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By William Spain, MarketWatch
The view from the Sri Lanka Air Force-owned Marble Beach near Trincomalee.
COLOMBO, Sri Lanka (MarketWatch) — From the floor of the stock exchange to the former security checkpoints now plastered with advertising posters to the bustling energy of this South Asian capital’s streets, the signs of renewal are plain.
Sri Lanka’s economic recovery from its long and brutal civil war has been astonishingly fast, though perhaps not so swift as the sudden, blood-soaked final chapter of that 25-year-old conflict in early 2009.
While GDP growth, estimated at north of 8% last year, is among the most robust in the world, and the stock market’s three-year return would make Warren Buffett’s eyes bug out, a rising debt load, widening trade imbalance and soaring fuel prices could endanger or even derail much of the recent progress.
Still, the once-feared Tamil Tigers, who at their peak ruled a third of the nation’s land area, are dead, dying or scattered. Massive sums are being plowed into new roads, bridges, port facilities and other infrastructure.
Tourism is booming, with arrivals up 31% last year. New construction is everywhere. Exports are up. Land long off-limits due to the war has been brought into agricultural production, keeping a check on some food prices. Inflation has largely been tamed.
And, even more than two years on, there is a palpable sense of relief and relaxation that the conflict is over.
‘A lot is happening here’
At a sawmill outside the city of Batticaloa on the east coast, the proprietor chats with visitors as his crew saw 200-year-old logs of satin wood into planks destined for the home of a Colombo gem merchant.
An ethnic Muslim caught in the crossfire between the majority Buddhist Sinhalese and the largely Hindu Tamils, he was driven from his home for more than a decade due to fighting between government forces and the insurgents.
He welcomes the reassertion of central control, he said, and, while he has the small businessman’s typical skepticism of government motives, he is enthusiastic about the improved roads and security situation, along with the opportunities they bring.
“A lot is happening here,” he said.
Stocks cool off after record returns
As international hoteliers flood in and foreign companies move to set up manufacturing ventures, still the easiest way for an outside investor to access the growth is probably via the local bourse.
It is also relatively painless. Foreign investors only need an account with a participant of the central depository system and, after some modest paperwork, can be up and running the same day, although the country’s securities and regulator has to approve any new foreign funds. The Department of Exchange Control only caps foreign holdings in plantation industries like tea and rubber.
From there, an investor can take the pick of listed firms in banking, tourism, food production, ceramics and everything in between. As a one-stop option, several blue-chip holding companies have their fingers in all of those pies — and a few more.
Between the end of the war and the middle of last year, the All Shares Index typically placed at or near the top of the world’s exchanges, with gains of 125% and 96% in 2009 and 2010, respectively. It slipped a bit in 2011, with profit taking cited along with worries over government debt, tight credit and trade deficits. It is down about 10% so far in 2012.
There is a modest 0.03% fee on trades, but any other upside can be taken right to the bank: Sri Lanka has no capital-gains tax.
John Keell’s Holdings, with interests in tourism, transportation, retail, real estate, tea plantations and other sectors, is the largest listed company on the CSE. The company’s profits were up by 46% through the first nine months of 2011, with revenues rising 28%.
About 45% of its float is held by foreign investors, including the Janus Overseas Fund JNOSX -0.05% , which bought a 12% stake about two years ago.
“I certainly can’t complain” about business levels, said Krishan Balendra, Keell’s head of corporate finance and strategy. “Generally, the government is pro-private-sector, and the private sector is the main engine of growth as it always has been. The biggest difference now is that we have got an environment of no war.”
Money on the ground
On the sun-drenched shores of Weligama Bay on the south coast, Nahil Wijayasuriya, a local business tycoon and chairman of East-West Properties, is watching his 200-room hotel rise from the sands. He has an agreement with Marriott MAR -0.03% , which will brand and manage the property, located within easy reach of nearby Galle, and about 90 minutes from Colombo via a new Western-style expressway. It is also within striking distance from Hambantota, site of a new deepwater harbor and international airport that is, not coincidentally, the home political turf of President Mahinda Rajapaksa.
Click to Play
Japan, India rates in focus
The central banks of Japan and India make decisions on interest rates and asset-purchase programs.
Wijayasuriya, who has or has had diverse interests around Asia including real estate and broadcasting, was holding a lot of his assets in cash.
But devaluation “threatened to turn it into toilet paper, so I decided to put some more money on the ground. And I have found that I can make more here now than I could in Singapore or the Philippines.”
Along with Marriott, other hospitality firms are eagerly eyeing Sri Lanka, which has seen annual visitor traffic double to roughly 900,000 over the last few years. Hong Kong–based Shangri-La last month broke ground on two new resorts. Starwood HOT -0.66% and Hyatt H +1.50% have also given the market at least the once-over, according to local media reports and government sources. Related story: Civil war over, Sri Lanka tourism blossoms.
Forecast: Cloudy, with chance of monsoon
There are some thunderclouds on the horizon — and not just related to the seasonal monsoons that lash both sides of the island depending on the time of year.
The value of Sri Lanka’s exports grew by 22% to $10 billion last year, but imports more than double that. There has been a big drive to become more self-sufficient in food, but, with little traditional heavy industry or petroleum, every car part and every gallon of gas has to come from abroad — bought and paid for in hard currency.
The government also removed some subsidies on fuel, leading to sharp price rises that are rippling through the supply chain and causing considerable pain at the lower end of the economic spectrum.
Worse, Sri Lanka gets roughly 90% of its oil, on favorable terms, from Iran. Sri Lanka has already been denied a waiver of U.S. sanctions on trade with Iran but can’t easily replace that supply as the only refinery is geared toward the specific composition of Iranian crude.
Late last month, a report from Fitch Ratings said that the “sharp official reserve depletion in the second half of 2011 has increased risks on the sustainability of its balance of payments.”
The IMF lends a hand
The International Monetary Fund has been lending a hand to keep things from getting too far out of whack, with loans already delivered and more on the way.
Koshy Mathai, the IMF representative for Sri Lanka, said he is generally satisfied with what the government has recently done to make the exchange rate more flexible and to tighten monetary policy, along with making money-losing state fuel and power monopolies pay more of their own way.
Sri Lanka, he said, “is blessed in that if you look at the debt-to-GDP-growth ratio ... they should be able to bring the debt down quite nicely in the next few years.”
He believes the medium-term prospects for GDP growth will remain in the 8% to 10% range, he said, especially if the country integrates more with other fast-growing economies in the region.
“More needs to be done by the private sector,” Mathai urged. “Right now, there is hardly a corporate bond market to speak of, and getting long-term finance from the banks is very difficult.”
Spreading the wealth
Whether Sri Lanka can sustain what its boosters like to call the “Wonder of Asia” will in large part depend on continuing to ease barriers to investment while maintaining political stability.
Crucial to the latter is ensuring that the newfound prosperity is shared, at least to some degree, across the ethnic and economic divides.
At the moment, unemployment, at 4.9%, remains low, while the nation’s central bank says that there has been a sharp reduction in poverty rates, from the 25% range in the 1990s to below 9% in 2009-10.
There have been a few protests, some violent, at the rising cost of living, especially when it comes to fuel and electricity. But the government has been able to keep a lid on most dissent due to the general economic expansion.
Rajapaksa Inc.?
President Rajapaksa, billboard-sized pictures of whom seem to be at every crossroads, still enjoys a deep reservoir of goodwill for putting paid to the Tigers once and for all — a feat that none of his predecessors managed to get close to achieving.
One aspect of his governance that rankles some is what could be seen as perhaps an overreliance on family members to help him run the show. One brother is secretary of the Ministry of Defense, while another is the minister of economic development and a third is the speaker of the parliament. Other relations enjoy high posts in government-run enterprises, the diplomatic corps, provincial governments, etc.
President Rajapaksa’s office declined to grant an interview.
“The politicization of many institutions has undermined public confidence,” said one Western diplomat. And many of the appointees “lack the cosmopolitan experience or skills needed” to perform their duties.
Getting cleaner by the year
It’s impossible to know whether Sri Lanka is more or less corrupt under Rajapaksa’s government than previous ones. But Sri Lanka did move up a couple notches on Transparency International’s Corruption Perceptions Index last year, from 91st place to 86th place. That put it a bit behind Thailand and China but ahead of neighboring India, along with Vietnam, the Philippines, Pakistan and Russia. The U.S. checks in at No. 24.
The question isn't really how much corruption there may be but what form it takes and whether it drains the life out of what would otherwise be profitable pursuits for everyone involved.
“If it is predictable and consistent in its application, we can cope with it,” commented one local economist, perhaps paraphrasing the old American definition of an honest politician as one who stays bought.
William Spain is a MarketWatch staff writer in Chicago.
The view from the Sri Lanka Air Force-owned Marble Beach near Trincomalee.
COLOMBO, Sri Lanka (MarketWatch) — From the floor of the stock exchange to the former security checkpoints now plastered with advertising posters to the bustling energy of this South Asian capital’s streets, the signs of renewal are plain.
Sri Lanka’s economic recovery from its long and brutal civil war has been astonishingly fast, though perhaps not so swift as the sudden, blood-soaked final chapter of that 25-year-old conflict in early 2009.
While GDP growth, estimated at north of 8% last year, is among the most robust in the world, and the stock market’s three-year return would make Warren Buffett’s eyes bug out, a rising debt load, widening trade imbalance and soaring fuel prices could endanger or even derail much of the recent progress.
Still, the once-feared Tamil Tigers, who at their peak ruled a third of the nation’s land area, are dead, dying or scattered. Massive sums are being plowed into new roads, bridges, port facilities and other infrastructure.
Tourism is booming, with arrivals up 31% last year. New construction is everywhere. Exports are up. Land long off-limits due to the war has been brought into agricultural production, keeping a check on some food prices. Inflation has largely been tamed.
And, even more than two years on, there is a palpable sense of relief and relaxation that the conflict is over.
‘A lot is happening here’
At a sawmill outside the city of Batticaloa on the east coast, the proprietor chats with visitors as his crew saw 200-year-old logs of satin wood into planks destined for the home of a Colombo gem merchant.
An ethnic Muslim caught in the crossfire between the majority Buddhist Sinhalese and the largely Hindu Tamils, he was driven from his home for more than a decade due to fighting between government forces and the insurgents.
He welcomes the reassertion of central control, he said, and, while he has the small businessman’s typical skepticism of government motives, he is enthusiastic about the improved roads and security situation, along with the opportunities they bring.
“A lot is happening here,” he said.
Stocks cool off after record returns
As international hoteliers flood in and foreign companies move to set up manufacturing ventures, still the easiest way for an outside investor to access the growth is probably via the local bourse.
It is also relatively painless. Foreign investors only need an account with a participant of the central depository system and, after some modest paperwork, can be up and running the same day, although the country’s securities and regulator has to approve any new foreign funds. The Department of Exchange Control only caps foreign holdings in plantation industries like tea and rubber.
From there, an investor can take the pick of listed firms in banking, tourism, food production, ceramics and everything in between. As a one-stop option, several blue-chip holding companies have their fingers in all of those pies — and a few more.
Between the end of the war and the middle of last year, the All Shares Index typically placed at or near the top of the world’s exchanges, with gains of 125% and 96% in 2009 and 2010, respectively. It slipped a bit in 2011, with profit taking cited along with worries over government debt, tight credit and trade deficits. It is down about 10% so far in 2012.
There is a modest 0.03% fee on trades, but any other upside can be taken right to the bank: Sri Lanka has no capital-gains tax.
John Keell’s Holdings, with interests in tourism, transportation, retail, real estate, tea plantations and other sectors, is the largest listed company on the CSE. The company’s profits were up by 46% through the first nine months of 2011, with revenues rising 28%.
About 45% of its float is held by foreign investors, including the Janus Overseas Fund JNOSX -0.05% , which bought a 12% stake about two years ago.
“I certainly can’t complain” about business levels, said Krishan Balendra, Keell’s head of corporate finance and strategy. “Generally, the government is pro-private-sector, and the private sector is the main engine of growth as it always has been. The biggest difference now is that we have got an environment of no war.”
Money on the ground
On the sun-drenched shores of Weligama Bay on the south coast, Nahil Wijayasuriya, a local business tycoon and chairman of East-West Properties, is watching his 200-room hotel rise from the sands. He has an agreement with Marriott MAR -0.03% , which will brand and manage the property, located within easy reach of nearby Galle, and about 90 minutes from Colombo via a new Western-style expressway. It is also within striking distance from Hambantota, site of a new deepwater harbor and international airport that is, not coincidentally, the home political turf of President Mahinda Rajapaksa.
Click to Play
Japan, India rates in focus
The central banks of Japan and India make decisions on interest rates and asset-purchase programs.
Wijayasuriya, who has or has had diverse interests around Asia including real estate and broadcasting, was holding a lot of his assets in cash.
But devaluation “threatened to turn it into toilet paper, so I decided to put some more money on the ground. And I have found that I can make more here now than I could in Singapore or the Philippines.”
Along with Marriott, other hospitality firms are eagerly eyeing Sri Lanka, which has seen annual visitor traffic double to roughly 900,000 over the last few years. Hong Kong–based Shangri-La last month broke ground on two new resorts. Starwood HOT -0.66% and Hyatt H +1.50% have also given the market at least the once-over, according to local media reports and government sources. Related story: Civil war over, Sri Lanka tourism blossoms.
Forecast: Cloudy, with chance of monsoon
There are some thunderclouds on the horizon — and not just related to the seasonal monsoons that lash both sides of the island depending on the time of year.
The value of Sri Lanka’s exports grew by 22% to $10 billion last year, but imports more than double that. There has been a big drive to become more self-sufficient in food, but, with little traditional heavy industry or petroleum, every car part and every gallon of gas has to come from abroad — bought and paid for in hard currency.
The government also removed some subsidies on fuel, leading to sharp price rises that are rippling through the supply chain and causing considerable pain at the lower end of the economic spectrum.
Worse, Sri Lanka gets roughly 90% of its oil, on favorable terms, from Iran. Sri Lanka has already been denied a waiver of U.S. sanctions on trade with Iran but can’t easily replace that supply as the only refinery is geared toward the specific composition of Iranian crude.
Late last month, a report from Fitch Ratings said that the “sharp official reserve depletion in the second half of 2011 has increased risks on the sustainability of its balance of payments.”
The IMF lends a hand
The International Monetary Fund has been lending a hand to keep things from getting too far out of whack, with loans already delivered and more on the way.
Koshy Mathai, the IMF representative for Sri Lanka, said he is generally satisfied with what the government has recently done to make the exchange rate more flexible and to tighten monetary policy, along with making money-losing state fuel and power monopolies pay more of their own way.
Sri Lanka, he said, “is blessed in that if you look at the debt-to-GDP-growth ratio ... they should be able to bring the debt down quite nicely in the next few years.”
He believes the medium-term prospects for GDP growth will remain in the 8% to 10% range, he said, especially if the country integrates more with other fast-growing economies in the region.
“More needs to be done by the private sector,” Mathai urged. “Right now, there is hardly a corporate bond market to speak of, and getting long-term finance from the banks is very difficult.”
Spreading the wealth
Whether Sri Lanka can sustain what its boosters like to call the “Wonder of Asia” will in large part depend on continuing to ease barriers to investment while maintaining political stability.
Crucial to the latter is ensuring that the newfound prosperity is shared, at least to some degree, across the ethnic and economic divides.
At the moment, unemployment, at 4.9%, remains low, while the nation’s central bank says that there has been a sharp reduction in poverty rates, from the 25% range in the 1990s to below 9% in 2009-10.
There have been a few protests, some violent, at the rising cost of living, especially when it comes to fuel and electricity. But the government has been able to keep a lid on most dissent due to the general economic expansion.
Rajapaksa Inc.?
President Rajapaksa, billboard-sized pictures of whom seem to be at every crossroads, still enjoys a deep reservoir of goodwill for putting paid to the Tigers once and for all — a feat that none of his predecessors managed to get close to achieving.
One aspect of his governance that rankles some is what could be seen as perhaps an overreliance on family members to help him run the show. One brother is secretary of the Ministry of Defense, while another is the minister of economic development and a third is the speaker of the parliament. Other relations enjoy high posts in government-run enterprises, the diplomatic corps, provincial governments, etc.
President Rajapaksa’s office declined to grant an interview.
“The politicization of many institutions has undermined public confidence,” said one Western diplomat. And many of the appointees “lack the cosmopolitan experience or skills needed” to perform their duties.
Getting cleaner by the year
It’s impossible to know whether Sri Lanka is more or less corrupt under Rajapaksa’s government than previous ones. But Sri Lanka did move up a couple notches on Transparency International’s Corruption Perceptions Index last year, from 91st place to 86th place. That put it a bit behind Thailand and China but ahead of neighboring India, along with Vietnam, the Philippines, Pakistan and Russia. The U.S. checks in at No. 24.
The question isn't really how much corruption there may be but what form it takes and whether it drains the life out of what would otherwise be profitable pursuits for everyone involved.
“If it is predictable and consistent in its application, we can cope with it,” commented one local economist, perhaps paraphrasing the old American definition of an honest politician as one who stays bought.
William Spain is a MarketWatch staff writer in Chicago.
Last edited by Quibit on Fri Mar 16, 2012 5:40 pm; edited 2 times in total
