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Sri Lanka Moving from Stability to Growth - AFC on the Road - Sri Lanka - December 2024

Sri Lanka Moving from Stability to Growth – AFC on the Road – Sri Lanka December 2024
 

 
 

Sri Lanka Moving from Stability to Growth – AFC on the Road –

Sri Lanka - December 2024

 

Dear Investors and Newsletter Readers,

As part of our on-the-ground research process, Ruchir Desai, Co-Fund Manager of the AFC Asia Frontier Fund, visited Colombo in December 2024 to meet with the fund’s portfolio companies and policymakers.

Sri Lanka’s ongoing economic rebound was visible to me when I landed at the airport in Colombo. It has been a long time since I saw such a crowded immigration hall at the Colombo Airport.

Sure, December is part of the peak season for tourism in Sri Lanka, but my previous visits took place when the country was either going through or recovering from macroeconomic issues, which has negatively impacted both tourist and business travel to Sri Lanka in the last few years.

Tourism has made a very strong comeback in Sri Lanka after a tough few years, with 2024 arrivals of 2.1 million tourists almost back to the pre-crisis level of 2.3 million. This recovery in the tourism sector has been a very important driver for building up Sri Lanka’s foreign exchange reserves, with tourism bringing in USD 3.2 billion in 2024. This will be one the key drivers for both the country’s future economic growth as well as its ability to further improve its foreign exchange reserves which can hold it in good stead at a time of economic stress.

 

The Sri Lankan Tourism Sector is Seeing Strong Momentum and will be a Key Future Driver for the Economy

The Sri Lankan Tourism Sector is Seeing Strong Momentum and will be a Key Future Driver for the Economy

(Source: CT CLSA Securities)

 

My meetings in Colombo began with the Central Bank of Sri Lanka (CBSL), where our group of investors met with the Governor, Mr. Nandalal Weerasinghe. In my view, the Central Bank of Sri Lanka has done an exemplary job in the last few years, and its quick and forward-looking decision making has been one of the key reasons why Sri Lanka has made such an impressive economic recovery after facing such enormous stress in 2022.

The meeting with the governor would set the tone for the rest of my meetings as the governor was very optimistic on the country’s economic outlook after all the tough decisions of the last few years, which have now resulted in a very strong economic recovery in Sri Lanka.

 

Ruchir Desai, Co-Fund Manager of the AFC Asia Frontier Fund with Mr. Nandalal Weerasinghe, Governor of the Central Bank of Sri Lanka

Ruchir Desai, Co-Fund Manager of the AFC Asia Frontier Fund with Mr. Nandalal Weerasinghe, Governor of the Central Bank of Sri Lanka

(Source: AFC Research)

 

The numbers speak for themselves. GDP growth in the first nine months of 2024 of +5.2% is well ahead of all estimates, with many multi-lateral agencies estimating GDP growth of between +2-3% at the start of the year. This rebound in economic activity has been led by the robust improvement in tourist arrivals and a pick-up in momentum in various industries and domestic consumption as lower inflation and lower interest rates bring back business and consumer confidence, as well as companies’ and consumers’ ability to spend.

 

Economic Momentum in Sri Lanka is Strong with GDP Growth Coming In Well Ahead of Expectations

Economic Momentum in Sri Lanka is Strong with GDP Growth Coming In Well Ahead of Expectations

(Source: Bloomberg)

 

Though these economic factors have been critical to the ongoing economic recovery in Sri Lanka, one of the more important drivers for this improved confidence has been the return of solid political stability post the presidential and parliamentary elections, which took place in September 2024 and November 2024 respectively.

These elections led to a resounding victory for the new and current President, Mr. Anura Dissanayake, in the presidential elections, while his coalition won a super majority in the parliamentary elections.

What we now have in Sri Lanka after many years, especially after the challenging five years between 2018-2023, is a combination of economic and political stability which, in my view, will lead to a period of sustained economic growth for Sri Lanka.

 

President Anura Dissanayake’s National People’s Power (NPP) Super Majority Victory in the November 2024 Parliamentary Elections Will Support Sri Lanka’s Economic Rebound

President Anura Dissanayake’s National People’s Power (NPP) Super Majority Victory in the November 2024 Parliamentary Elections Will Support Sri Lanka’s Economic Rebound

(Source: CT CLSA Securities)

 

This return of both economic and political stability has been the key catalyst for the upward re-rating of the Colombo All Share Index in 2024 and especially in the last quarter of 2024, when the index gained +34.5% as investors gave a thumbs up to the return of strengthened political stability. With such a blistering rally, the Colombo All Share Index was the third best-performing stock market globally in 2024, with a USD return of +65.4%.

 

Sri Lanka was the Third Best Performing Stock Market Globally in 2024 on the Return of Economic and Political Stability (USD Price Returns)

Sri Lanka was the Third Best Performing Stock Market Globally in 2024 on the Return of Economic and Political Stability (USD Price Returns)

(Source: Bloomberg, % change in prices between 29th December 2023 – 31st December 2024)

 

It is not just investors who have taken a more optimistic view on Sri Lanka. All the companies I had meetings with in Colombo had a very positive view on their respective industries and the country as a whole. I met management teams of companies from the banking, consumer, and construction-related industries, and I have not seen Sri Lankan management teams being so optimistic on the outlook for a very long time.

The key takeaway from all the companies I met was that 2025 should be a good year, as demand is coming back after many years of being suppressed by economic or political headwinds.

With Sri Lanka entering 2025 with economic momentum behind it and supported by political stability, I expect a broad-based earnings recovery across sectors and our AFC Asia Frontier Fund is invested in large and well-established companies in the banking, consumer and construction-related industries which are very well positioned to leverage their strong industry position to capture the ongoing economic growth.

 

AFC Asia Frontier Fund’s Key Sri Lankan Holdings have been Multi-Baggers for Fund Performance

AFC Asia Frontier Fund’s Key Sri Lankan Holdings have been Multi-Baggers for Fund Performance

(Source: Bloomberg, % change in prices between 30th December 2022 – 17th January 2025)

 

Our AFC Asia Frontier Fund had been increasing its weight to Sri Lanka in 2023 and 2024 in anticipation of the ongoing economic and earnings recovery. Still, we increased it even further in the fourth quarter of 2024 post the presidential and parliamentary elections when it became completely evident that the country would have much-needed and significant political stability. Sri Lanka is now the second largest country weight in the AFC Asia Frontier Fund, just behind Pakistan.

 

Sri Lanka is now the Second Largest Weight in the AFC Asia Frontier Fund

Sri Lanka is now the Second Largest Weight in the AFC Asia Frontier Fund

(Source: AFC Research, as of 31st December 2024)

 

After a few days of meetings with many listed companies, we visited the Cinnamon Life City of Dreams project, that has been developed by John Keells Holdings, a holding of the fund. Besides the office and residential towers, which are part of the project, the key attraction of this project is a hotel, and it will also include a casino which is being developed by Melco Resorts of Macau and is scheduled to open in the latter part of 2025. Hence the branding with the name City of Dreams to keep it in line with Melco Resorts’ other City of Dreams projects in Macau and Philippines.

The Cinnamon Life City of Dreams is the first integrated resort in South Asia, which will also have a sizeable casino operation, and this project could become a key asset to further drive tourist arrivals into Sri Lanka, especially from India, which is the largest source market.

In general, I am very impressed with how the skyline of downtown Colombo is developing because in addition to the Cinnamon Life City of Dreams, other well-established hotel brands like Shangri La and ITC Hotels from India also have a waterfront presence along downtown Colombo. Besides these newer hotels, the more established names like Cinnamon Grand, Galle Face Hotel, The Kingsbury, and Taj add to the charm of Galle Face Green in downtown Colombo.

With English widely spoken, improving infrastructure, and a more relaxed pace of life, I think Colombo is one of the better cities to be in South Asia as a tourist or for business, and I believe the city will only improve from here as the government realises and notices the importance of attracting international travellers.

 

View of Colombo Waterfront from Cinnamon Life City of Dreams

View of Colombo Waterfront from Cinnamon Life City of Dreams

(Source: AFC Research)

 

After my meetings and site visits, I headed south to Weligama, a three-hour drive from Colombo. The tourism rebound in Sri Lanka was evident in Weligama as my hotel was pretty much fully booked and the beach was definitely more crowded than during my last visit here in November 2022 when there were not as many tourists since the economy and the tourism sector had just bottomed out.

 

Weligama which is South of Colombo is a Big Surfing Attraction for Tourists

Weligama which is South of Colombo is a Big Surfing Attraction for Tourists

(Source: AFC Research)

 

I firmly believe that Sri Lanka has now set a powerful platform for sustainable economic growth not only in 2025 but with a 3–5-year view from here. Though the Colombo All Share Index has rallied strongly in the last two years, valuation multiples are still at a discount to their historical average, and I believe a combination of the following positive catalysts are all in place and should continue to re-rate valuation multiples upwards:

  • 2025 should be another good year for earnings growth on the back of the ongoing economic momentum and the rebound in tourism.
  • Ongoing success of the IMF (International Monetary Fund) program and its related policy reforms.
  • Sovereign credit rating upgrades, which took place in December 2024, adds to investor confidence and should attract more foreign investors.
  • Most importantly, a return of political strength after a prolonged period of instability will be a driving force for the economy and investor confidence.
 

Sustained Economic Growth and Strong Political Stability Should Continue Re-Rating Valuations in Sri Lanka

Sustained Economic Growth and Strong Political Stability Should Continue Re-Rating Valuations in Sri Lanka

(Source: Bloomberg)

 

For all the reasons above, I remain very positive on Sri Lanka’s outlook, and therefore, it is also one of our top country picks for 2025, and you can read more about these views in our AFC Asia Frontier Fund – 2024 Review and Outlook for 2025.

I already look forward to my next visit to Sri Lanka in 2025, and updating you on the remarkable comeback the country continues to make in a short period since its crisis in 2022.

If you would like to know more about our AFC Asia Frontier Fund, please find below the links to the latest factsheets and presentation as of 31st December 2024 and also the link to our previous report on Sri Lanka from June 2024: 

 



      Sri Lanka Economic Recovery Gathers Pace - AFC on the Road - Sri Lanka June 2024

 

I hope you have enjoyed reading our AFC on the Road report. If you would like further information about our AFC Asia Frontier Fund, please get in touch with me or my colleagues.

With kind regards,

Ruchir Desai
Co-Fund Manager, AFC Asia Frontier Fund

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