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Cablegate: Sri Lanka: War, Air Attacks Hit Business Confidence

VZCZCXRO5017
RR RUEHBI RUEHLMC
DE RUEHLM #0843/01 1651033
ZNR UUUUU ZZH
R 141033Z JUN 07
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 6250
INFO RUCPDOC/USDOC WASHDC
RUEHKA/AMEMBASSY DHAKA 0192
RUEHIL/AMEMBASSY ISLAMABAD 7173
RUEHKT/AMEMBASSY KATHMANDU 5280
RUEHLO/AMEMBASSY LONDON 3828
RUEHNE/AMEMBASSY NEW DELHI 1078
RUEHNY/AMEMBASSY OSLO 3899
RUEHKO/AMEMBASSY TOKYO 2985
RUEHKP/AMCONSUL KARACHI 2195
RUEHCG/AMCONSUL CHENNAI 7759
RUEHBI/AMCONSUL MUMBAI 5419
RUEHON/AMCONSUL TORONTO 0244
RUEHBS/USEU BRUSSELS
RHEFDIA/DIA WASHINGTON DC
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RHHMUNA/HQ USPACOM HONOLULU HI
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION

UNCLAS SECTION 01 OF 03 COLOMBO 000843

SIPDIS

SENSITIVE

SIPDIS

STATE FOR SCA/INS
DOL/ILAB FOR TINA MCCARTER
MCC FOR S. GROFF, D. TETER, D. NASSIRY AND E. BURKE
TREASURY FOR LESLIE HULL

E.O 12958: N/A
TAGS: ECON EINV ETRD CE
SUBJECT: SRI LANKA: WAR, AIR ATTACKS HIT BUSINESS CONFIDENCE

REF: A) COLOMBO 536 B) COLOMBO 491 C) COLOMBO 637

1. (SBU) Summary: The resumption of war in Sri Lanka is hurting the
economy both in the short term and the long term, by driving up
day-to-day business costs and by making firms nervous about new
investments. Veteran Sri Lanka business people say the current
investment environment is as bad as they have ever seen. The
government continues to expect strong growth this year, pointing to
good results in the first quarter and the fact that local blue chip
companies continue to report strong revenues and profits as
evidence. Even accounting for Sri Lanka's remarkable economic
resilience, it appears likely that the economy will grow far less in
2007 than the seven percent growth it registered in 2006. End
summary.

2. (U) Sri Lanka's $30 billion economy has grown at a steady average
annual rate of four to five percent over the 24 years of conflict
between the government and the ethnic separatist Liberation Tigers
of Tamil Eelam (LTTE). The 2002-2005 ceasefire unlocked trade and
investment that produced average growth during that period of five
and a half percent. Growth peaked at over seven percent in 2006,
despite the steady return to war, on the strength of investments
made in the Western Province during the ceasefire, strong private
sector services growth, and high government deficit spending (ref
A). That momentum appeared to continue into 2007, with particularly
strong export growth in the first quarter.

LTTE AIR ATTACKS HURTING BUSINESS CONFIDENCE
--------------------------------------------

3. (SBU) The healthy start in 2007 appears to have been undone by
the LTTE air attacks on government and civilian targets in March and
April (refs B and C). The government's decision to suspend night
operations at Colombo's international airport was intended to
insulate civilians and air traffic from the danger of future air
attacks. However, the move sent an exceptionally strong signal to
business decision-makers that they cannot continue to rely on the
war having minimal impact on their operations in and around the
capital.

4. (SBU) Since the airport attacks, day-to-day business costs have
risen, and firms appear markedly more cautious about committing long
term investments to Sri Lanka. The stock market is one indicator:
after reaching an all-time high on February 13, it has fallen back
about 15 percent, almost entirely since the first air attack in
March. Real estate prices likewise have begun to fall after rising
steadily for the preceding five years. A local business magazine's
monthly business confidence survey hit a 32-month low in May, with
73 percent of respondents expecting their business to get worse in
the next year, compared to 42 percent who felt that way in April.
That decline in confidence appears to cut across sectors, as
indicated by the following examples:

GARMENTS

-- Sri Lanka's largest garment manufacturer told Ambassador that it
plans to move its design operations to India, to avoid disruption of
foreign partners' visits to consult with the company's local
designers. The company could not risk cancelled meetings and fouled
up travel plans due to unpredictable airline schedules since the air
attacks. Additionally, some of its clients' security officials were
advising personnel against traveling to Sri Lanka at all.

-- Sri Lanka's apparel producers' association is concerned that the
airport attacks disrupted logistics for such functions as air
freight delivery of production inputs and samples. Because such

COLOMBO 00000843 002 OF 003


interruptions are incompatible with "just in time" production
schedules, the association fears that apparel buyers may be forced
to source purchases elsewhere.

TOURISM

-- Tourist arrivals in the first quarter of 2007 were down by 16
percent compared to 2006. Figures have gotten worse since the March
and April air attacks, with some hotels reporting single digit
occupancy. Most have resorted to drastic rate cuts to attract
sufficient Sri Lankan visitors to simply cover costs. A major hotel
operator said it has already decided not to hire temporary employees
for this year's peak season, in order to control costs.

-- Conferences that were to take place in Colombo have been
cancelled. For example, the European Commission cancelled an EU-Sri
Lanka Chamber of Commerce IPR seminar when the lead expert presenter
deferred his travel, citing European embassy travel warnings.
Similarly, Post was looking forward to the Near East and South Asia
Council of Overseas Schools Leadership Conference that was scheduled
to take place in Colombo this fall. However, NESA decided to move
the conference to Bangkok -- again because many of its planned
speakers from the United States and Europe were scared off by the
airport attacks.

-- A private domestic air carrier has ceased operations in response
to the declining number of visitors and the government's request
that it suspend services to certain destinations for security
reasons. Government security concerns also drove the decision to
order Colombo hotels to turn off generators during air raid
warnings, despite the inconvenience to hotel guests.

-- A number of hotel developers have deferred plans to invest in
construction of new hotels or renovations of existing properties. A
major Sri Lankan hotel operator told Ambassador that it will shift
plans for new investment from Sri Lanka to India and Maldives.

TRANSPORTATION

-- The president's office stated that its decision to close the
Colombo airport for night flights was made at the request of
national carrier Sri Lankan Airlines, which believed that its
insurance premiums would have been raised had it continued to fly at
night.

-- The Sri Lanka Ports Authority ordered the night-time closure of
one of the Colombo port's two entry points to reduce the possibility
of an LTTE attack on the port. According to the port authority
chairman, this has resulted in the monthly loss of 222 hours of
navigation time for ships calling at the port. The port will invest
in video and underwater surveillance to in order to eventually
restore operations to full capacity.

-- A Singapore-owned flour milling operation in Trincomalee told
Ambassador that it pays a risk premium of $250,000 for every
shipment it brings into Trincomalee harbor.

INFRASTRUCTURE

-- A major Sri Lankan conglomerate told Ambassador that it will cut
back on all capital spending planned for this year, to reduce costs
in what it expects to be a slow economy. The company is looking
especially cautiously at a planned major real estate development in
Colombo's upcoming South Harbor expansion. It says the project is
so large it could add two percent annually to GDP. Yet, as the
project goes through planning and approvals processes, the company

COLOMBO 00000843 003 OF 003


is evaluating whether to reduce its eventual investment, because the
project would be less viable in a falling economy.
-- The government also has cut back on infrastructure investment in
order to finance its war effort. The state-owned oil refinery has
been unable to fund routine maintenance, its labor union told local
media. Periodic electricity outages attributed to power equipment
failures also suggest insufficient investment in maintenance
state-owned electricity board.
HUMAN RESOURCES

-- The CEO of a Colombo-based software company with offices in
Chennai, Malaysia, Singapore, and the United States told Ambassador
and a local newspaper that the company is experiencing a brain drain
as a result of the conflict. The CEO noted that both Tamil and
Sinhalese software engineers have left or were planning to leave.

-- The Embassy Colombo consular section reports signs of increasing
applications for visas by business people with portable sources of
income, such as gem dealers. Many Sri Lankans with backgrounds in
information technology, science, and mathematics are also applying
for visas, despite the fact that work opportunities in those fields
in Sri Lanka are generally good.

COMMENT: GOVERNMENT REMAINS OPTIMISTIC
DESPITE BUSINESSES' CONCERNS
--------------------------------------

5. (SBU) For Sri Lanka, one of the most alarming aspects of the
current business climate is the fact that the government is not
listening to business people's concerns. Virtually every business
leader we talk to says that President Rajapaksa distrusts the
Colombo business elite, in the belief that they support the
opposition United National Party. Even those business people with
access to the president say they are reluctant to speak frankly to
him about their concerns for fear that he will shut them out or
brand them as unpatriotic. The president may be ignoring their
concerns in part because his own economic advisors remain
optimistic. Thus, while business leaders are telling us the
business environment is "about the worst it has ever been," the
central bank governor, finance secretary, and minister of export
promotion and enterprise development like to point out that many
local and foreign firms have reported high revenues and profits in
recent times. They cite the growth and export figures of the last
few years as evidence that the economy remains strong despite the
LTTE attacks and the government's increased war effort. They also
state that sustained growth of eight to ten percent is necessary to
achieve the poverty alleviation goals in the president's Mahinda
Chintana election manifesto. Even in their optimism they are not
predicting growth to reach those levels. If the current business
climate is a good indicator, growth in 2007 is likely to fall well
short of those levels.

© Scoop Media

 
 
 
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