Archive for February, 2018

Salient Features of the New Forex Act – Interview Transcript

 

Speaker: Travis Gomez

Date: 13th Jan 2018

Video length – 8:40 mins

What is government’s intention with regard to the new Forex Act (0.36 -1.52)

  • This represents a shift in the policy direction from one of restricting foreign exchange movement to one that is facilitating exchange rate movement
  • The change in the name from Exchange Control to Exchange Management emphasizes this point
  • This goes in line with some of the other policy changes the Government has been making such as the new Inland Revenue Act, changes to the immigration and emigration laws.
  • The shift is towards a more rules based approach, which has greater transparency and less political discretion

What are some of the broad features of the new Act (1.52 – 4.00)

  • Greater clarity with regard to some of the definitions.
    • Ex: Who counts as a resident and who is eligible  for opening up the different types  of accounts
  • Reducing the complexity and simplification.
    • The Act clubs 18 different accounts into 5 main accounts.
  • Greater competition and discretion for banks.
    • The banks would have more discretion in the approval of forex transactions.
    • This is done with the intention of streamlining and speeding up the approval process
    • The Act also opens up the market for greater competition as licensed brokers can open up certain accounts as well.

What are the implications of the Act for the broad economy? (4.00- 5:35)

  • The act signals a more open approach to forex which could encourage a greater flow of FDI’s in to the country
  • The Act broadens the type of investment opportunities non-residents can participate in. Apart from the typical stock & bond investments, foreigners can also invest in Unit trusts, Fixed deposits in banks etc.
  • Of particular interest is the fact that the Act states that non-residents can invest in immovable property i.e: Real estate
  • The Act also allows banks to provide loans in LKR or USD terms to non-residents for the purpose of constructing and buying real estate.
  • This would be a positive development for the real estate sector, as given the level of activity ongoing in the sector, foreign investor participation can absorb some of the new capacity that is rapidly coming on line.

At a firm level, what are the implications of the Act? (5:35 – 6:37)

  • The Act extends the limits to which companies can invest. The limit for listed companies has been increased from USD 500,000 per year to USD 2 mn per year.
  • Firms also have the opportunity to invest in sovereign bonds and Unit Trusts abroad
  • The limits for individuals has also been increased from USD 100,000 (life time investment) to USD 200,000.
  • This would be an opportunity for firms in Sri Lanka and individuals to diversify their risk by investing abroad

For an individual, what are the implications of the Act? (6:37 – 8:10)

  • The limits on how much LKR and foreign currency that can be taken in and out of the country has been changed. You can take up to LKR 20,000 or up to USD 15,000 in foreign exchange without having to declare it.
  • With regard to migration transfers, the Act has increased the initial amount as well as the annual amount you can take as forex when migrating. The annual migration allowance has been increased to USD 30,000 per year
  • In addition, any pension payments, dividend income etc. would not be subject to the above limit.
  • Overall, there has been a reduction in the restrictions imposed on individuals.

The Global Economy in January

Global markets started off 2018 on a positive note in January with global stock markets continuing to make gains and emerging market inflows continuing amidst major sovereign debt issuances earlier in the year. However, the month ended giving way to what has been a global equity sell-off in early February, sparked by higher US Treasury yields that have reached multi-year highs. The sell-off started on February 2nd when US yields increased after US payrolls data indicated the highest wage growth since 2009, opening the door for higher inflation and thereby justifying US rate hikes.

On 8th February, the benchmark S&P 500 and the Dow industrials confirmed they were in correction territory, both falling more than 10% from the Jan. 26 record highs. While some analysts have called this sell-off the start of a new era, ending the period of low volatility enjoyed by markets, others see it as closing the gap between elevated asset prices and more sluggish fundamentals.

Emerging markets experienced $4 billion in outflows, mostly from equities, since January 30th according to the Institute for International Finance (IIF) – the largest outflow since the election of President Trump in 2016. South Korea, Indonesia, Thailand have suffered the worst losses so far as of 6th February. However, compared to previous global sell-offs most emerging markets have been faring better, despite the fact that higher US yields make EM risk assets less attractive.

These market movements are in the context of a US Federal Reserve that confirmed its projected rate hike path last week and Jerome Powell being sworn in as the new chairman on the 5th of February. Powell now faces the challenge of ensuring that the economy neither overheats nor goes cold. Moreover, January was also the first full month since the European Central Bank implemented the promise to halve the quantity of its monthly bond purchases to Euros 30 billion.

Brent crude prices were near four-year highs as prices reached $70 a barrel mark early in the year driven by continued optimism that the supply glut was ending this year and due to drops in US stockpiles. However, prices moderated slowly throughout the month, leading to prices reaching $62 a barrel on the 9th of February amidst the ongoing stock market turmoil and a scare about rising global supplies. Iran has announced plans to increase production and US production has surpassed 10 million barrels per day; a level surpassed only by Saudi Arabia and Russia.

I’ve failed a lot – Here’s why that’s OK.

A favorite question of mine at recruitment interviews and one we are always hoping to hear interesting answers to is “Tell us (if comfortable) about your biggest failings”. We don’t usually get good answers and this may be because, culturally we are not comfortable talking about failure.

To do my part, to make it clear that failure is ok and you need to fail to learn, at a recent speech to students at a University, I opened my speech with a story of one my failures. Here is a lightly edited draft of the start to that speech:

Good morning everyone! Thank you very much for this opportunity.

I very much appreciate the intro you gave me, listing out my achievements – But as you also just heard I have failed many times. So before I talk about how we do research at Frontier, let me give you a little background into some of the things I have failed in.

This is me at age 17, with a trophy for the “best results” in my school.

Then I went off to Uni and in my final year:

  1. I got a lot more involved in varied student activities that involved public speaking – this is something I took up as a personal challenge in Uni, because public speaking was something I was terrified of before going to University.
  2. I also went into a very deep study of 19th and early 20th century stock market bubbles, which was an optional and very small part of my course load, but led me to ignore the rest of my studies till far too late.

I got totally burnt out doing all this and I went into full blown “panic mode” in the final two months of uni. I had had a really great time in university before then, but those final two months were a really bad period.

This is me at age 21. Absolutely shocked at seeing my degree results and realizing I had passed. I was quite convinced I had failed. With that expectation, just passing was great news to me, but the reality was that I was definitely well in the bottom half of my batch and my hopes of getting into a good graduate school for studying beyond my degree were gone, so I felt it was not a good end to my Uni Career.

And it does not stop there. I returned to Sri Lanka from Singapore, because I completely failed to make progress after an initial great break with my first job overseas.  Then, after starting Frontier, for the first seven years it was a ridiculously small business where, even in my seventh year, I really did not know if I would continue in business or just have to quit.

 I am sharing this for two reasons:

  1. Now looking back, the study of bubbles in the 19th/20th century (which I burnt myself out doing) is the material from Uni that I think is the most fundamentally useful to my work now. And the ability to speak publicly is far more useful that any results from Uni. So now, using the term popularized by Steve Jobs, the dots connect well backwards.
  2. If you ever go through a hard time, I hope this helps. Knowing that failing badly is the story behind many successful figures, as shown in the following graphic, has helped me, so hopefully more stories like this with a Sri Lankan context would help you

“Failing” is also often the result of doing something risky or different. But knowing that it’s ok to take that risk, because it often works out better in the longer term, despite the initial failing, helps to encourage others to be open to taking more risk – this is something we need to build a more entrepreneurial and creative workforce in Sri Lanka.

I am also putting this on the blog, as a message to anyone looking to join Frontier. We want to make it clear that we are not “conventional” in wanting to recruit people with only a straight line track of success. We want to recruit team members who have failed and learnt from it – those that can bring those learnings to Frontier. If that sounds like you, send us your details to http://frontiergroup.info/careers/

“Do not be embarrassed by your failures, learn from them and start again.”

– Richard Branson.