Sri Lanka

In-depth country-focused analysis on Sri Lanka's economic, political and operational risk environment, complemented by detailed sector insight

Sri Lanka

Our comprehensive assessment of Sri Lanka's operating environment and the outlook for its leading sectors are formed by bringing together a wealth of data on global markets that affect Sri Lanka, as well as the latest industry developments that could impact Sri Lanka's industries. This unique integrated approach has given us an impeccable track-record for predicting important shifts in the markets, ensuring you’re aware of the latest market opportunities and risks in Sri Lanka before your competitors.

Country Risk

Sri Lanka Country Risk

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Core Views

  • The Sri Lankan rupee depreciated 2.0% in H115, and we expect the currency to weaken further against the US dollar over the coming quarters, to LKR135.00/USD and LKR138.00/USD by end-2015 and 2016, respectively. However, strong tourism earnings growth and a positive real interest rate environment will likely provide some support for the rupee.

  • As electoral politics once again take centre stage in Sri Lanka, fiscal consolidation efforts by the government will likely take a hiatus as politicians are likely to present populist manifestos in order to muster public support. As such, we maintain our expectation for the country's budget deficit as a share of GDP to come in at 5.3% in 2015, versus the government's forecast of 4.4%.

  • The CBSL will likely cut its benchmark interest rates again (by 75bps) over the coming...

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Sri Lanka Operational Risk Coverage (9)

Sri Lanka Operational Risk

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BMI View: Sri Lanka's economy has grown strongly in recent years, averaging annual increases of 6.4% between 2003 and 2012. Prospects for the future look similarly good, with a rate of 7.7% annual growth recorded for 2014 and heavy investment by China set to sustain growth. Areas of the economy particularly attractive to foreign investors include the manufacturing, real estate, tourism and infrastructure sectors, with the latter two set to grow strongly as the country continues to rebuild following its 26-year civil war. Investment in Sri Lanka is by no means risk-free, however, and against these opportunities stand a number of risks. These include poorly managed public finances, pervasive corruption and extensive weaknesses in the country's legal system, all of which contribute to the significant difficulties...

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Sri Lanka Crime & Security

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BMI View: Any assessment of the crime and security situation in Sri Lanka must take into full account the resolution of the recent civil war, with the conflict continuing to have a profound impact on the country's internal security, its foreign relations and the effectiveness of its security services. Since the end of the civil war in 2009 there have been no terrorist attacks, with the government victory over Tamil forces bringing a measure of peace and stability to the country. Nevertheless, the reconciliation process is likely to be long and arduous, meaning that the risk of future outbursts of violence cannot be ruled out. Foreigners mainly face risks from petty crime rather than major threats to personal safety. Overall, the country scores 42.7 out of 100 in BMI's Crime and Security Risk Index, ranking...

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Sri Lanka Labour Market

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Success in developing an increasingly productive and healthy workforce with good basic skills has played a key role in helping Sri Lanka to approach middle-income status. However, there are a number of human capital issues the country needs to address before it can offer a labour market competitive with leading Asian nations.

At 4.1%, unemployment is good by regional standards, with increasing investment creating better-paid opportunities in manufacturing and the service sector. Nonetheless, close to 50% of workers remain in agriculture, typically earning close to the low minimum wage of USD39 a month. Low numbers of people actively seeking work also belie poor rates of workforce participation, with only 35% of the potential female labour force in employment. Other issues include disappointing rates of secondary and university level education and generous legal protections for workers in some areas. We award Sri Lanka a score of 49.5 in our...

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Sri Lanka Logistics

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Supply chains in Sri Lanka must traverse an uneven transport network in terms of quality. There are solid growth prospects, and cheap but unreliable utilities availability. On the other hand, the export-driven manufacturing sector is boosted by relatively efficient trade procedures, which reduce costs and the risk of delays. Sri Lanka receives an overall score of 61.5 out of 100 in the  BMI Logistics Risk Index. This places the country in 12th position out of 29 Asian states, in between Vietnam and Brunei, and two places ahead of its neighbour India.

The relatively poor availability of key utilities such as electricity, water and internet, which together threaten to grind businesses to a halt and overshadow the competitive utilities costs, is a key threat to investors. In particular, the quality and reliability of internet connectivity in Sri Lanka pose risks to investors in the services and communications sectors....

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Sri Lanka Trade & Investment

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Sri Lanka's economy has grown strongly in recent years, averaging annual increases of 6.4% between 2003 and 2012. Prospects for the future look similarly good, with a rate of 7.2% recorded for 2013 and heavy investment by China set to sustain growth. Areas of the economy particularly attractive to the foreign investor include the country's manufacturing, real estate and infrastructure sectors, with the latter two set to grow strongly as the country continues to rebuild following its 25-year civil war. Investment in Sri Lanka is by no means risk-free, however, and against these opportunities stand a number of risks. These include poorly managed public finances, pervasive corruption and extensive weaknesses in the country's legal system, all of which contribute to the significant difficulties associated with investing. We have awarded Sri Lanka a score of 50.1 in our Trade and Investment Risk Index, putting the country 12th among 29 Asian nations, just above China....

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Sri Lanka Industry Coverage (7)

Autos

Sri Lanka Autos

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BMI View: We believe that there is a broadly supportive outlook for the Sri Lankan economy and, by extension, new car sales over the rest of 2015, although some risks remain. BMI's Country Risk team recently downgraded its 2015 GDP forecast from 7.5%, to 6.5%. However, this is still a solid growth number.

In 2014, a total of 50,398 new vehicles were sold in Sri Lanka, according to figures calculated by BMI based upon data released by the Central Bank of Sri Lanka. This represented strong growth of 26.9% year-on-year (y-o-y).

Breaking down the headline figure, passenger car sales stood at 38,780 units (+36.6%) for 2014. Commercial vehicle sales stood at 11,618 units (+2.6%).

Looking at early sales trends for 2015, the local Economynext website was reporting that motor car registrations (incorporating both new and used...

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Commercial Banking

Sri Lanka Commercial Banking

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Commercial Banking Sector Indicators
Date Total assets Client loans Bond portfolio Other Liabilities and capital Capital Client deposits

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Information Technology

Sri Lanka Information Technology

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BMI View: We have a bullish outlook for Sri Lankan IT spending and industry development over the medium term based on our outlook for strong economic growth combined with a government supportive of digitalisation. We forecast a CAGR of 14.2% for IT market spending 2015-2019, with the market expected to increase to a value of LRK179.2bn in 2019. We believe Sri Lanka will outperform the majority of IT markets in the Asia Pacific region due to a...

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Pharmaceuticals & Healthcare

Sri Lanka Pharmaceuticals & Healthcare

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BMI View: The fragmented nature of the Asia Pacific region will continue to provide unequal commercial opportunities for pharmaceutical firms looking to invest in the region. Sri Lanka's pharmaceutical sector managed to attract investments from both domestic and foreign investors in recent years, as economic growth has picked up and the government remains focused on improving the domestic pharmaceutical sector. We expect that pharmaceutical and healthcare sector growth will outpace economic growth over the five-year forecast period.

Headline Expenditure Projections

  • Pharmaceuticals: LKR75.1bn (USD575mn) in 2014 to LKR82.6bn (USD618mn) in 2015; +10.0% growth in local currency terms and 7.4% in US dollar terms. Forecasts remain flat compared with the previous quarter.

  • ...

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Power

Sri Lanka Power

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BMI View: Sri Lanka will look to coal and renewables to meet its energy needs for the next three to five years, as alternatives offered by gas-fired power generation remain too costly and the necessary pipeline links, LNG facilities and distribution system are still lacking. More urgently, plans for coal and renewable generation, as well as the cross-border energy trade with India have yet to be...

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Telecommunications

Sri Lanka Telecommunications

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The telecoms industry in Sri Lanka has yet to utilise the country's prime location lying on major trade routes and serving as a gateway to the Indian subcontinent. Although upgrades to infrastructure are being made by the government and SLT, pre-paid subscriptions dominant in a low ARPU mobile market and the prospects for more premium services are modest. 4G LTE mobile broadband services have begun to be rolled out despite low uptake for 3G services to date. The telecoms tax will squeeze margins in the mobile industry with consolidation likely to accelerate, while the broadband sector will rely on SLT's new fibre-optic network being rolled out by the end of 2016. As with much of the wider industry, pay-TV suffers from a lack of competition...

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Tourism

Sri Lanka Tourism

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BMI View: The Sri Lanka tourism report examines a range of key indicators in the emerging tourism market in the Asia Pacific region. Healthy domestic economic growth is boosting outbound tourism figures, while improving regional and global travel connections are facilitating growth in inbound arrivals. With visitor numbers increasing we are forecasting healthy growth in tourism related expenditure and industry value, and expect to see a range of developments in the market moving forward.

Maintaining the current stability is vital to the future of the Sri Lankan tourism industry, as any recurrence of civil conflict will likely deter visitors and undermine the recent gains made in terms of infrastructure development. At present however, President Mahinda Rajapaksa and his ruling coalition (the United People's Freedom Alliance) appear stable and able to formulate, enact and enforce their policy...

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