Jon Springer. Contributor
– From forbes.com
From an
investor’s point of view, the case for Sri Lanka is getting strong. In the rear
view mirror, yet still lurking and causing hesitation for some, are the Sri
Lankan Civil War that ended in 2009 and the market bubbles that followed the
war’s end through 2011. While there are risks to investing anywhere, Sri Lanka
has one of the best cases for an economy with the stars aligned in its favor.
Government
Stability
President
Rajapaksa recently called for elections in January 2015, a full 16 months ahead
of when they would be required. Under his leadership, the civil war ended in
2009, term limits for the presidency were removed in 2010, a wave of
infrastructure investment has been engaged and the country’s economy has
experienced a still rising peace dividend. The previous election in 2010
resulted in his party taking a little over 60% of the seats in parliament.
In
provincial elections in March and September of this year, Mr. Rajapaksa’s
United People’s Freedom Alliance (UPFA) party held 55% of the vote in two
provinces in March and 51% in the one province in September. With no other
party gaining more than 40% of the vote in any of these elections, the only
question in January is how significant the UPFA majority will be in parliament
after January’s elections.
High
Performing Stock Market With Room To Run
Sri Lanka’s
stock market (up 25.8% year-to-date as of October 29, 2014) is currently
on-target to finish among the top 10 performing stock markets in the world this
year alongside the likes of Argentina (112.8% ytd), Denmark (20.91% ytd), Dubai
(40.3% ytd), India (30% ytd), Indonesia (20.4% ytd), Pakistan (24.7% ytd),
Philippines (23% ytd), Qatar (38.4% ytd), Thailand (24.3% ytd) and Vietnam
(21.4%; all data as of October 29, 2014).
Harsha
Fernando, Director and Chief Executive Officer of local brokerage SC Securities
(Pvt) Limited, says:
“The market has witnessed a bullish sentiment due to the
prevailing low interest rate scenario. Assuming this trend continues, the
market will continue its bullish trend. Next year being an election year, I
would assume the market to further strengthen its position due to elections
defining a clear political scenario.”
Dihan
Dedigama, CEO of Softlogic Stockbrokers concurs:
“We feel that the Colombo Bourse will continue to be a
benefactor of the low interest rate regime we have seen from the beginning of
the year and will realize good returns for the next few years. With the bank
loan growth expected to gradually start picking up, companies will reap the
benefits of the conducive environment and should be backed by strong corporate
earnings growth. Meanwhile with political stability and the country’s economy
poised to grow plus 7 per cent over the next 3 years, we do not see any reason
why the stock market would not perceive a steady rise.”
Ceylon
Asset Management has however made the boldest prediction reiterated to me last
night by their Economic Advisor, Michael Preiss:
“We expect 25% growth in the equity market on average per
year for the next five years. If you think about it, that isn’t that much based
on 7 to 8% growth in the economy annually. What people don’t realize is that on
a per capita basis, Sri Lanka is twice as rich as India.”
Modi’s
India
Mr. Preiss
went on to point out that India was an out of favor place for investments a
year and a half ago but is now a popular place to invest with a high performing
market since Mr. Modi was elected. There are two ways growth in India’s economy
can benefit Sri Lanka:
- Based on trade relations and
proximity, positive economic news for India is also positive for Sri
Lanka.
- Mr. Preiss believes that as more
money flows into India, investors will take the time to consider other
countries in the region to invest which will net positive results for Sri
Lanka.
Annual Tourism Records
The 26-year civil war was
obviously bad for tourism. As a result Sri Lanka’s beaches, cultural sites,
wildlife and natural beauty had multiple decades with minimal amounts of
tourism. In late August this year, the one millionth tourist of this year was
welcomed with great fanfare at the airport. Tourism from people in
Europe and the Middle East is steadily rising. While India for now continues to
be Sri Lanka’s largest source of tourists, the biggest rise in tourism this
year has been from Chinese visitors with year-over-year increases in excess of 100% on a monthly
basis.
The graphs
above depict tourism numbers only through the end of July 2014. Almost more
important than the fact that the number of tourists is increasing is the fact
that tourist arrivals are also spending more money per tourist.
Ports And
Chinese Investment
Chinese
investment in Sri Lanka is aiding growth and providing a strong geopolitical
and economic ally. The Chinese-led project to landfill 575 acres to create
Colombo Port City adjacent to the capital of Colombo and its current port is a record-breaking private
sector investment in Sri Lanka. While it may seem bold now, Sri Lanka is
seeking to compete with Singapore and Dubai as a maritime center.
While other Chinese financed projects exist at other port facilities in the country, this one alone is estimated to be a $1.4 billion project. While India remains Sri Lanka’s largest trading partner, China replaced the U.S. as Sri Lanka’s second largest trading partner last year.
Internal
Infrastructure
As of
October 13th of this year, for the first time in 24 years, trains are connecting the
north of the country with the south. Highway and road infrastructure is also
improving around the country though significant government investment. This
internal infrastructure developments:
- Will improve industrial, factory
and distribution network efficiency.
- Will cut down on food spoiling in
transit to markets internally and externally.
- Makes tourism and investor arrivals
and experiences more pleasant. For example, the new highway from the
airport means my next trip from the airport to Colombo city will take
about half the time and miss all the potholes.
Most
importantly, infrastructure projects in Sri Lanka are not merely government
talk and in planning stages, they are being executed.
Becoming
Middle Income
There is
anticipation that Sri Lanka per capita income will increase sufficiently in the
next two to three years that it will become defined by the World Bank as a
middle income country. Ceylon Asset Management who launched the country’s first
dollar denominated bond investment fund this year thinks this is a big deal.
Mr. Preiss of Ceylon Asset Management says:
“When Sri
Lanka moves into middle income in a couple of years, the credit rating will
improve too. In 2 to 3 years, Sri Lanka could be investment grade. For fixed
income investments, you make money if you invest before the asset is investment
grade.”
Counter-Cyclical
Like Vietnam
As with
Vietnam, the Central Bank of Sri Lanka is only recently lowering interest rates
after raising them to reign in asset bubbles. While developed countries are
still hovering near all-time low interest rates that sooner or later must rise,
Sri Lanka and Vietnam are pulling back from double digit rates. Money market
funds that were paying around 16% interest rates a year and a half ago are now
around 9%. The price of money for business has gone down in Sri Lanka and
economic growth has encouraging signs.
Real Estate
On The Upswing
Ivan
Robinson of “Lanka Real Estate” notes:
“With the
announcement of the draft ‘Restrictions on Alienation of Land Bill’ having been
passed in Parliament on the 20th of this month, the real estate sector in Sri
Lanka is now set on the right foot to attract FDI in this specific field. After
two years of uncertainty in this sector we now have a clear cut law that states
that the previous 100% tax due on property purchases by foreigners is no longer
applicable. The new law also states that a foreigner can now hold 49%
shareholding of a company that buys land, which is up from the previous 25%,
the balance 51% has to be held by a Sri Lankan nominee. After 20 years, this
same company then gains the same rights as a Sri Lankan individual and can buy
freehold land unconditionally. Also, a foreigner can lease property for 99
years by paying a one off tax of 15% based on the value of the lease.
This new
law paves the way forward for a clear and transparent solution for foreigners,
individuals or corporations, to invest in the Sri Lankan Real Estate market.”
Hardy
Jamaldeen, manager and director of Steradian Capital since 2010 is
also bullish on real estate:
“Along with
the current growth trajectory many opportunities are continuously arising in
the SriLankan Real Estate environment. The most exciting is the foreseeable
demand for long-term income producing assets. Land and buildings can bridge
this gap in the form of offices, industrial estates, shopping centers, student
accommodation and hotels. Structuring these assets into bite sizes that the
market can absorb will be the key to its success.”
Risks?
The two
principal risks to Sri Lanka’s economy are a global economic downturn and the
small chance that political instability is brought upon the country again by a
political minority. Beyond that, there are currency exchange risks for foreign
investors and there is the risk that investing somewhere else could do better.
That said, all parties quoted in this article believe January’s election will
lead provide an economic boost in the near-term and stable growth in the
long-term.
* Our
thoughts and prayers are with the families and friends of those involved in the
recent flood and landslide in Central Sri Lanka this week.
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