Opinion: The untapped potential of Sri Lanka

While it is easy for investors to overlook Sri Lanka due its close proximity to larger and highly-populous neighbour India, Oliver Bell, portfolio manager of the T. Rowe Price Frontier Markets Equity SICAV Fund, believes there is significant untapped potential in this frontier economy.

As he describes below, Bell, said that he found plenty of promise during a recent research trip to the diverse Asian country – in particular its strategic Indian Ocean location.

The quays to success

Situated in the more-stable centre of the often-volatile Indo-Australian tectonic plate, Sri Lanka’s shoreline, unlike India, is fortunate to be largely surrounded by deep water – the required ingredient needed to house large-scale port developments. Sri Lanka has three main ports – on its east, west and south coasts – which are perfectly situated along the main shipping route between Asia and Europe.

Colombo, the Sri Lankan commercial capital, is home to the country’s largest port – which currently has three major associated quays. These quays are each owned by the Sri Lankan government, the Chinese, as well as John Keells Holdings – Sri Lanka’s largest listed conglomerate.

An additional two quays for the Colombo port are likely to be constructed in the near future – which will find no shortage of suitors, particularly from India.

One Belt, One Road’

China is well aware of Sri Lanka’s strategic location and has invested heavily in the country over recent years. Despite some setbacks – largely related to India’s fears over Chinese military influence in the area – Sri Lanka late last month finally signed its long-awaited US$1.1bn deal with China for development and control of the southern port of Hambantota.

This project forms part of China’s giant trillion-dollar ‘One Belt, One Road’ initiative.

Sri Lanka could witness a multi-year construction boom. In addition to the resumption of China-led developments, there are a number of other large-scale public and private projects in the pipeline.

Tokyo Cement, the largest cement manufacturer in Sri Lanka, has a 32% market share in the country and has recently increased its capacity by 1m tonnes to 2.8m. This capacity increase will displace imported cement. Access Engineering is another direct beneficiary of Sri Lanka’s medium-term infrastructure development plans – with the company involved in projects across numerous sectors.

While Access has been growing its order book by 20% a year, the group has the ability to grow even faster, but has been prudently selective with its projects.

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