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The bullish case for Sri Lanka

26 June 2013 04:35 am - 0     - {{hitsCtrl.values.hits}}

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By Nicholas Pardini
Sri Lanka is not often considered a viable option by investors. However, with previous geopolitical tensions settled, things are changing to the upside. Due to a peace dividend from ending 30 years of civil war, Sri Lanka’s emergence as a tourist destination and a low base for development, I expect Sri Lanka to be one of the strongest performing frontier markets for the next decade.

The main bullish driver for Sri Lanka is the emergence of the stability of the country’s governance. In 2009, the civil war between the national government and the Tamil Tigers was resolved and the government has been able to maintain stability since.

Most of the country’s prior economy and infrastructures were hollowed out by conflict and the lack of it currently has sparked a boom created by the rebuilding of the country. Rapidly increasing infrastructure development, a low GDP per capita and a lack of basic private services create a low but stable base that should project towards higher rates of growth.

A byproduct of the peace dividend is Sri Lanka’s growth as an international tourist destination. A stable country has allowed foreign direct investment in the tourism industry to expand rapidly. Without fear of war, more hotels, restaurants and tourist recreation facilities are coming under construction. Developing even basic tourist infrastructure will provide a boom in visitors. Sri Lanka has tropical beaches, low costs to visit (outside of hotels) and a unique culture that makes the island a draw for foreigners. Another minor quirk benefitting Sri Lankan tourism is that it is the closest place where Indians can legally take the CFA exam, which attracts higher-end visitors to sit for their exam.

Airlines have included routes to Colombo from all over Asia and Australia. Even discount airlines such as Singapore’s Tiger Airways added Colombo as a destination, which shows the country’s growing demand as a tourist destination.

The downside for investing in Sri Lanka is the lack of liquid investment options. Colombo’s stock exchange is highly illiquid and charges rich commissions. Among the stocks listed in Sri Lanka, none have the transparency or size needed to draw foreign investments.

As a result, real estate and private equity are the best ways to capture Sri Lanka’s growth. Since Sri Lanka main driver for growth is tourism, projects in that sector should outperform. Although private equity firms have made large investments, there is room for more entrants in the market.

An example of this is the supply and demand of hotels. Even though Sri Lanka has one of the world’s lowest costs of living, hotels in Colombo still average of US $ 200 per night. The reason for this is a massive shortage of hotels on the island. Lacking world-class restaurants and resort amenities also provides other high return outlets.

Overall, Sri Lanka’s emergence provides one of the best investment opportunities in South Asia with the highest rewards found in the country’s nascent tourism business.

(Nicholas Pardini is Managing Partner at Nomadic Capital Partners Newport Beach, California)
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