Colombo Stock Exchange

Advanced Diploma in Financial Markets (ADFM)

Introduction to Financial Market-2024-Batch 9
Individual Assessment -100%
Scope of the work

You are an Investment Consultant and having practice based in Sri Lanka. Recently a client who
has attended to an online investment seminar and got to know about the Stock market, Unit Trust,
Treasury Bill and Bond markets, has sought an investment advice on which
market/instruments he should be investing. He has stated that currently Rs. 100 Mn has been
deposited in a saving account of a bank.

His friend has told him about investment in other securities as well specially in Government
Securities. He has little idea about the talks of IMF’s Extended Fund Facility (EFF) to Sri Lanka.
His web search indicated about External and Domestic Debt Restructure and also Domestic Debt
Optimization (DDO) exercise as well. However, considering current economic situation in the
country, he is wondering about the feasibility of investment return. His father has advised him
about investing in real estate as well.

He has sought an investment advice from you on the selection of good investment
opportunities. (Equity, Fixed Income, Unit Trust Property, Etc)

You have requested your junior assistant to study client’s request and she has provided the
below information.

The baseline forecast is for the world economy to continue growing at 3.2 percent during 2024
and 2025, at the same pace as in 2023. A slight acceleration for advanced economies where
growth is expected to rise from 1.6 percent in 2023 to 1.7 percent in 2024 and 1.8 percent in 2025
will be offset by a modest slowdown in emerging market and developing economies from 4.3
percent in 2023 to 4.2 percent in both 2024 and 2025. The forecast for global growth five years
from now at 3.1 percent is at its lowest in decades. Global inflation is forecast to decline steadily,
from 6.8 percent in 2023 to 5.9 percent in 2024 and 4.5 percent in 2025, with advanced economies
returning to their inflation targets sooner than emerging market and developing economies. Core
inflation is generally projected to decline more gradually. The global economy has been
surprisingly resilient, despite significant central bank interest rate hikes to restore price stability.

As inflation converges toward target levels and central banks pivot toward policy easing in many
economies, a tightening of fiscal policies aimed at curbing high government debt, with higher
taxes and lower government spending, is expected to weigh on growth.

Global growth, estimated at 3.2 percent in 2023, is projected to continue at the same pace in 2024
and 2025. The forecast for 2024 is revised up by 0.1 percentage point from the January 2024
World Economic Outlook (WEO) Update, and by 0.3 percentage point from the October 2023
WEO. The pace of expansion is low by historical standards, owing to both near-term factors, such
as still-high borrowing costs and withdrawal of fiscal support, and longer-term effects from the
COVID-19 pandemic and Russia’s invasion of Ukraine; weak growth in productivity; and
increasing geoeconomic fragmentation. Global headline inflation is expected to fall from an annual

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average of 6.8 percent in 2023 to 5.9 percent in 2024 and 4.5 percent in 2025, with advanced
economies returning to their inflation targets sooner than emerging market and developing
economies. The latest forecast for global growth five years from now at 3.1 percent is at its lowest
in decades. The pace of convergence toward higher living standards for middle- and lower-income
countries has slowed, implying a persistence in global economic disparities. The relatively weak
medium-term outlook reflects lower growth in GDP per person stemming, notably, from persistent
structural frictions preventing capital and labor from moving to productive firms. Dimmer prospects
for growth in China and other large emerging market economies, given their increasing share of
the global economy, will weigh on the prospects of trading partners.

Global commodity prices are leveling off after a steep descent that played a decisive role in
whittling down overall inflation last year, which could make it harder for central banks to cut
interest rates quickly, according to the World Bank’s latest Commodity Markets Outlook. The
report also finds that a major outbreak of conflict in the Middle East could halt the inflationary
decline that has occurred over the past two years.

Between mid-2022 and mid-2023, global commodity prices plummeted by nearly 40%. This
helped to drive most of the roughly 2-percentage-point reduction in global inflation between 2022
and 2023. Since mid-2023, however, the World Bank’s index of commodity prices has remained
essentially unchanged. Assuming no further flare-up in geopolitical tensions, the Bank’s forecasts
call for a decline of 3% in global commodity prices in 2024 and 4% in 2025. That pace will do little
to subdue inflation that remains above central bank targets in most countries. It will keep
commodity prices about 38% higher than they were on average in the five years before the
COVID-19 pandemic.

Persistently high geopolitical tensions over the past two years have propped up the price of oil
and many other critical commodities even as global growth has slowed. The price of Brent crude
oil, for example, surged to $91 per barrel earlier this month nearly $34 per barrel above the 2015-
2019 average. The Bank’s forecasts indicate that Brent prices will average $84 per barrel in 2024
before declining to an average of $79 in 2025, assuming no conflict-related supply disruptions. If
the conflict in the Middle East were to escalate further, however, oil-supply disruptions could push
up global inflation. A moderate conflict-related supply disruption could raise the average Brent
price this year to $92 per barrel. A more severe disruption could see oil prices surpass $100 per
barrel, raising global inflation in 2024 by nearly one percentage point.

In 2022, Sri Lanka experienced the worst economic crisis in its post-independence history, as
longstanding structural weaknesses were exacerbated by exogenous shocks and policy
mistakes. Sri Lanka’s economy is projected to see moderate growth of 2.2% in 2024, showing
signs of stabilization, following the severe economic downturn of 2022. But, the country still faces
elevated poverty levels, income inequality, and labor market concerns, says the World Bank's
latest bi-annual update.

The economy is expected to continue to stabilize in 2024 and beyond. Growth is expected to turn
positive in 2024 and remain moderately positive over the medium term, limited by the scarring
effects of the crisis, lower real incomes amid higher taxes, and higher migration of skilled workers.
Inflation is likely to rise moderately in the near term due to new revenue measures and the waning
of favorable base effects and remain benign in the medium term as demand continues to be
subdued.

In the Stock Market, ASPI up by 15.63% and S&P SL 20 up by 18.55% as at 17th May 2024.

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The current account recorded an annual surplus for the first time since 1977, supported by a
strong boost from remittance flows and tourism, amid weak imports. The merchandise trade deficit
declined from US$5.2 billion in 2022 to US$4.9 billion in 2023, given a larger decline in imports
than exports. The improvement in the current and financial accounts strengthened the balance of
payments (BoP) and FX liquidity in 2023.

The IMF approved an Extended Fund Facility (EFF) to Sri Lanka on the 20th of March 2023. In
addition to the EFF itself-USD 2.9bn in eight tranches-it means three big positives for the
economy.

1. Non-IMF development funding. Immediately, this is USD 1.5bn from the World Bank and ADB
to start/restart various projects. The projects themselves will help GDP, while the fund inflow will
help Balance of Payments (BoP). Other bilateral/multilateral development funding may follow.

2. Gives the IMF’s seal of approval on the SL Government’s plan to revive the economy. The
enhanced credibility will help attract FDI and investment flows.

3. Puts some control on the Government’s ability to relapse into the bad practices that lead us
into this crisis in the first place

Following the IMF announcement, the Treasury/CBSL released a, document, detailing the
Government’s thinking around achieving debt sustainability and longer-term growth. This
document reiterated and further clarified the main points made by the IMF.

1. SL needs to bring its Public Debt: GDP down to 95% by 2032 (this includes SOE debt), and
have average Gross Financing Needs (GFN) of 13% from 2027-2032.

2. Central Bank holdings of LKR 2.7 Tn in T-Bills will be swapped into a longer duration instrument.
This will be a major part of the solution as far as domestic debt is concerned.

3. The government has already announced its plans on Domestic Debt Optimization (DDO)
exercise and in the process of the re-structuring.

4. The External Debt Restructure (EDR) will do the heavy lifting in bringing SL to debt
sustainability.

Debt restructuring required to help restore debt sustainability made progress in 2023. An
Agreement in Principle for restructuring official external debt, in line with the IMF debt targets,
was reached with the official creditors in November 2023.Negotiations with external commercial
creditors continue in parallel. The DDO – including the T-bond exchange with superannuation
funds (84 percent participation), the T-bill exchange with the central bank, and the exchange of
domestic foreign currency bonds into local currency bonds was completed in September 2023.
Financial sector-held domestic currency denominated securities were excluded from the DDO to
reduce stability risks.

The Sri Lankan Rupee has been gradually appreciating against the US Dollar since November
30th last year, marking a second instance of such appreciation. This trend is seen as a positive
sign of economic recovery, supported by a positive balance in the Current Account driven by
increased remittances and robustly rising tourism earnings. • The Central Bank's efforts to bolster

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foreign reserves by purchasing Dollars from the market too have contributed to this appreciation.
Moreover, the financial aid from multilateral agencies like IMF, World Bank and ADB during Dec-
23 has further supported CBSL to strengthen its reserve positions thereby supporting the
appreciation in the rupee.

Interest rates began to decline, reflecting monetary easing and improved liquidity conditions. After
almost two years of monetary tightening, moderating inflation in mid-2023 allowed the Central
Bank of Sri Lanka (CBSL) to return to a loosening cycle. Policy rates were reduced by 650 basis
points between June and November 2023, bringing the Standing Deposit Facility rate down to 9
percent and the Standing Lending Facility rate to 10 percent. The Statutory Reserve Ratio was
also reduced by 200 basis points to 2 percent in August 2023, releasing approximately LKR 200
billion in liquidity. CBSL relaxed restrictions imposed on the ability of banks to access standing
facilities through open market operations in February 2024, which further improved overnight
liquidity. Combined with monetary easing and clarity on domestic debt restructuring, this resulted
in a decline in market interest rates, with a sharper adjustment at the short end of the yield curve.

Headline inflation, as measured by the year-on-year (Y-o-Y) change in the Colombo Consumer
Price Index (CCPI, 2021=100) showed some uptick to record 1.5% in April 2024 compared to
0.9% in March 2024.

The Monetary Policy Board of the Central Bank of Sri Lanka, at its meeting held on 25 March
2024, decided to reduce the Standing Deposit Facility Rate (SDFR) and the Standing Lending
Facility Rate (SLFR) of the Central Bank by 50 basis points (bps) to 8.50 per cent and 9.50 per
cent, respectively. The Board arrived at this decision following a comprehensive assessment of
current and expected domestic and international economic developments, to maintain inflation at
the targeted level of 5 per cent over the medium term, while enabling the economy to reach its
potential. In arriving at this decision, the Board took note of, among others, subdued aggregate
demand conditions, the lesser-than-expected impact of the recent changes to the tax structure on
inflation, favorable near-term inflation dynamics due to the recent adjustment to electricity tariffs,
well-anchored inflation expectations, the absence of excessive external sector pressures and the
need to continue the downward trajectory in market interest rates.

At the CBSL’s Treasury Bill auction held on 15th May 2024, the weighted average yields declined
across the board for the 6th consecutive week. The total offered amount of LKR 177.5Bn was
fully accepted with 1Yr bill being oversubscribed amidst higher reception. Accordingly, weighted
average yield rates declined by over 30bps across all maturities with 03M closing at 9.04% (-
39bps), whilst 06M and 1Yr bills closing at 9.43% (-33bps) and 9.57% (-33bps), respectively.

Prices of new condominiums in Colombo district continued to increase during Q4, 2023, as
depicted by the Price Index for New Condominiums. The index reached 205.9 during the quarter
recording a quarter-on-quarter growth of 2.9 per cent, as per the information collected through
the Condominium Market Survey conducted by the Central Bank of Sri Lanka.

You are required to prepare a report on the advising the client on the selection of good
investment opportunities. (Equity, Fixed Income, Unit Trust Property, Etc)

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Individual Report
The suggested structure for the report is as follows;
Structure % of marks allocated
(indicative of the depth and
breadth of each section)
▪ Title page
▪ Analysis of the Business Operating Environment (Global and 20%
Sri Lanka) with a reference to economic indicators
▪ Analysis of the available market/securities for investment 30%
together with advantages and disadvantages
▪ Comparison of possible returns for each available securities 20%
together with known risks
▪ Conclusion and recommendation 25%
▪ References 05%
▪ Appendices (if any)
Total 100%

The number of pages of the report should not exceed 15 pages.

Submission deadlines

1. This is an individual assignment

2. Due date – 30th June 2024 (before 11.59pm)
3. Report must be submitted in to LMS as a soft copy.

The format of the report should be as follows:

• Times New Roman font, 12 Font size, 1½ spacing, 1-inch margin for Top, Bottom, Left
and Right

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