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Viewing cable 09COLOMBO944, BOOMING SRI LANKAN STOCK MARKET SHOWS ECONOMIC

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Reference ID Created Released Classification Origin
09COLOMBO944 2009-10-12 04:26 2011-08-25 00:00 UNCLASSIFIED Embassy Colombo
VZCZCXRO7740
PP RUEHBI RUEHCI
DE RUEHLM #0944/01 2850426
ZNR UUUUU ZZH
P 120426Z OCT 09
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC PRIORITY 0615
INFO RUEHKA/AMEMBASSY DHAKA PRIORITY 1941
RUEHIL/AMEMBASSY ISLAMABAD PRIORITY 8977
RUEHKT/AMEMBASSY KATHMANDU PRIORITY 7215
RUEHNE/AMEMBASSY NEW DELHI PRIORITY 3356
RUEHCG/AMCONSUL CHENNAI PRIORITY 9538
RUEHKP/AMCONSUL KARACHI PRIORITY 2536
RUEHCI/AMCONSUL KOLKATA PRIORITY 0426
RUEHBI/AMCONSUL MUMBAI PRIORITY 6838
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHC/DEPT OF LABOR WASHDC PRIORITY
UNCLAS SECTION 01 OF 02 COLOMBO 000944 
 
SIPDIS 
 
DEPARTMENT PASS TO USTR FOR VICTORIA KADER 
 
E.O. 12958: N/A 
TAGS: CE ECON EFIN KMCA EINV
SUBJECT: BOOMING SRI LANKAN STOCK MARKET SHOWS ECONOMIC 
CONFIDENCE 
 
1.     Summary.  The Colombo Stock Exchange (CSE) surged to a 
record high in early October, making it the world,s second 
best performing stock market in 2009.  According to analysts, 
the CSE is rising due to the end of the Sri Lankan civil war 
(thereby lowering the risk premium for the country), lower 
interest rates, expectations of post war economic growth, and 
increased investor confidence after the IMF loan.  Local 
investors have led the boom, although foreign investors are 
starting to invest as well.  End Summary. 
 
A Booming Stock Market 
 
2.    The Colombo Stock Exchange,s All Share Price Index 
(ASPI) closed at 3,098 points on October 5, the highest level 
ever.  The ASPI measures the price of shares of all of the 
listed companies.  The ASPI has recorded a remarkable growth 
of 106.8 percent for this year, making the CE the second best 
performing stock market in the world after Lima,s stock 
market.  The market has risen over 60 percent since May. 
According to Nihal Fonseka, president of the CSE, there have 
been two bursts of investing, immediately after the end of 
the war in May and in the last two months. 
 
3.    The end of the war, combined with future expectations 
of economic growth, are the biggest reasons for the rise of 
the stock market.  Chinthaka Ranasinghe, head of research at 
John Keells Holdings Stock Brokers (JHK-SB), observed that 
the long brutal civil war has been the largest obstacle for 
the local economy, so the end of the war has boosted investor 
confidence.  Simultaneously, the war risk premium has been 
removed from the CSE.  Other factors helping the market 
include declining interest rates, low inflation, stability of 
the rupee, improved foreign exchange reserves and post war 
economic growth potential. 
 
4.    The highest levels of growth have been in companies 
associated with post war construction and tourism.  All 
sub-sectors in the CSE have performed well in 2009, with 
construction (up 286 percent) investment trusts (208 
percent), hotels and tourism (123 percent), local 
conglomerates (157 percent) and banks (123 percent) 
outperforming the market.  Ranasinghe asserted that the 
earning potential for the entire market is high.  While some 
equities have been pushed by speculators and may not match 
their fundamentals, the improved economic outlook has made 
investors optimistic.  JHK-SB analysts expect a moderate 
improvement in corporate earnings in FY 2010 (ending March 
2010) and that a significant peace dividend will be seen in 
company earnings in FY 2011 (April 2010-March 2011).  Their 
analysis is based on reconstruction programs and renewed 
economic activities in the North and East, infrastructure 
projects in the South, a strong rebound in tourism and 
increased capital inflows and investment. 
 
CSE Demonstrates Local Condience in the Economy 
 
5.     The CSE lists 230 companies; most are large local 
companies, but there are also a few multinational firms. 
Important sectors like garments and infrastructure are not 
listed in the CSE and therefore not included in the ASPI. 
The investors include not only the wealthy, but also upper 
middle class and retired Sri Lankans. 
 
6.    The growth in the CSE is primarily driven by local 
investors.  According to analysts, local investors are 
shifting their money from fixed rate instruments to equities 
due to lower interest rates and expectations of low 
inflation.  Benchmark three month Treasury bill yields have 
declined 774 basis points from a year ago to a five year low 
of 9.48 percent.  Inflation is at a record low of 0.7 
percent.  Total CSE volume in the first nine months of 2009 
was Rs 87 billion $756 million), with foreign investors 
contributing about 30 percent of that volume.  According to 
market analysts, foreign investors have been slow to enter 
the market.  In fact, right after the war ended, CSE 
President Fonseka thought that there had been a net outflow 
of foreign investment, as the market became more liquid and 
some foreign investors were able to sell and get out.  Now 
foreign investment appears to be coming back into Sri Lanka. 
 
COLOMBO 00000944  002 OF 002 
 
 
Other new investors have not yet entered the market and seem 
to be reviewing the situation.  Econoff recently spoke to a 
large U.S. hedge fund that was considering coming into Sri 
Lanka, but they were worried that they could have missed the 
boat and were too late. 
 
7.    The CSE with a market capitalization of Rs 1 trillion 
($8.6 billion) represents between a fourth and a fifth of the 
Sri Lankan economy.  Channa De Silva, Director General of the 
Securities Exchange Commission, considers the optimism of the 
stakeholders of the CSE a reflection of the buoyancy of the 
economy.  According to De Silva the ASPI is a leading 
indicator of the mainstream economy.  It reflects economic 
prospects about 6 months ahead.  However, factors 
constraining CSE growth could be the upcoming elections and 
market liquidity. 
 
8.    Comment.  Although the Sri Lankan economy is starting 
to rebound (growth estimates are up to 4 percent for 2009), 
the enormous growth in the stock market appears to reflect a 
mix of improving economic prospects and speculation.  There 
are a number of factors that could cloud the economic future, 
including uncontrolled government spending in advance of the 
presidential and parliamentary elections and the European 
Union pulling its GSP  trade preferences.  Nevertheless, the 
fact that local investors are leading the growth in stock 
prices demonstrates real confidence in the economic potential 
of Sri Lanka.  End Comment. 
BUTENIS