Little more than a year after Sri Lanka’s electorate swept away the creeping autocracy of Mahinda Rajapaksa, the island is facing a mounting financial crisis.
A ballooning budget deficit and sluggish economic growth prompted Fitch last week to downgrade Sri Lanka’s already junk-level credit ratings. Under pressure from its foreign-currency debt burden, the country has attempted to defend the weakening rupee, only to drain its international reserves and worsen the balance of payments.
To head off criticism from the International Monetary Fund before going cap-in-hand for a $1.5 billion bailout, Prime Minister Ranil Wickremesinghe announced this week his government would increase VAT to 15% from 11% and tax capital gains for the first time since 1987.
While shares in Colombo fell more than 2% on the news Tuesday, the measures improve the likelihood of Sri Lanka winning agreement for an IMF loan, easing its financial strain.
“We’ve had the budget squabbles,” Mattias Martinsson, the investor behind Tundra Fonder, says in an interview from Sri Lanka on this week’s Emerging Opportunities show. “And we had a decent market correction of 25%, so we see a lot of value in the long term here.”
Once the country has worked through the economic shocks caused by the power shift from Rajapaksa to President Maithripala Sirisena, the economy has the potential to grow by 6-7%.
Although most of Tundra’s investments are in Pakistan, Sri Lanka is also a long-term favorite.
“Just like Pakistan, you have very good corporate governance,” says Martinsson. “You have companies that know how to behave towards minority investors.”
Martinsson’s trip to Sri Lanka this time round was for a family vacation. And it’s the tourist industry that he views as holding the greatest potential of all.
“When I was here in 2009, they had 300,000 tourists a year,” recalls Martinsson. “This year, that number will grow to 2 million.
“When you travel around the country right now, you see a lot of activity, construction activity. Every 15th plot that you see is a construction plot.
“Looking two, three years ahead, I think it’s definitely one of the markets that one should focus on.”
Listen to Martinsson’s interview on the Emerging Opportunities show on Share Radio by clicking here.