The recent rating downgrade would not have any negative impact on expansion plans of the Bank said Country Manager Bank of China (Colombo Branch) Wang Chuan said.
He said that they have plans to open a second branch in Hambantota but due to the pandemic these plans are now on hold.
In an EXCLUSIVE interview with ‘Daily News Business’ he said that the downgrade will not have much impact on our bank’s expansion plan in Sri Lanka and they will continue to follow our bank’s existing risk preferences while co-operating with our target customers.
“Sri Lanka for the past 70 plus years has been meeting its debt obligations while there is also political stability with a government with power with a two thirds majority in power. The Colombo Port City along with mega private sector investments exceeding USD 70 million each are currently implemented.”
Chuan also oversees the involvement of the Bank of China in Bangladesh, Nepal and the Maldives. He has been in the bank for nearly two decades and he was earlier posted to Kazakhstan as the Country Manager. Hailing from Sichuan Province China he is also graduate from South West University of Finance and Economics.
Excerpts of the interview
Q) In this backdrop how do you react to a country downgrade by international rating organizations?
A: Let me first thank ‘Daily News’ for giving us this opportunity. On this subject, I need to first make it clear that what we have expressed here are our views on the recent decision of Rating Agencies and the expected reaction by international investors, lenders and such parties and not to discuss the rights of Rating Agencies that perform their role which is an important one in the commercial world.
So talking of this issue, it is important to remember that this is not the first time Sri Lanka has faced such a downgrade but the context in which it has now happened is quite understandable. In the face of the Covid-19 pandemic many other countries too have faced such downgrades. Therefore, this downgrade could be looked upon as a temporary threat. It is also important to remember how the country faced and overcame the Covid-19 first wave quite successfully even though it is still grappling with the second one. Of course even many developed countries are in the same or worse predicament with soaring death rates, a situation Sri Lanka has successfully controlled.
It is also noteworthy that the country made great progress in its development efforts since the end of the civil war 2009 with per capita GDP reaching the level of middle-income countries and major improvements in living standards of the people. Also one cannot ignore the traditionally high standards of education and literacy, much improved infrastructure such as transportation, ports and so on. It needs to be remembered that all this has happened in a peaceful manner and within a stable environment. Combined with the above, Sri Lanka also enjoys regional advantages of its strategic location connecting East, Middle-East and the West. Despite such downgrading, one also needs to remember that Sri Lanka has a good sovereign credit record with no defaults on its International debt obligations up to now. Therefore, it is necessary for the international community to take a more medium to long term view on the future prospects for development.
It is also noteworthy that Sovereign Ratings are an indicator for investors which are usually revised from time to time. We can take the experience of China’s Treasury’s sovereign bond issuance as an example: certain International rating agencies downgraded China’s Sovereign Rating in 2017 but the Chinese Ministry of Finance decided to return to the international market the same year to issue offshore dollar debt without a Rating and the $2 billion issue was oversubscribed 10 times by international investors despite the spread being only 15 and 25 basis points over the US Treasury Bond price.
Thus, Sovereign ratings are not the only decisive factor for debt or equity investors. Just for reference, China’s sovereign rating has seen a total of 10 rating adjustments since 1998 including upgrades and as well as downgrades.
All in all, I am optimistic that investors will start looking at Sri Lanka’s prospects not only based on sovereign ratings, but on more in-depth understanding of realities backed by proper research and hopeful that the traditional resilience of the Sri Lankan people, under the leadership of the government, will overcome the immediate challenges and build a better Sri Lanka capitalizing on their comparative advantages thereby making Sri Lanka an attractive investment destination among the emerging markets in the post pandemic era.
Q) Will this downgrade have a negative impact on FDI?
A: As already stated, any negative impact would be temporary. China’s own experience shows that there is no long term relationship between sovereign downgrades and FDI’s and that what is needed is for Sri Lanka Government to actively promote confidence building measures and take steps to bring in greater fiscal discipline. Other incentives such as tax holidays / lower taxes, assistance in identifying suitable lands and the Human Resources, granting more expatriate worker visas are also needed to attract foreign investors. Organizing investment and export promotion activities and taking part in major international trade & investment promotion events and exhibitions can also help. But this requires the continuing commitment of the Government of Sri Lanka and consistency in its economic policies. With such measures, the expected impact of this downgrade could be minimized.
Objectively speaking, sovereign downgrade will increase the bargaining power of investors. From a trading point of view, there will be a portion of the speculative return at a premium in addition to the return on value investment. I think this is also a good opportunity for investors in Sri Lanka to identify the business opportunities and investment projects with good growth potential through deep and objective research.
Q) What made you open a branch in Sri Lanka?
A: Bank of China is the most globalized among the Chinese banks and our service network covers 61 countries and regions in the world, covering the Asia-Pacific, Europe-Africa and the Americas. Our financial services include commercial and investment banking, trade finance, insurance, securities, equity investment, asset management, etc.
It was considered that the Bank of China could well use these skills to further extend its services to Sri Lanka and the neighboring countries given the strategic location in South Asia. After all, China’s relations with Sri Lanka date back into many Centuries and have always supported each other even in times of adversity. The historic Rubber-Rice pact which benefitted both countries immensely is one of the prime examples. For a long period China has been among the biggest exporters to Sri Lanka and among the biggest investors, taking a long term view of the economic prospects of Sri Lanka. In such context our decision to open this Branch is only natural and we plan to use our strengths as one of the big four banks in the world and the most internationalized bank in China to assist Sri Lankan and Chinese Enterprises to further expand their business horizons.
Q) What was the response of local regulators’ towards opening foreign banks in Sri Lanka like you?
A: We had a very positive response from the Sri Lankan Government and the Central Bank. It wasn’t surprising because of the strong and close relations China always had with Sri Lanka. Here we acknowledge the strong support offered by the Central Bank that enabled us to finalize the regulatory approvals within a relatively short period. With our opening, it has been possible to fill a long felt lacuna resulting from the absence of a major Chinese bank despite the strong investment and trade relations between our two countries.
Q) Did you meet the objectives of opening the branch and what major benefits has the branch brought local corporates?
A: Our objectives in opening the Branch were long term and we are in the process of realizing these. As explained earlier, there were manifold benefits in setting up this Branch. It has benefitted local corporates by giving them the ability and access to a frontline Chinese bank with highly competitive sources of funding. A particular benefit has been the access to a strong RMB/CNY funding base. Our presence will also facilitate the conducting of transactions involving China which are now largely denominated in USD in the Chinese Currencies – RMB & CNY. Once this service becomes popular it will bring immense benefits to both, exporters and importers to and from China to reduce bank charges, commissions and most importantly foreign exchange risks encountered when dealing in USD with China. In addition to the large Chinese corporate customers we have among our clientele some of the leading names of Sri Lanka.
We also actively assist Sri Lankan companies to participate in major investment and export promotion fairs conducted in China, create “match making” links between local and Chinese corporates, gaining access for Sri Lankan customers to China’s export, import and the investment sources. We will be continuing such support in the future.
After a little over two years of our opening, we are happy to have been able to introduce most of the products/services that were initially envisaged.
Q) What is the current profile of the Bank of China in the banking circles of Sri Lanka?
A: Having opened a little over two years ago, we are still keeping a somewhat low profile. But we have been working closely with some of the major commercial banks, while giving full play to the advantages of Bank of China’s traditional strengths, in order to introduce certain types of products which will make transactions with PRC much easier, cheaper and faster. With this objective, we plan to popularize the use of RMB by offering RMB Nostro & related Services while actively exploring new opportunities.
At the same time, we are also responding positively to the Sri Lankan government’s call to partner in realizing the vision of building a South Asian Financial Center.
Further, leveraging on the strengths of Bank of China Group’s business advantages and the comparative strengths of Sri Lanka, we are planning to extend our services to selected customers and financial institutions outside Sri Lanka next year particularly Maldives & Bangladesh which countries are also being covered by our branch.
On a different note, our assistance is frequently sought and happily given to local Banks who are encountering difficulties in matters of communication involving the Chinese language when dealing with other Chinese financial institutions.
Q) How will downgrade have an impact for Sri Lanka’s future international borrowings?
A: This too we have touched on earlier. As explained, the impact of Covid-19 has resulted in the rating downgrades of many countries including major economies with Sri Lanka not being an isolated case and we do not envisage a lasting impact. In fact, there are many other factors; financial pricing, the location, liquidity level of market currency, market risk preference, financing schemes, financing scale, secondary market price of the same financing instruments etc. Therefore, it is very likely that international lenders and investors would take all these into account and take a realistic long term view without placing excessive emphasis on Ratings and not being carried away by temporary downturns caused by unfortunate events such as Covid-19.
