:945:1" rel="noopener">CelcomDigi (CDB MK)</a> / Digi.com merger last November. </li>
<li>Preceding my comments on Axiata are the current setup/unwind tables for Asia-Pacific Holdcos. </li>
<li>These relationships trade with a minimum liquidity of US$1mn, and a % market capitalisation &gt;20%.</li>
</ul>



Axiata Group (AXIATA MK)'s NAV discount and implied stub are around their lows since the CelcomDigi (CDB MK) / Digi.com merger last November. 
Preceding my comments on Axiata are the current setup/unwind tables for Asia-Pacific Holdcos. 
These relationships trade with a minimum liquidity of US$1mn, and a % market capitalisation &gt;20%.


Sri Lanka's public debt was 100% of GDP in 2020, and its primary fiscal deficit is officially estimated to be 4% of GDP this year, implying that the government has chosen to stay on an unsustainable fiscal path. External debt is even more precarious, with foreign reserves (US$4.8bn in January 2021) far below short-term external debt, and a deteriorating basic balance (with large portfolio outflows in recent quarters, and negligible FDI inflow). Without an IMF program, the RBI declined to roll-over a currency swap in February 2021, although China provided an additional RMB10 billion swap on 23 March 2021. China's support is a poisoned chalice (with an "unequal treaty" already handing one port, Hambantota, to China's control), but even with that Sri Lanka will struggle to make the US$4 billion of external debt repayments this year, and larger ones in the next 4 years. We recommend staying well clear of Sri Lanka bonds due in 2022 and beyond. Sovereign defaults are rare in Asia, and Sri Lanka prides itself on never having defaulted on its external debts. But with foreign reserves down to US$4.8 billion in January 2021 (of which US$1.37 billion comprised currency swaps with other central banks), while short term external debt was estimated at US$9 billion, Sri Lanka's external liquidity situation was extremely precarious. On 23 March 2021, Sri Lanka signed a RMB10 billion (over US$1.5 billion) swap facility with China, which should enable repayment of the US$1 billion sovereign bond that matures on 27 July 2021. But the Reserve Bank of India (RBI) had declined to roll-over a US$400 million swap in February 2021, and the Rajapaksa government has ruled out turning to the IMF, leaving it with very few other options. External debt repayments for each of the next 5 years are US$4-5 billion annually, and total external debt is 285% of Sri Lanka's annual exports of goods &amp; services (far above the average of 110% for all developing economies). The external debt service ratio has been above 30% for the past two years, well above the 25% level that is considered risky. Public debt reached 100% of GDP in 2020 (up from 79.9% in 2017 and 86.3% in 2019), and the primary fiscal deficit is officially expected to be 2.5% of GDP in 2020 and 4% of GDP in 2021. So the public debt will stay on an unsustainable path, rising (by Fitch's estimate) to 116% of GDP in 2022. In 2020, the domestic public debt was financed primarily through a huge 62.7% YoY increase in net credit to government (81% of it from commercial banks), which caused M2 money supply to expand 23.4% YoY in 2020, the fastest expansion in more than 25 years. Rapid monetary expansion didn't cause inflation to rise much in 2020 (with recession causing a large output gap that would have depressed price levels). Money supply will perforce decelerate in 2021 as the economy returns to normalcy, and net credit to government must decelerate sharply too. Massive government borrowings will cause domestic bond yields to rise, making public debt even more unsustainable. The Rajapaksa government has spoken of two approaches to meeting its external obligations -- using non-debt capital flows to finance the current account deficit (which is relatively small at 2% of GDP), and the "Malaysia template" (1998) of capital controls (supplemented by import controls). The Malaysia template is irrelevant, because Malaysia had a much more diversified export base (huge electronics exports, not just commodities like palm-oil, rubber, crude oil which responded very strongly to the depreciated ringgit), much larger ongoing FDI inflows (4% of GDP, while Sri Lanka rarely receives more than 1% of GDP worth of FDI), and used the capital controls to rapidly resolve its banks' bad-loan problem; Malaysia did not have public or external debt challenges remotely as large as Sri Lanka does. FDI as a source of funding for Sri Lanka's current account deficit has diminished rapidly (to just US$743 million, 0.8% of GDP, in 2019, and US$434 million, or 0.5% of GDP in 2020), and foreign portfolio outflows have grown steadily in each of the past 6 quarters (to US$1,149 million in 4Q 2020, a quarter in which FDI inflow was just US$ 89 million). Apart from a tyre-manufacturing proposal from a mid-sized Chinese producer (not among the top-30 in the world or the top-5 in China), no significant FDI is in the pipeline. So foreign reserves are likely to continue declining, and Sri Lanka will face an external payments crisis by October 2021 in the absence of even larger lending by China -- which (like in Hambantota port) will involve covenants that give China ownership of Sri Lankan land and other assets in the event of non-payment.

Sri Lanka's public debt was 100% of GDP in 2020, and its primary fiscal deficit is officially estimated to be 4% of GDP this year, implying that the government has chosen to stay on an unsustainable fiscal path. External debt is even more precarious, with foreign reserves (US$4.8bn in January 2021) far below short-term external debt, and a deteriorating basic balance (with large portfolio outflows in recent quarters, and negligible FDI inflow). Without an IMF program, the RBI declined to roll-over a currency swap in February 2021, although China provided an additional RMB10 billion swap on 23 March 2021. China's support is a poisoned chalice (with an "unequal treaty" already handing one port, Hambantota, to China's control), but even with that Sri Lanka will struggle to make the US$4 billion of external debt repayments this year, and larger ones in the next 4 years. We recommend staying well clear of Sri Lanka bonds due in 2022 and beyond. Sovereign defaults are rare in Asia, and Sri Lanka prides itself on never having defaulted on its external debts. But with foreign reserves down to US$4.8 billion in January 2021 (of which US$1.37 billion comprised currency swaps with other central banks), while short term external debt was estimated at US$9 billion, Sri Lanka's external liquidity situation was extremely precarious. On 23 March 2021, Sri Lanka signed a RMB10 billion (over US$1.5 billion) swap facility with China, which should enable repayment of the US$1 billion sovereign bond that matures on 27 July 2021. But the Reserve Bank of India (RBI) had declined to roll-over a US$400 million swap in February 2021, and the Rajapaksa government has ruled out turning to the IMF, leaving it with very few other options. External debt repayments for each of the next 5 years are US$4-5 billion annually, and total external debt is 285% of Sri Lanka's annual exports of goods &amp; services (far above the average of 110% for all developing economies). The external debt service ratio has been above 30% for the past two years, well above the 25% level that is considered risky. Public debt reached 100% of GDP in 2020 (up from 79.9% in 2017 and 86.3% in 2019), and the primary fiscal deficit is officially expected to be 2.5% of GDP in 2020 and 4% of GDP in 2021. So the public debt will stay on an unsustainable path, rising (by Fitch's estimate) to 116% of GDP in 2022. In 2020, the domestic public debt was financed primarily through a huge 62.7% YoY increase in net credit to government (81% of it from commercial banks), which caused M2 money supply to expand 23.4% YoY in 2020, the fastest expansion in more than 25 years. Rapid monetary expansion didn't cause inflation to rise much in 2020 (with recession causing a large output gap that would have depressed price levels). Money supply will perforce decelerate in 2021 as the economy returns to normalcy, and net credit to government must decelerate sharply too. Massive government borrowings will cause domestic bond yields to rise, making public debt even more unsustainable. The Rajapaksa government has spoken of two approaches to meeting its external obligations -- using non-debt capital flows to finance the current account deficit (which is relatively small at 2% of GDP), and the "Malaysia template" (1998) of capital controls (supplemented by import controls). The Malaysia template is irrelevant, because Malaysia had a much more diversified export base (huge electronics exports, not just commodities like palm-oil, rubber, crude oil which responded very strongly to the depreciated ringgit), much larger ongoing FDI inflows (4% of GDP, while Sri Lanka rarely receives more than 1% of GDP worth of FDI), and used the capital controls to rapidly resolve its banks' bad-loan problem; Malaysia did not have public or external debt challenges remotely as large as Sri Lanka does. FDI as a source of funding for Sri Lanka's current account deficit has diminished rapidly (to just US$743 million, 0.8% of GDP, in 2019, and US$434 million, or 0.5% of GDP in 2020), and foreign portfolio outflows have grown steadily in each of the past 6 quarters (to US$1,149 million in 4Q 2020, a quarter in which FDI inflow was just US$ 89 million). Apart from a tyre-manufacturing proposal from a mid-sized Chinese producer (not among the top-30 in the world or the top-5 in China), no significant FDI is in the pipeline. So foreign reserves are likely to continue declining, and Sri Lanka will face an external payments crisis by October 2021 in the absence of even larger lending by China -- which (like in Hambantota port) will involve covenants that give China ownership of Sri Lankan land and other assets in the event of non-payment. 

Sri Lanka: Closer to Being Asia's Argentina Despite Swaps from PRC's Poisoned Chalice

Independent Asian Credit Research, Bondcritic

Warut Promboon

Independent Asian Credit Research

Asian Fixed Income/Frontier Market Research

Bondcritic

Bondcritic, established in 2009, is designed to be an independent credit research voice that helps investors gain insights and unbiased analyses on Asian fixed income market. Our mission is to discover deep-value Asian high-yield and distressed bonds with a bottom-up approach, together with the help of our proprietary ESG (Environmental, Social Development, and Governance) model. At the same time, we focus on bringing investment cases of unrated and unloved issuers to the general public.

Thematic (Sector/Industry)

In this Smartkarma Original, we seek to study how diversity and incentives influence stock performance and profitability. We tallied diversity and incentive data related to the board of directors, management, and employees across major economies in Asia and picked top 10 companies of each country in terms of market capitalization. We chose to exclude major companies listed in exchanges of other economies such as Tencent and Alibaba to limit our sample size.
Then we devised diversity and incentive scores to assign to those companies and compare those scores against a 5-year trend of their return on shareholders’ equity (ROE) ratios and 1-year stock performance from 1-July-19 to 30-June-20 over its corresponding exchange indices.
The report covers diversity vs. incentives in Asia, diversity score vs. 1-year stock performance and ROE trend, incentives vs. 1-year stock performance and ROE trend, diversity + incentives scores vs. 1-year stock performance and ROE trend, companies with top and bottom diversity + incentive scores, countries with top and bottom average diversity + incentive scores, and incentive score vs. staffing cost trend. 
The results show that companies with high diversity scores do perform well. A high diversity score also has a positive impact on the ROE trend, based on our regression analysis at 95% confidence level. We found that employee incentives are not significant as staff diversity but they can still have an influence on company performances at a lower 90% confidence level.
We note that this study is at the preliminary stage and stock performance is a function of many factors, not only the diversity scores that we concluded. Needless to say, our diversity and incentive scores also reflect the level of disclosures by selected companies, not necessarily the actual practice within each company. Our diversity and incentive scores are also not a credit rating or ranking with peers and, hence, do not reflect default probability of selected companies.
We caution that in Asia, many diversity trends in the West may not apply. The fact that many Asian business communities may remain less sensitive to equal opportunities for females, disabled persons, or LGBTQ communities could make returns of Asian companies less correlated to diversity than in the West. Likewise, additional incentives in some countries in Asia may not be necessary as employees’ strong performance (i.e. in Japan) is a norm, according to the prevalent work culture.
Bondcritic is developing a scoring model, which includes environment, social development, and corporate governance; the last of which cover diversity and incentives. This report is the first of the series to uncover shenanigans in the Asian corporate sector.

In this Smartkarma Original, we seek to study how diversity and incentives influence stock performance and profitability. We tallied diversity and incentive data related to the board of directors, management, and employees across major economies in Asia and picked top 10 companies of each country in terms of market capitalization. We chose to exclude major companies listed in exchanges of other economies such as Tencent and Alibaba to limit our sample size.
Then we devised diversity and incentive scores to assign to those companies and compare those scores against a 5-year trend of their return on shareholders’ equity (ROE) ratios and 1-year stock performance from 1-July-19 to 30-June-20 over its corresponding exchange indices.
The report covers diversity vs. incentives in Asia, diversity score vs. 1-year stock performance and ROE trend, incentives vs. 1-year stock performance and ROE trend, diversity + incentives scores vs. 1-year stock performance and ROE trend, companies with top and bottom diversity + incentive scores, countries with top and bottom average diversity + incentive scores, and incentive score vs. staffing cost trend. 
The results show that companies with high diversity scores do perform well. A high diversity score also has a positive impact on the ROE trend, based on our regression analysis at 95% confidence level. We found that employee incentives are not significant as staff diversity but they can still have an influence on company performances at a lower 90% confidence level.
We note that this study is at the preliminary stage and stock performance is a function of many factors, not only the diversity scores that we concluded. Needless to say, our diversity and incentive scores also reflect the level of disclosures by selected companies, not necessarily the actual practice within each company. Our diversity and incentive scores are also not a credit rating or ranking with peers and, hence, do not reflect default probability of selected companies.
We caution that in Asia, many diversity trends in the West may not apply. The fact that many Asian business communities may remain less sensitive to equal opportunities for females, disabled persons, or LGBTQ communities could make returns of Asian companies less correlated to diversity than in the West. Likewise, additional incentives in some countries in Asia may not be necessary as employees’ strong performance (i.e. in Japan) is a norm, according to the prevalent work culture.
Bondcritic is developing a scoring model, which includes environment, social development, and corporate governance; the last of which cover diversity and incentives. This report is the first of the series to uncover shenanigans in the Asian corporate sector.

Asian Governance: Diversity & Incentives Through the Cultural Lens

Sri Lanka's external debt was 440% of its goods exports and 270% of its goods &amp; services exports at end-2019 (unsustainable based on the IMF-WB framework). The acceleration in real GDP growth (averaging nearly 6.4%) during Mahinda Rajapaksa's presidency (2005 to early-2015) was akin to India's acceleration in the 1980s (similarly funded by an external borrowing binge). Sri Lanka hasn't made structural changes, remaining dependent on tea and tourism as foreign-exchange earners, and must now either agree a program of structural reform (akin to India 1991) or face a restructuring of its external debt later this year. Either way, near-term growth prospects are dismal. We recommend staying well clear of Sri Lanka exposure.  Sri Lanka's economy -- driven mainly by earnings from tourism, tea and (modest) textile exports -- is in dire straits. Foreign visitor arrivals declined 18% YoY in 2019 (falling to a 4-year low of 1.91 million), causing real GDP to decelerate to 2.3% growth in 2019 (the lowest since 2001). During Mahinda Rajapaksa's 10 years as President (2005-early 2015), Sri Lanka experienced rapid real GDP growth -- infrastructure-driven 6% annual growth in 2005-09, and a "peace dividend" of 6.7% annual growth in 2010-14 driven by a surge in foreign visitor arrivals. But growth was accompanied by high inflation (8% annual average over the 10 years) and a massive rise in external debt, which rose from US$11.4bn at the start of Rajapaksa's term to US$42.9bn at its end (16.6% CAGR).  Sri Lanka took its 16th loan from the IMF in 2016 -- a 3-year Extended Fund Facility (EFF) worth US$1.5bn, extended by a year to 2 June 2020 -- and has been a ward of the IMF for 70% of the time in the past 40 years. (Among South Asian economies, only Pakistan has been in IMF programs longer). But its external debt reached 63.9% of GDP in 2019 -- or a humongous 440% of goods exports, and 270% of exports of goods &amp; services, numbers that are well above the upper limit for the IMF's framework for external-debt sustainability. Last year's fiscal and primary deficits were 6.2% and 0.3% of GDP (vs. an IMF requirement of a primary surplus of 0.2%).In February (before the Covid-induced slump in tourism), the IMF projected 3.7% real GDP growth for 2020, a fiscal deficit of 7.9% of GDP and a primary deficit of 1.9% of GDP. Those estimates were based on the dramatic tax cuts by the new administration of President Gotabaya Rajapaksa (with Mahinda Rajapaksa as Prime Minister). The IMF's latest projection is for real GDP to contract 0.5% in 2020; we estimate a contraction of at least 2% in 2020. The external debt dynamics will consequently deteriorate dramatically, making it near-impossible for Sri Lanka to meet its external debt service payments of US$4-4.5bn  in each of the next 5 years. By October, Sri Lanka will need a large structural adjustment loan from the IMF -- or will need to restructure its external debt. Until the Rajapaksa administration decides which path to take (one entailing a near-term hit to growth but with the prospect of structural improvement in the medium-term, the other an Argentina-like future), we would advise staying away from Sri Lankan assets.

Sri Lanka's external debt was 440% of its goods exports and 270% of its goods &amp; services exports at end-2019 (unsustainable based on the IMF-WB framework). The acceleration in real GDP growth (averaging nearly 6.4%) during Mahinda Rajapaksa's presidency (2005 to early-2015) was akin to India's acceleration in the 1980s (similarly funded by an external borrowing binge). Sri Lanka hasn't made structural changes, remaining dependent on tea and tourism as foreign-exchange earners, and must now either agree a program of structural reform (akin to India 1991) or face a restructuring of its external debt later this year. Either way, near-term growth prospects are dismal. We recommend staying well clear of Sri Lanka exposure.  Sri Lanka's economy -- driven mainly by earnings from tourism, tea and (modest) textile exports -- is in dire straits. Foreign visitor arrivals declined 18% YoY in 2019 (falling to a 4-year low of 1.91 million), causing real GDP to decelerate to 2.3% growth in 2019 (the lowest since 2001). During Mahinda Rajapaksa's 10 years as President (2005-early 2015), Sri Lanka experienced rapid real GDP growth -- infrastructure-driven 6% annual growth in 2005-09, and a "peace dividend" of 6.7% annual growth in 2010-14 driven by a surge in foreign visitor arrivals. But growth was accompanied by high inflation (8% annual average over the 10 years) and a massive rise in external debt, which rose from US$11.4bn at the start of Rajapaksa's term to US$42.9bn at its end (16.6% CAGR).  Sri Lanka took its 16th loan from the IMF in 2016 -- a 3-year Extended Fund Facility (EFF) worth US$1.5bn, extended by a year to 2 June 2020 -- and has been a ward of the IMF for 70% of the time in the past 40 years. (Among South Asian economies, only Pakistan has been in IMF programs longer). But its external debt reached 63.9% of GDP in 2019 -- or a humongous 440% of goods exports, and 270% of exports of goods &amp; services, numbers that are well above the upper limit for the IMF's framework for external-debt sustainability. Last year's fiscal and primary deficits were 6.2% and 0.3% of GDP (vs. an IMF requirement of a primary surplus of 0.2%).In February (before the Covid-induced slump in tourism), the IMF projected 3.7% real GDP growth for 2020, a fiscal deficit of 7.9% of GDP and a primary deficit of 1.9% of GDP. Those estimates were based on the dramatic tax cuts by the new administration of President Gotabaya Rajapaksa (with Mahinda Rajapaksa as Prime Minister). The IMF's latest projection is for real GDP to contract 0.5% in 2020; we estimate a contraction of at least 2% in 2020. The external debt dynamics will consequently deteriorate dramatically, making it near-impossible for Sri Lanka to meet its external debt service payments of US$4-4.5bn  in each of the next 5 years. By October, Sri Lanka will need a large structural adjustment loan from the IMF -- or will need to restructure its external debt. Until the Rajapaksa administration decides which path to take (one entailing a near-term hit to growth but with the prospect of structural improvement in the medium-term, the other an Argentina-like future), we would advise staying away from Sri Lankan assets.  

Sri Lanka: Struggling to Avert Being The "Next Argentina" Amid Unsustainable Debt

Sri Lanka

Dialog Axiata PLC offers a wide range of telecommunications services. The Company operates a mobile phone network, offers fixed line, broadband, television, and international services.

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Dialog Axiata (DIAL SL)

Sri Lanka: Election Could Jeopardise Hard-Earned Economic Gains, but Hopefully Won't

Communist JVP's Dissanayake has 48% support in last poll, substituting SLPP. Unless electoral outcome differs, SL's IMF program would be...

Prasenjit K. Basu

StubWorld: Axiata Is Coming Up Cheap

Both the NAV discount and implied stub for Axiata Group (AXIATA MK) are around their lows since the CelcomDigi (CDB MK) / Digi merger last November.

David Blennerhassett

Sri Lanka: Closer to Being Asia's Argentina Despite Swaps from PRC's Poisoned Chalice

Sri Lanka's public debt is 100% of GDP, & 2021 primary fiscal deficit 4% of GDP. External debt is 440% of goods exports, foreign reserves are...

Prasenjit K. Basu

Asian Governance: Diversity & Incentives Through the Cultural Lens

In this Smartkarma Original, we seek to study how diversity and incentives influence stock performance and profitability. We tallied diversity and...

Bondcritic

Sri Lanka: Struggling to Avert Being The "Next Argentina" Amid Unsustainable Debt

Sri Lanka's external debt was 440% of its goods exports and 270% of its goods & services exports at end-2019 (unsustainable based on the IMF-WB...

Prasenjit K. Basu

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

Sri Lanka: Election Could Jeopardise Hard-Earned Economic Gains, but Hopefully Won't

​Communist JVP's Dissanayake has 48% support in last poll, substituting SLPP. Unless electoral outcome differs, SL's IMF program would be...

Prasenjit K. Basu

StubWorld: Axiata Is Coming Up Cheap

Both the NAV discount and implied stub for Axiata Group (AXIATA MK) are around their lows since the CelcomDigi (CDB MK) / Digi merger last November.

David Blennerhassett

Sri Lanka: Closer to Being Asia's Argentina Despite Swaps from PRC's Poisoned Chalice

Sri Lanka's public debt is 100% of GDP, & 2021 primary fiscal deficit 4% of GDP. External debt is 440% of goods exports, foreign reserves are...

Prasenjit K. Basu

Asian Governance: Diversity & Incentives Through the Cultural Lens

In this Smartkarma Original, we seek to study how diversity and incentives influence stock performance and profitability. We tallied diversity and...

Bondcritic

Sri Lanka: Struggling to Avert Being The "Next Argentina" Amid Unsustainable Debt

Sri Lanka's external debt was 440% of its goods exports and 270% of its goods & services exports at end-2019 (unsustainable based on the IMF-WB...

Prasenjit K. Basu

Communist JVP's Dissanayake has 48% support in last poll, substituting SLPP. Unless electoral outcome differs, SL's IMF program would be...