Sri Lanka Business Forecast Report Q2 2008

Publication Date	March 2008
Publisher	Business Monitor
Product Type	Report
Pages	49
ISBN Number	1746-580X
Product Code	BMI00743

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Summary

War Will Continue to Constrain Long-Term Potential

Sri Lanka's Civil War Will Escalate over The Course of 008, following The Government's Annulment of The 2002 Ceasefire, and This Will Continue to Constrain The Country's Long-Term Economic Potential.

Although Much of The Fighting Is Concentrated in The North and East of The Island, Bomb Attacks by The Rebel Liberation Tigers of Tamil Eelam (Ltte, Tamil Tigers) Will Affect Other Areas, Including Colombo. The Fighting Will Also Deter Significant Foreign Investment and Divert Vital Public Funds to The Defence Budget. with No End to War in Sight, Much-Needed International Donor Aid Will Be Put on Hold, Further Holding Back Sri Lanka's Development.

President Mahinda Rajapaksa Will Continue to Favour A Military Victory over The Ltte, and His Brother, Defence Secretary Gotabhaya Rajapaksa, Has Called for The Ltte to Be Banned Outright.

Although This Has Not Yet Occurred, The Chances of Successful Negotiations Are Slim, Especially with The Ltte Having Stated That Peace Is Not Possible with Rajapaksa in Office. with The Government Continuing Its Assault of Ltte-Held Areas, The Group Will Hit Back in Colombo and Other Economic Centres, in Line with Their Publicly Stated Objectives to Maximise Economic Disruption.

against This Backdrop, We Forecast Economic Growth Slowing to 6.0% in 2008, from An Estimated 6.3% in 2007. Although Sri Lanka's Economy Has Considerable Potential - in Areas Such as Outsourcing, Infrastructure Development, Oil Exploration, Tourism, and Tapping The Burgeoning Indian Market - These Opportunities Will Be Hampered by The War. until There Is A Durable Peace Agreement in Place, We Doubt That Gdp Growth Can Sustain Rates of 7.0-8.0%, Which Is The Government's Long-Term Target. Aside from The War Situation, Sri Lanka Is Vulnerable to A Slowdown in The Us, Its Biggest Export Market. in Addition, The Stronger Rupee and High Inflation Are Undermining The Competitiveness of Key Exports Such as Garments. as Regards Macroeconomic Stability, We Continue to Forecast Inflation Remaining in Double-Digits in 2008 and 2009, Thanks to High Fiscal Spending and Commodity Prices. Meanwhile, Sri Lanka's Recent Increase in Foreign Borrowing Will Leave It Vulnerable to External Shocks.

Sri Lanka's Business Environment Will Continue to Suffer from The Civil War. More Broadly, While The Island Stands to Benefit from A Favourable Geographic Location and A Well-Educated Workforce, Corruption in The Judiciary, and Particularly in The Contract-Bidding Process, Remains A Concern.

Meanwhile, The Physical Infrastructure Is Inadequate to Cope with The Economy's Needs. However, The Government Is Pressing Ahead with Its Infrastructure Programme. Going Forward, The Business Environment Is Unlikely to See A Significant Improvement under President Mahinda Rajapaksa, Who Has Been Pursuing A More Nationalistic and Less Business-Friendly Economic Policy than His Predecessor.

Content

Executive Summary
- War Will Continue to Constrain Long-Term Potential
Chapter 1: Political Outlook
- Swot Analysis
- BMI Political Risk Ratings
- Domestic Politics
- Sliding towards Open Civil War
- There Is A Real Danger That Sri Lanka's Conflict with The Rebel Tamil Tigers Will Descend into Full-Scale Civil War.
- Table: Sri Lankan Cabinet - Selected List
Chapter 2: Economic Outlook
- Swot Analysis
- BMI Economic Risk Ratings
- Economic Activity
- Long-Term Potential on Hold
- Sri Lanka's Long-Term Economic Potential Will Continue to Be Constrained by The Civil War, Which Looks Set to
- Intensify in 2008.
- Table: Economic Activity
- Monetary Policy
- Losing The Battle against Inflation
- The Central Bank of Sri Lanka (Cbsl) Is Losing The Battle against Inflation, and Is Unlikely to Bring It Back into
- Single Figures in 2008, or Even in 2009.
- Table: Monetary Policy
- Exchange Rate Policy
- Rupee's Recent Appreciation Is Unsustainable
- The Appreciation of Sri Lanka's Rupee since October 2007 Is Looking Unsustainable.
- Table: Exchange Rate Policy
- Debt Policy
- High Debt Burden Poses Rising Risks
- Although Sri Lanka's Government Has Made Progress in Reducing Its Debt Burden, The Latter Remains at Dangerously
- High Levels, and Is Being Exacerbated by The Country's Chronically High Fiscal Deficits.
- Table: Foreign Debt
Chapter 3: Special Report
- Looking beyond 2008
- The Future of The World, in Three Acts
- Us: The Rebalancing Act
- Unwinding The Imbalances
- We Believe That A Substantial, Multi-Year Shift in The Us External Accounts Is under Way.
- China: What If We're All Wrong?
- Our Core Scenario for China
- We Are Retaining Our Positive Headline Growth Projections for China across The Forecast Period to 2012, with Our
- Expectations of The Continued Success of The Urbanisation Process and Export-Driven Growth Model Underpinning
- Our Assumptions.
- Japan: Immigration Key to Long-Term Growth
- Demographic Woes Portend Long-Term Decline
- Immigration Remains The Only Realistic Way That Japan Can Overcome Its Long-Term Economic Challenges. Chapter 4: Business Environments
- Swot Analysis
- BMI Business Environment Risk Ratings
- Business Environment Outlook - Q2 2008
- Table: BMI Business and Operational Risk Ratings
- Institutions
- Table: BMI Legal Framework Ratings
- Infrastructure
- Market Orientation
- Table: Sri Lanka Fdi
- Table: Asia, Fdi Inflows
- Table: BMI Trade Ratings
- Table: Top Export Destinations, Us$Mn
- Operational Risk