The government in a bid to entice more investments recently gave the green light for the resumption of the Port City project which was suspended since March 2015| (Pic by Chandana Wijesinghe)

Sri Lanka has had peace for seven years, and a new president and prime minister have been in office for the past 15 months, but the much-awaited dividend from an end to more than two decades of civil war seems to have disappeared somewhere in the South Asian island’s sandy beaches. The tea- and tourism-driven economy is heading for a rescue by the International Monetary Fund, and its top companies are struggling to earn the cost of now-expensive capital:

It’s the government’s refinancing risk that’s starting to hurt companies. Between now and the end of 2019, Colombo needs to repay $28 billion in bonds and loans, of which $9 billion is due this year, according to data compiled by Bloomberg. Fitch cut its rating on Sri Lanka last month to B+ — the same level as Angola, Rwanda and Uganda — and has pegged the government’s external debt-servicing requirement for the rest of this year at $4 billion. That’s more than three-fifths of the country’s foreign-exchange reserves in January.

The Colombo All-Share Index has lost 15 percent in dollar terms so far in 2016, which makes it the world’s second-worst performing benchmark index after the Shanghai Composite as of Wednesday’s close. The yield on the 10-year government bond has soared from under 8 percent a year ago to about 11.6 percent now. The Sri Lankan rupee has weakened 24 percent over the past five years, yet tea exports last year fetched the country $1.34 billion. That’s about 5 percent less than in 2012.

On the positive side, the end of the Tamil separatist insurgency has brought tourists back — visitors from China jumped almost 68 percent last year. That means consumption demand is strong. For John Keells, Sri Lanka’s dominant conglomerate, revenue from food and retail grew 21 percent in nine months to December. But weak global demand is hurting trade and manufacturing. Most bank shares are trading below the book value of their assets, or barely above. Credit growth is slowing, and at least some lenders don’t look to have built adequate buffers to deal with loan losses.

Maybe an IMF program will persuade the government to put its own finances back on track, which will help lower borrowing costs for companies and individuals. But that’s some ways off. Business confidence is sliding, and if global oil prices rise, Sri Lanka’s import costs would shoot up. For investors, that could make the economy’s peace dividend even more difficult to discern.
(Bloomberg Gadfly)