The Hambantota port, located in southern Sri Lanka, was built in 2015 by a Chinese company and with massive financial support from the Asian major. However, it is hardly being used. According to DPA news agency, the port has handled only 44 ships since 2015.

In order to help pay off the loans taken for the port’s construction as well as meeting its operational and maintenance costs, the government has sold 70% of its stake in the port to China Merchants Port Holdings. This stake sale to the Chinese firm will be via two joint ventures which will be launched to conduct commercial and administrative management operations of the port.

The Sri Lankan Cabinet approved the stake sale on July 29, nearly six months after the broad framework was agreed upon. The state-run Chinese firm will operate the port over a 99-year lease.

After 10 years, Sri Lanka can buy an additional 20% stake, which will make the two parties equal partners with a 50% share each.

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Benefits to Sri Lanka

On July 31, ratings major Moody’s Investors Service, in its analysis of the deal, opined that the sale would increase Sri Lanka’s forex reserves, apart from boosting investor confidence.

It state that “Importantly, the sale will allow the government to set aside earnings to repay its upcoming debt maturities and reduce its external debt, a key constraint on Sri Lanka’s credit quality.”

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Moody’s expects more foreign direct investment to flow into Sri Lanka, especially from China, as China Merchants Port Holdings has decided to invest an additional $600 million to develop the adjacent area by buying 15,000 acres of land to create a large economic zone.

Positive for equities

Higher foreign investment into Sri Lanka would support infrastructure development, and possibly attract private sector investment, which will be helpful in boosting its economic output.

These factors could help improve its credit rating profile and attract investors to the country. The MSCI Sri Lanka Index is up 9.3% in YTD 2017 until August 2 – the second best performer from Asia behind Vietnam. It has outperformed that MSCI Frontier Markets Asia Index, which has risen 6.5% in the same period.

However, this still places it well behind other frontier markets with the exception of Morocco and Tunisia and it is still underperforming the broader Frontier Markets Index, which has returned 14% in the period.

Increased investment could help Sri Lanka catch up with the rest of the frontier market pack.

But before jumping to assessments, investors need to be aware of the not so savory part of the financing deal with China, which we’ll look at in the next article.

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