Strangle Hold

Dec 01, 2009 (LBO) – First, we need to understand that debt markets broadly require three enabling factors, the need (or demand) for debt capital, a source (or supply) of debt capital, and the accompanying intermediary infrastructure that is required to put the two together. As far as the private sector corporate debt market is concerned, Sri Lanka has been severely hamstrung on the first two counts, with some shortfalls on the third.

I will touch on some of the more macro issues pertaining to these.

Capital Needs

In the case of the first, the need (or demand) for debt capital again has, broadly, two branches. Short term and long term capital, and it is important to recognize this as the nuances of prognosis for the two are quite different.

The primary use and need for short term debt has been for working capital, and the logical providers of this have been the commercial banks.

However, given the wide margins within the banking sector, driven by structural factors such as high operating costs, credit costs and taxation, there seems to be a very strong case for disintermediation of the banks.

So why hasn’t this happened? (let’s hold that question in abeyance for the moment)

The primary use of long term capital is project