Sri Lanka is gearing itself to be Asia’s next tiger, only five years after ending the three decades long separatist war with economic reforms fuelling astounding growth, the prestigious Financial Times published in the UK stated.
Since 2009, when the war ended the country’s Gross Domestic Product has surged 175 per cent, to $67bn, and is projected to top $76 bn this year. Real GDP, adjusted for price changes, is up by two-thirds over the period, to 6.7 per cent, and is projected to remain in that range for the medium term.
Inflation is in check, falling from 11 to 6.9 per cent, and investment is building. The Colombo Stock Exchange’s capitalisation has more than quintupled since 2005, to 2.94 tn rupees ($22.6bn). “The market is on a positive trajectory, and we expect a period of exponential growth,” the FT quotes Vajira Kulatilaka, Chairman of the Colombo Stock Exchange as saying, during a Sri Lanka Investment Forum in New York last month. “A lot of companies that went through a bad patch have now started investing, retail has picked up and economic activity is taking place in the country.”
Foreign investors have taken notice. More than a third of investments in the CSE are from abroad, and foreign direct investment inflows came to $1.4bn last year, from $300m in 2005. Last month US-based TPG Capital Management reached terms to buy a majority stake in Union Bank of Colombo for $113m in what would be the country’s biggest buyout deal. Foreign retail investment remains thin, but access is widening. Mr Kulatilaka says no western firms are known to be working on country-specific funds, though many US and European index funds and exchange traded funds tracking frontier markets have Sri Lanka exposure. Kulatilaka expects the bourse will have its first ETF launch next year. Unit trusts are accessible to foreign investors through domestic custodian banks. In July the domestic house Ceylon Asset Management launched Sri Lanka’s first US dollar-denominated mutual fund, which invests in sovereign debt and securities issued by rated banks and companies in Sri Lanka. “It is a stockpickers’ market,” says Gustavo Galindo, Portfolio Manager at Russell Investments, which operates indices as well as active funds with exposure.
“You have to have a long-term perspective because liquidity will be tight since there are not that many investors, but precisely because there are not that many investors, you have these big stock fluctuations and valuations that create opportunity,” added Galindo.
“The infrastructure, tourism and consumer sectors are especially promising,” Galindo says. Sri Lanka’s government bond market is its biggest for foreign investors.