Sri Lanka

SEB MERCHANT BANKI NG – COUNTRY RI SK ANALYSI S October 20, 2008

important your attention is drawn to the statement on the back cover of this report which affects your rights.
Analyst: Jenny Nordgren. Tel: +46 8 763 96 05. E-mail : jenny.nordgren@seb.se

Despite the ongoing armed conflict, economic growth has been strong averaging more than 6 %
since 2002. However, growing macroeconomic imbalances and increased reliance on external
financing pose serious challenges in current global economic and credit conditions.

Country Risk Analysis
eáÖÜ=Äìí=ëäçïáåÖ=ÖêçïíÜK Tle economy grev soIidIy by 6.8 ° in 2007 aIbeil dovn
from 7.7 ° in 2006. Grovll las primariIy been driven by domeslic demand - boll
consumplion and inveslmenl - bul exporls lave aIso been buoyanl. Hovever, a
conlinued sIov dovn of economic aclivily is expecled as a resuIl of vorsening gIobaI
economic condilions, lle expiralion of LU lrade preferenliaI agreemenls for
garmenls end of 2008 (GSI pIus) and negalive effecls of lle delerioraled securily
silualion on lourism and foreign direcl inveslmenls (IDI).

fåÑä~íáçå=éÉ~âÉÇ=Äìí=êÉã~áåë=ÜáÖÜK InfIalion las surged since lle second laIf of
2007 mainIy as a resuIl of ligler
gIobaI food prices, removaI oiI
price subsidies and slrong
domeslic demand supporled by
Iarge vage increases and Iax
economic poIicies. Tle infIalion
rale may lave peaIed in Iune llis
year al 28 ° bul is expecled lo
remain ligl and slay veII above
lle CenlraI BanI's largel of 10 °
for 2008. NeverlleIess, lle CenlraI
BanI las Iepl inleresl rales
unclanged since Iebruary 2007 resuIling in negalive reaI inleresl rales.
Inflation
Source: Reuters EcoWin
04 05 06 07 08
P
e
r
c
e
n
t
2.5
5.0
7.5
10.0
12.5
15.0
17.5
20.0
22.5
25.0
27.5
30.0
CPI
3-month
SLIBOR
Repo rate

tÉ~â=éìÄäáÅ=Ñáå~åÅÉëK A Iarge pubIic seclor vage biII, ligl inleresl rale paymenls
and ligl miIilary spending lave resuIled in persislenlIy Iarge budgel deficils of
around 7 ° lo GDI. IiscaI revenues underperformed during lle firsl laIf of 2008
indicaling llal lle budgel deficil may be even ligler llan lle largeled 7 ° of GDI
llis year. IubIic debl lo GDI remains ligl al 86 ° end-2007 aIbeil veII beIov ils
peaI 106 ° of GDI in 2002. NeverlleIess, lle governmenl is increasingIy reIying on
foreign currency dominaled domeslic borroving and lle duralion of domeslic debl
las been faIIing since 2005 raising lle vuInerabiIily lo exclange and refinancing risI.


SEB Merchant Banking Country Risk Analysis October, 2008
aÉíÉêáçê~íáåÖ=ÉñíÉêå~ä=Ä~ä~åÅÉ. Despile a videning lrade deficil, lle currenl accounl
deficil decIined in 2007 lo 4.2 ° from 5.9 ° lle previous year leIped by an increase
of remillances from Sri IanIans vorIing abroad (7.2 ° of GDI). Hovever, lle
currenl accounl deficil is expecled lo viden significanlIy llis year lo 7-8 ° of GDI in
viev of lle slarp expansion of lle lrade deficil during lle firsl laIf of 2008 due lo a
Iarge imporl biII fueIIed nol onIy by ligl oiI prices bul aIso slrong domeslic demand
for consumplion goods. Nolvillslanding sliII robusl infIovs of remillances, exlernaI
financing increasingIy reIies on commerciaI exlernaI borroving, incIuding
inlernalionaI bond issuances and syndicaled Ioans, maIing lle economy more
vuInerabIe lo gIobaI credil condilions. InlernalionaI reserves increased somevlal
during 2008 lo USD 3.5 bn in Augusl bul reserve cover remains reIaliveIy Iov al
aboul 3 monlls of imporls.

mçäáíáÅ~ä=ëáíì~íáçå. Tle governmenl reIauncled miIilary aclion againsl lle separalisl
army of Iiberalion Tigers of TamiI LeIam (ITTL) in IuIy 2006 and figlling las
escaIaled since lle governmenl formaIIy villdrev from lle ceasefire in Ianuary
2008. Governmenl forces lave made significanl advances, vinning bacI lle Laslern
Irovince by mid-2007 and lley are nov allempling lo regain conlroI of lle areas in
lle Norllern Irovince sliII leId by lle ITTL. Tle silualion in lle Laslern province
remain voIaliIe as indicaled by vioIenl cIasles belveen TamiIs and MusIims
foIIoving lle IocaI eIeclions in May 2008 vlicl sav governmenl parlies vin a
narrov majorily of seals. Despile lle governmenl's advances, lle ITTL is expecled
lo conlinue ils campaign by slepping up allacIs on sofl largels and economic assels
as indicaled by recenl bombings in CoIombo.

--´--

qÜÉ=pêá=i~åâ~å=ÉÅçåçãó=Ü~ë=ëÜçïå=êÉã~êâ~ÄäÉ=êÉëáäáÉåÅÉ=íç=íÜÉ=äçåÖJíÉêã=çåÖçáåÖ=
~êãÉÇ=ÅçåÑäáÅí=ïáíÜ=~å=~îÉê~ÖÉ=dam=ÖêçïíÜ=çÑ=ãçêÉ=íÜ~å=S=B=ÇìêáåÖ=íÜÉ=ä~ëí=óÉ~êëK=
eçïÉîÉêI=ïÉ~â=éìÄäáÅ=Ñáå~åÅÉë=~åÇ=~=ÇÉíÉêáçê~íáåÖ=ÉñíÉêå~ä=Ä~ä~åÅÉ=éçëÉ=ëÉêáçìë=
ÅÜ~ääÉåÖÉë=áå=ÅìêêÉåí=ÖäçÄ~ä=ÉÅçåçãáÅ=~åÇ=ÅêÉÇáí=ÅçåÇáíáçåëK=dêçïáåÖ=ëÜçêíJíÉêã=
ÅçããÉêÅá~ä=ÉñíÉêå~ä=ÇÉÄí=~ë=ïÉää=~ë=ÑçêÉáÖå=ÅìêêÉåÅó=ÇÉåçãáå~íÉÇ=éìÄäáÅ=ÇÉÄí=Ü~ë=
áåÅêÉ~ëÉÇ=íÜÉ=ÉñÅÜ~åÖÉ=~åÇ=êÉÑáå~åÅáåÖ=êáëâëK=^ë=~=êÉëìäíI=çåÉ=çÑ=íÜÉ=ê~íáåÖ=~ÖÉåÅáÉë=
Ü~ë=ÇçïåÖê~ÇÉÇ=áíë=ê~íáåÖ=~åÇ=ÑìêíÜÉê=ê~íáåÖ=~Åíáçåë=ã~ó=ÄÉ=éÉåÇáåÖK==
=
=
=
Key ratios 2008
Population 19.4
GDP/capita ($) 2115
GDP (change) 6%
Inflation 20%
Current account balance/GDP -7%
Reserves/imports (months) 3
Budget balance/GDP -7%
Government debt/GDP 83%
Graph: The pentagon shows the creditworthiness of
Sri Lanka as relatively weak including increased
event risk due to a return to civil war and weak
information base.
bñíÉêå~ä=ê~íáåÖëW=
Iilcl: B+, slabIe
Moody's: NA
S&I: B+, neg.
mÉÉêëW
BangIadesl
India
IaIislan
0
2
4
6
8
10
12
Resilience
Liquidity
Information
Absence of event
risk
Macro balance
Sri Lanka Average EM India
How to read the chart?
Moving out from the center
reduces risk.

2

SEB Merchant Banking Country Risk Analysis October, 2008
Key data: 2003 2004 2005 2006 2007 2008 2009 2010
GDP (bill.US$) 19 21 24 28 32 41 47 52
GDP/capita (US$) 996 1085 1276 1472 1676 2115 2404 2638
GDP (real change) 5.9% 5.4% 6.2% 7.7% 6.8% 6.3% 5.7% 5.8
Investments/GDP 25% 32% 36% 42% 45% 54% 62% 67%
Budget balance/GDP -7.2% -7.5% -7.0% -7.0% -7.7% -7.0% -6.3% -5.8%
Govt debt/GDP 105% 102% 91% 89% 86% 83% 82% 80%
CPI inflation (%) 6.3% 7.6% 11.6% 13.7% 17.5% 20.0% 12.9% 9.0%
Money demand (%) 15.5% 19.6% 19.0% 17.9% 16.5%
Stock prices (%change) 30% 42% 28% 42% -7%
Interest rates 9.7% 8.9% 10.2% 12.9% 30.9%
Exch. Rate ($) 96.5 101.2 100.5 103.9 110.6 111.4 116.4 121.7
Trade/GDP (%) 59% 63% 59% 57% 55% 53% 50% 48%
Oil price (Brent) $29 $38 $54 $65 $73 $117 $113 $101
Billions US $
Export of goods 5.1 5.8 6.3 6.9 7.7 8.9 9.8 10.6
Imports of goods 6.0 7.2 8.0 9.2 9.9 12.7 13.4 14.4
Other: 0.8 0.8 0.9 0.7 0.7 0.9 0.8 0.8
Current account -0.1 -0.7 -0.7 -1.6 -1.5 -2.9 -2.9 -3.0
(% of GDP) -0.6% -3.3% -3.0% -5.7% -4.5% -7.0% -6.1% -5.8%
FDI 0.2 0.2 0.3 0.6 0.6 0.5 0.5 0.6
Loan repayments -0.4 -0.5 -0.6 -0.7 -0.6 -0.6 -0.7 -0.7
Net other capital flows 0.9 0.8 1.6 1.9 2.2 3.4 3.6 3.7
Balance of payments 0.6 -0.1 0.5 0.2 0.7 0.4 0.6 0.6
Reserves 2.2 2.1 2.6 2.8 3.4 3.8 4.4 5.0
Total debt 10.4 11.1 11.3 11.4 12.2 14.3 16.6 18.9
o/w short term debt 1.5 2.1 2.3 2.6 2.7 2.9 3.1 3.3
Source: OEF (Oxford Economic Forecasting) and SEB estimates.
Rating history
Fitch (eoy) Not rated BB- BB- BB-
Moody's (eoy) Not rated
S&P (eoy) Not rated B+ B+ B+
Type of government: Parliamentary democracy
Next elections Presidential elections 2011
Other:
Latest PC deal 2005/Voluntary from creditors
Latest IMF arrangements 2005/SBA
%
I n t e r n a t i o n a l r e s e r v e s
S o u rc e : R e u t e r s E c o W i n
0 4 0 5 0 6 0 7 0 8
U
S
D

(
b
i
l
l
i
o
n
s
)
1 . 7 5
2 . 0 0
2 . 2 5
2 . 5 0
2 . 7 5
3 . 0 0
3 . 2 5
3 . 5 0
3 . 7 5
C o l o m b o S E , A l l S h a r e I n d e x
S o u r c e : R e u t e r s E c o W i n
2 0 0 2 2 0 0 4 2 0 0 6 2 0 0 8
In
d
e
x
0
5 0 0
1 0 0 0
1 5 0 0
2 0 0 0
2 5 0 0
3 0 0 0
3 5 0 0
E x c h a n g e r a t e
S o u r c e : R e u t e r s E c o W i n
0 2 0 3 0 4 0 5 0 6 0 7 0 8
U
S
D
/
L
K
R
9 2 . 5
9 5 . 0
9 7 . 5
1 0 0 . 0
1 0 2 . 5
1 0 5 . 0
1 0 7 . 5
1 1 0 . 0
1 1 2 . 5
1 1 5 . 0
H o t e l s & O c c u p a n c y R a t e s
o c c u p a n c y r a t e ( % ) h o t e l u n i t s ( R H S )
S o u r c e : R e u t e r s E c o W i n
2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8
2 0 0
2 0 5
2 1 0
2 1 5
2 2 0
2 2 5
2 3 0
2 3 5
2 4 0
2 4 5
2 5 0
1 5
2 5
3 5
4 5
5 5
6 5
7 5
8 5




3

SEB Merchant Banking Country Risk Analysis October, 2008


aáëÅä~áãÉê=

`çåÑáÇÉåíá~äáíó=kçíáÅÉ=

Tle informalion in llis documenl las been compiIed by SLB Merclanl BanIing, a
division villin SIandinavisIa LnsIiIda BanIen AB (pubI) (“SLB¨).

Opinions conlained in llis reporl represenl lle banI's presenl opinion onIy and are
subjecl lo clange villoul nolice. AII informalion conlained in llis reporl las been
compiIed in good faill from sources beIieved lo be reIiabIe. Hovever, no
represenlalion or varranly, expressed or impIied, is made vill respecl lo lle
compIeleness or accuracy of ils conlenls and lle informalion is nol lo be reIied upon
as aullorilalive. Anyone considering laIing aclions based upon lle conlenl of llis
documenl is urged lo base lis or ler inveslmenl decisions upon sucl invesligalions
as le or sle deems necessary. Tlis documenl is being provided as informalion onIy,
and no specific aclions are being soIiciled as a resuIl of il: lo lle exlenl permilled by
Iav, no IiabiIily vlalsoever is accepled for any direcl or consequenliaI Ioss arising
from use of llis documenl or ils conlenls.

SLB is a pubIic company incorporaled in SlocIloIm, Sveden, vill Iimiled IiabiIily. Il
is a parlicipanl al major Nordic and oller Luropean ReguIaled MarIels and
MuIliIaleraI Trading IaciIilies (as veII as some non-Luropean equivaIenl marIels)
for lrading in financiaI inslrumenls, sucl as marIels operaled by NASDAO OMX,
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Turquoise and Cli-X. SLB is aullorized and reguIaled by IinansinspeIlionen in
Sveden: il is aullorized and subjecl lo Iimiled reguIalion by lle IinanciaI Services
Aullorily for lle conducl of designaled inveslmenl business in lle UK, and is
subjecl lo lle provisions of reIevanl reguIalors in aII oller jurisdiclions vlere SLB
conducls operalions.

SLB Merclanl BanIing. AII riglls reserved.




4