Sri Lanka Business Forecast Report Q3 2008

Publication Date	June 2008
Publisher	Business Monitor
Product Type	Report
Pages	55
ISBN Number	1746-580X
Product Code	BMI01199

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Summary

External risks To Test Economy's resilience Sri Lanka's economy has proved highly resilient to the ongoing civil war, having expanded by 6.8% in 007, but we are forecasting a slowdown to 6.0% in 008, as the island nation suffers from record high oil prices and inflation, and weaker growth in the EU and US - its principal export markets. Meanwhile, the civil war will continue, with the Liberation Tigers of Tamil Eelam (LTTE, Tamil Tigers) stepping up suicide attacks in government-controlled areas.

President Mahinda Rajapaksa will continue to pursue his strategy of defeating the Tamil Tigers militarily, while seeking to re-integrate former rebel-controlled areas through elections and infrastructure spending. However, elections held in the Eastern province (which was recaptured from the Tigers in July 007) in May 008 have been heavily criticised by the opposition, amid reports of voter intimidation and polling irregularities. Thus, we are sceptical of the Rajapaksa's plan to use the Eastern province as a blueprint for areas recaptured from the LTTE in future. As regards foreign relations, Sri Lanka's increasing political isolation from the West will prompt it to forge closer ties with China, and increasingly Iran, which are providing substantial economic assistance.

Although Sri Lanka's economy has been resilient in the face of civil war, we forecast a deceleration of expansion from 6.8% in 2007 to 6.0% in 2008 owing to record-high oil prices and inflation, and weaker growth in the island's main export markets (the EU and US). Indeed, the government's and central bank's biggest challenge will be to reduce inflation from 25% without jeopardising economic growth. However, this will prove difficult since the government's expansionary fiscal policy will keep the budget deficit above 7.0% of GDP over our forecast period. Meanwhile, we believe that the Sri Lankan rupee's de facto peg with the US dollar will prove unsustainable, given the country's rising oil import bill and widening current account deficit. Going forward, we believe real GDP growth can remain within the 6.0-7.0% range, but that an acceleration to the 7.0-8.0% range will be unlikely unless the civil war is brought to an end, or at least reduced to a minimal level of violence.

Sri Lanka's business environment will continue to suffer from the civil war, which is escalating in 2008. More broadly, while Sri Lanka 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, and is increasingly relying on foreign borrowing for funding. 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
- External Risks to Test Economy's Resilience
Chapter 1: Political Outlook
- SWOT Analysis
- Bmi Political Risk Ratings
- Domestic Politics
- Eastern Elections: A Flawed Blueprint
- Elections Designed to Democratise The Recaptured Eastern Province and Provide A Blueprint for Erasing Support
- for Secessionist Rebels in The North Have Been Criticised as Deeply Flawed
List of Tables
- Table: Political Overview
Chapter 2: Economic Outlook
- SWOT Analysis
- Bmi Economic Risk Ratings
- Economic Activity
- An Encouraging, but Unsustainable Resilience
- Sri Lanka's Economy Has Proved More Resilient than Expected to The Ongoing Civil War, but IT Will Be Severely
- Tested in 2008 as US and European Economic Growth Slows, and Oil Prices Remain Painfully High
List of Tables
- Table: Gdp & Poulation
- Monetary and Fiscal Policies
- Inflation to Remain in Double Digits
- Sri Lanka's Rate of Inflation Will Remain in Double Digits in 2008 and 2009, as Record High Oil and Food Prices,
- and Loose Monetary and Fiscal Policies Keep Prices Elevated
List of Tables
- Table: Consumer Prices & Interest Rates
- Exchange Rate Policy
- Rupee Peg Unsustainable in The Long Run
- Sri Lanka's De Facto Peg with The US Dollar Is Unsustainable over The Long Term, Given The Island's Surging Import
- Bill, and Its Deteriorating Trade and Current Account Deficits
List of Tables
- Table: Public Finance (Lkrmn)
- Investment Climate
- Iran Emerging as An Alternative Economic Anchor
- Iran Is Rapidly Emerging as A Key Economic Anchor for Sri Lanka, Which Tehran Sees as A Key Link in Its Geopolitical
- Strategy for South Asia
Chapter 3: Special Report
- Business Outlook for Global Frontier Markets
- Growing Fast on The New Frontier
- The 41 States That Bmi Examines in A New Report on Our Online Service May Make up Only A Small Slice of The World
- Economy, but They Possess Characteristics That Will See Them Gain Importance in The Eyes of Investors and Global
- Businesses over The Coming Years
- Frontier Investment
- Potential and Pitfalls
- The Spectacular Macroeconomic Performance of Frontier Markets in Recent Years Has Been Matched by Mildly
- Successful Efforts to Deepen Capital Markets
List of Tables
- Table: Gdp per Capita, US$ (in Order of % Increase)
- Table: Diversity through Frontier Markets - Correlation Coefficients January 2004-April 2008
- Table: Frontier Market Indices
- Regional Overview
- Laos
- Neighbouring Economies The Key to Growth
- Laos's Gdp Growth Has Been Boosted in Recent Years as Neighbours China, Thailand and Vietnam Compete for Its
- Natural Resources. Gdp Expansion in 2007 Has Been Estimated at 7.6% and We See Annual Growth Remaining
- above 7% for Our Five-Year Forecast Period
- Yemen
- Huge Potential, but Don't Bank on Gcc Membership
- Markets Do Not Come Much More Frontier than Yemen, and, as Would Be Expected, There Is Huge Potential for
- Development, with The Prospect of Eventual Gcc Membership Likely to Act A Key Investment Pull
List of Tables
- Table: Yemen Economic Activity
- Democratic Republic of The Congo
- Mining Industry to Drive Growth
- The Democratic Republic of The Congo's Mining Industry Will Be A Key Driver of Growth and Is Likely to Attract
- Significant Levels of Fdi, with Our Real Gdp Forecasts Standing at 8.3% and 7.9% in 2008 and 2009, Respectively
List of Tables
- Table: Democratic Republic of The Congo - Economic Activity
- Cuba
- Investment Prospects after Fidel
- The Accession of A New Leadership Structure in Cuba Has Sparked Excitement That The 45-Year-Old Trade Embargo
- with The US May Be Lifted and Cuba May Move toward Market Liberalisation
List of Tables
- Table: Cuba Macroeconomic Data and Forecasts
- Mongolia
- Minerals to Drive Economic Boom
- Mongolia Is in The Midst of A Massive Resource-LED Economic Boom That Should Lift Gdp Growth into The Double
- Digits and Underpin Robust Increases in Exports and Inflows of Foreign Investment Capital over The Long Term
List of Tables
- Table: Mongolia - Economic Activity
Chapter 4: Business Environment
- SWOT Analysis
- Bmi Business Environment Risk Ratings
- Business Environment Outlook
List of Tables
- Table: Bmi Business & Operational Risk Ratings
- Institutions
List of Tables
- Table: Bmi Legal Framework Ratings
- Infrastructure
- Market Orientation
List of Tables
- Table: Asia, Fdi Inflows
- Bmi Trade Ratings
List of Tables
- Table: Top Export Destinations
- Operational Risk