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Asia Frontier Capital's Sri Lanka Country Report

|Includes:JKEHY, John Keells Holdings Ltd. (JKELF)

AFC Country Report: Sri Lanka

In line with focusing on a country in each month's newsletter, we cover Sri Lanka this month and discuss its economy and future prospects. We previously wrote on Sri Lanka in our September 2013 newsletter in which we touched upon on the country's thrust on rebuilding the nation as well as the growing prospects for its tourism industry. The country continues to be on track with respect to these developments as these parts of the economy continue to grow.

The Sri Lankan government is making a huge effort to build up the country's infrastructure by building new highways, expressways and ports. A major initiative of the government is the development of expressways linking important parts of the country or making connectivity within cities more efficient. The major expressways which are already in operation or in the planning stages are the Southern Transport Development Project, Colombo-Katunayake Expressway Project, Outer Circular Highway Project and North East Expressway Project.

The Southern Transport Development Project also called the "Southern Expressway" is already operational and links Colombo - which is in the Western Province - to Matara, a town in the Southern Province. The distance of 126 kilometres can now be covered in 2 hours as compared to 4.5-5 hours before the road was built. There are also plans to extend the Southern Expressway to Hambantota which is seeing the development of new port as well as an international airport.

The Colombo-Katunayake Expressway is also operational and this has significantly improved travel time between the Colombo international airport and the city. The 25.8 kilometre expressway began operations in October 2013 and has reduced travel time from the international airport to the city to only 20 minutes.

The Outer Circular Highway which is currently under construction will be a link to have seamless connectivity between the Colombo-Katunayake Expressway and the Southern Expressway and the first phase of this project is expected to be completed in May 2014.

(click to enlarge)Click to enlarge

Another expressway in the planning stage is the 99 kilometre North East Expressway Project which will link Colombo in the West to Kandy in Central Sri Lanka and will allow greater connectivity to the North and East of Sri Lanka.

The development of these new expressways is a reflection of the growing importance the government is placing on infrastructure as a means to take the Sri Lankan economy forward. This commitment is also reflected in the government's plan to rebuild existing or develop new roads and highways especially in the Northern and Eastern parts of Sri Lanka which were affected the most by the civil war. Some examples of such projects are the Pro Poor Eastern Infrastructure Development Project, Northern Road Connectivity Project, Northern Road Rehabilitation Project and Conflict Affected Region Emergency Project. Most of the new expressways, roads and highways being built or planned are funded by the Government of Sri Lanka, EX-IM Bank of China, the Asian Development Bank and the Japan International Cooperation Agency.

Another major infrastructure project in the country is the development of the Hambantota port in Southern Sri Lanka. The first phase of the project was completed last year at a cost of USD 361 million and the second phase is expected to be completed by October 2015 at a cost of USD 808 million. Hambantota port could see itself becoming strategically important due to its location and therefore could develop into a transhipment port.

The government's emphasis on infrastructure has had an impact on overall GDP growth rates as the construction industry has been growing at double digit growth rates since 2011. In 2013, the construction industry contributed 1.3% to overall GDP growth.

The tourism industry has also seen a big improvement since 2009 as tourist arrivals crossed the 1 million mark in 2012 and grew by 27% in 2013 to touch 1.27 million tourist arrivals. The tourism industry now generates more than USD 1 billion in revenue and directly employs close to 70,000 people. Improving infrastructure and development of new attractions such as the casino projects by the Crown Group and John Keells Holdings could see the number of tourist arrivals increase in the coming years as Sri Lanka is still a tiny tourist market compared to other Asian tourist markets such as Thailand, Malaysia, Indonesia, Cambodia and Vietnam.

Overall, the economy appears to be moving in the right direction but the government would need to watch its finances as it does run a fiscal deficit which is not small but it has come down from the levels seen in 2009/2010. The Central Bank of Sri Lanka has been in an accommodating mode as deficits and inflation have been under control so there is a possibility that domestic consumer demand could increase in 2014.

With greater emphasis given by the Sri Lankan government to infrastructure development and future growth prospects for the tourism industry, the AFC Asia Frontier Fund has researched and invested in companies linked to these industries and the fund continues to look for other potential opportunities in Sri Lanka.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.