The outlook of Moody’s Sri Lanka B1 rating

| by Victor Cherubim

Ben Graham in his book “Intelligent Investor,” has observed:
                                 “Price is what you pay, value is what you get.”

( November 19, 2012, London, Sri Lanka Guardian) Every price is not value, as we know from an understanding of the true value of a business.

In a business scenario, the acid test in valuation is the liquidation value. A deep value screen that values a company based on its current assets minus its total liabilities has to be evaluated in relation to its worst case scenario, which is what an investor would be able to liquidate a company and still emerge with a gain, with a 33 % margin of safety.

Every item we purchase, whether it be goods, services, stocks and shares, commodities or know-how, everything has an intrinsic value. What is required for sustaining strong economic growth as well as improvement in the investment environment in Sri Lanka, according to Moody’s the global credit rating agency is sustainability of price stability.

The slowdown in Sri Lankan exports, the fiscal space and flexibility due to the government debt and refinancing needs together with the GDP growth from a high of 8.3% in 2011 to a projected low of around 6.8% in 2012, have all been highlighted by Moody’s to assess our vulnerability.
The need for a valuation of investment finance
After the near 30 years of war, the world investment markets according to some sources had a beady eye on Sri Lanka. To satisfy our impending thirst for infrastructure development needs, they were prepared to invest in our infrastructure, but at a price. The war had devastated the North and East and was starved of finance for decades, but our economy was unable to sustain this development without foreign investment. But was Sri Lanka competitive?
Sri Lanka had to go with a begging bowl so to speak, to the world for investment finance. World Bank, IMF, Asian Development Bank, Chinese, Indian and other foreign lenders were all waiting, having researched our procurement needs ahead of the end of war. They had all done their homework well ahead of May 2009 and were eager to supply our infrastructure finance, but watched our competitiveness.
As we came out of our war scenario, celebrating the trophies of a hard-won victory, we were cajoled into resolving our many pressing issues of reconstruction and re settlement of our IDP’s, our mine clearance and our readjustment to our newfound peaceful life. We hardly had a readymade plain of action due to the scale our problem. If however, we did have an action plan for our transition to peace; our approach was thwarted from inside and outside. There were pressure groups each with their own agenda. There was lobbying for a share of the market for infrastructure management. One of the “legacies” of a protracted war is planning for a return to normalcy. This was no easy task.
Risk assessment
The measure of relative value when a nation has to carry on the day to day functions of administration and government as well as provide capital for infrastructure management and simultaneously attend to the needs of readjustment of the lives of all its citizens is an overwhelming burden, particularly when opinions are divided on the way forward.
It is an equally embattled experience when market conditions for infrastructure development finance are restricted. United Nations and other world nations generally quick to respond in times of national crisis or emergency situation, like the Tsunami aid, are reluctantly slow in response. We knew it was quite a different matter for development aid, when protracted negotiations and terms of credit had to be agreed. Something that appears relatively cheap investment finance on basis of relative value can still be overvalued in an absolute sense. We were unaware of the stringent conditions of World Bank aid.
Comparison between Company investment and National Development Capital
In a business scenario, the acid test in valuation is the liquidation value. A deep value screen that values a company based on its current assets minus its total liabilities has to be evaluated in relation to its worst case scenario, which is what an investor would be able to liquidate a company and still emerge with a gain, with a 33 % margin of safety.
According to Warren Buffett, the three most important words in investing are termed: “margin of safety.” Seth Klarman defines this as being “achieved when securities are purchased at prices sufficiently below underlying value to allow for human error, bad luck or extreme volatility.”
The margin of safety is always dependent on the price paid. It could be large at one price, small at
some higher price. Put it in other words, it is a form of risk assessment.
Borrowing national development capital is a much more precise exercise and it is necessary to research international markets for comparable development finance. In our predicament, we had no choice but to go for cheap finance that was available at the time of our need from the world. Perhaps, our BB credit rating was no inducement.
International Finance
The World Bank, IMF and Asian Development Bank were our main providers as “Lenders of Last Resort.” But friendly nations like China, Iran, and India, not forgetting, other Commonwealth countries, also assisted.
China was our largest provider with packages that bundled together finance from several different government windows, some of it concessional and some of it at market rate, usually promoting broad diplomacy objectives. It included grants, zero interest loans and concessional (low, fixed interest) loans.
The construction of the Magampura Mahinda Port at Hambantota, the construction of roads, railways, stadiums, bridges, thermal power stations all are turn key projects and operations from start to finish with Chinese materials, Chinese labour and Chinese technology. China’s Defense Minister in late August ’12 signed a MOU to grant Rs.1.56 Billion (Chinese Yuan 75 million) to construct a state of art auditorium complex at Military Academy, Diyatalawa. India provided much need aid for other projects, particularly construction of the railway from Vavuniya to KKS as well as construction of houses for the displaced. Most of Indian aid is a welcome addition, in the form of grants in aid and scholarships for needy students and training facilities.
Differences in quality and differences in price are characteristics to be taken into consideration.
Warren Buffett  summed it up “When you build a bridge you insist it can carry 30,000 pounds, but you only drive 10,000 pound trucks across it.” In the same way, the preferred criteria for future investment capital, is “the government’s commitment to and success in fiscal consolidation”.
                                                                                                                      
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Author: Sri Lanka Guardian

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