Sri Lanka Stocks Headed for a Record High on Rates and Peace

02nd October 2009, www.bloomberg.com, By Anusha Ondaatjie

Sri Lanka stocks, Asia’s best performers this year, headed for a record high as the end of the island’s civil war and inflation at the weakest pace in at least five years stokes an economic recovery.

The Colombo All-Share Index rose 0.8 percent to 3,022.24 at 12:44 p.m. local time. The measure of 238 companies reached an all-time closing high of 3,016.42 on Feb. 13, 2007, on the Colombo Stock Exchange.

Equity purchases accelerated after the index surpassed 3,000, previously seen as a so-called resistance level, said Acuity Stockbrokers director Narendra Godamunne.

The army’s victory over the separatist Liberation Tigers of Tamil Eelam rebels in May has prompted economists to boost their growth forecasts and spurred an equities rally, helping to double the benchmark index this year. Consumer prices in the capital, Colombo, rose 0.7 percent in September from a year earlier, giving the Central Bank of Sri Lanka room to continue cutting interest rates that are at a three-year low.

“With falling interest rates and the negative implications from the war removed, investors are looking positively at the growth prospects,” Godamunne said by phone in Colombo.

The All-Share index has rebounded after posting the region’s third-worst performance in the previous two years because record spending on defense strained government finances, and foreign currency reserves plunged to a record low, prompting the government to seek International Monetary Fund aid.

Better Returns

Dialog Telekom Plc, Sri Lanka’s biggest mobile-phone service provider, today gained 3.7 percent to 7 rupees. Aitken Spence Plc, the island’s largest operator of resorts, rose 1.7 percent to 885. John Keells Holdings Plc, which owns tea plantations and hotels, climbed 0.7 percent to 154 rupees.

Sri Lankan stocks may offer better returns as the end of the war frees up government spending for investments in infrastructure and agriculture, investor Jim Rogers said in August.

President Mahinda Rajapaksa is seeking funds to turn the north and east of the island into productive parts of the economy after driving out the LTTE rebels and killing their leader Velupillai Prabhakaran.

The government last month hired HSBC Holdings Plc, JPMorgan Chase & Co., and Royal Bank of Scotland Plc to sell $500 million of bonds overseas, the South Asian island’s first in two years.

The government plans to focus spending in the 2010 budget on rebuilding roads, schools and hospitals in areas formerly controlled by the LTTE, the Ministry of Finance said in July.

The central bank on Sept. 11 lowered the reverse repurchase rate to 10.5 percent from 11 percent. The repurchase rate was lowered to 8 percent from 8.5 percent.

“Right Track”

Central Bank Governor Nivard Cabraal said in August the $41 billion economy is on the “right track.” The bank expects lower borrowing costs and reconstruction spending to help boost 2009 economic growth to as much as 4.5 percent.

Standard & Poor’s raised its outlook on the island’s credit rating on Aug. 25 to stable from negative, citing improved foreign-exchange reserves.

The International Monetary Fund, which approved a $2.6 billion loan to Sri Lanka in July, on Sept. 22

increased the country’s 2009 growth forecast to 3.5 percent from a July estimate of 3 percent.

Sri Lanka’s economic growth accelerated for the first time in a year last quarter as the end of the war spurred rebuilding and consumer demand. Gross domestic product expanded 2.1 percent from a year earlier after gaining 1.5 percent the previous three months.

To contact the reporter on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net