Sri Lanka at a crossroads

December 18, 2018

The challenging reality of Sri Lanka has been uncovered in the past 8 weeks. For investors, this period has sent a clear message: you are operating in one of the riskiest markets in the world, and should be prepared. There is no denying that Sri Lanka’s growth story is real, and this country will develop over the coming decades by the will of the people and prudent policy making, however that will come with the aftershocks of the civil war, which only ended 9 years ago, and the fact Government are still experiencing power struggles following independence of 1948 – this is still a young democracy struggling to find stability and consistency. Macro-economic pressures of climate change, geo-political juggling between two axis powers, and rising economic instability globally for a relatively small and illiquid market directly impacted by rising US interest rates add to the tough environment, especially as the government prepare for elections in January 2020.

 

Business is still continuing, and any negative speculation can find solace in the strength of the legal system and independent judiciary – an exemplar case which we believe is a strong step forward, however this is clouded by the broader challenges that make it difficult for investors to increase allocations. Compounded in addition by currency depreciation and decreasing business sentiment and impacted asset valuations with additional political risk, there is a mixed outcome which is largely cautious depending on the type of investor.

 

For P1F, this, as articulated by an earlier press release, has accelerated our diversification strategy, branching out into lower-risk markets as a natural hedge against such volatility. This however is not straightforward given global economic pressures (which many widely suspect as the laboured beginnings of a global recession), and so this context presents opportunities we are mindful could become available, and so we therefore are preparing for. What this however means for Sri Lanka, is that, whilst proving a strong democratic country with an independent judiciary, unless the investment is strategic and long-term, this still remains a very challenging investment destination when compared globally. We however have done exactly that - we are a strategic long-term investor who are setting a new vision for the future through our work, where we are predominantly focusing on private healthcare as a secure growth area, in particular NCDs and geriatrics, wellness, as well as focusing on strategic commercial mixed-use developments as part of Colombo Fort and future Port City. We also are exploring commercial and industrial development opportunities around Hambantota as part of the master-planned growth there, as well as around Colombo Port Terminal as part of expansion plans, which both present lower-risk options given they form part of a wider infrastructural expansion-drive. However, given high interest rates, these funds would largely be raised internationally, and secured by foreign assets to achieve the best rates, and the projects themselves should be as free from political risk as possible to ride through expected uncertainty in the coming 12-18 months.

 

We still are looking for development opportunities, local partners to work with, and a prudent management process that can mitigate risk, increase transparency, ensure clear decision making and information communication, and stable but frontier returns for our shareholders. The opportunity starts with being patient, and seeing how the coming weeks unfold into the new year. As part of our diversification strategy, this actually is good timing in better structuring our approach that still strongly includes Sri Lanka as part of our portfolio, leveraging our in-depth market knowledge, access, and existing positions, whilst we are also able to support these investments with lower-risk options in lower-risk markets but along similar sector lines of healthcare, commercial real estate (core, core+), and industrial development.

 

Hope combined with pragmatism is powerful, and we are doing our best to create new opportunities at a time in need of innovation.

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