Finance & Business World

The International Monetary Fund’s board of directors approved the issuance of bonds to the lender’s 186 members for the first time as it seeks additional sources of money to lend during the global recession.

The board made the move in a vote today and did not place a limit on the note sales, Andrew Tweedie, the Washington-based IMF’s finance chief, said on a conference call with reporters. The bonds are part of a wider effort to seek $500 billion in new funding as the lender helps countries from Iceland to Pakistan combat the global financial crisis.

The securities, the culmination of months of talks between the fund and its members, will offer the largest emerging-market nations a new way of making IMF contributions while they seek greater say at the fund. China, Brazil and Russia have favored the bonds instead of regular contributions as they wrangle with other members over redistributing the IMF’s voting power.

“We expect other countries will follow suit, perhaps other emerging markets,” John Lipsky, first deputy managing director at the fund, said in a Bloomberg Television interview today. “Also, some developed and advanced economies may find this an attractive way to participate in international support for the IMF’s efforts.”

Buying Plans

An IMF official, speaking on condition they not be named, said the board initially considered limiting the bond sales to $150 billion, based on the level of interest from member states. Board members decided against such a cap because IMF needs will evolve over time, the official said.

China’s government has said it will buy $50 billion in notes. Russia and Brazil last month said they would each buy $10 billion of bonds from the IMF. India has also indicated it would contribute to an IMF bond program. The four nations make up the so-called BRICs.

“This is a victory for the BRICs, particularly China,” said Claudio Loser, the former director of the IMF’s Western Hemisphere department. “Because they will be investing in the fund they will have, directly or indirectly, some say in the governance of the fund that goes beyond their quota.”

The IMF’s “quota” system allocates voting rights to member states based on their financial contributions.

The note sales probably would not reach the $500 billion in new funding that the lender is seeking, Lipsky said.

Drawing Rights

The notes will be denominated in Special Drawing Rights, or SDRs, which represent a basket of currencies consisting of the U.S. dollar, the euro, the yen and the British pound. Note sales denominated in SDRs would be paid interest on a quarterly basis, the IMF said.

Chinese officials have sought a greater role over time for SDRs in an effort to reduce the U fast payday loan no faxing.S. dollar’s dominance in the global economy.

The current official rate for SDRs is 0.37 percent, set using a weighted average of three-month rates in the component currencies. That compares with the 0.195 percent rate for three- month U.S. Treasury bills. One dollar is currently equivalent to about 0.65 SDR.

The IMF makes money on its loans by charging countries more than the SDR interest rate. The fund’s board agreed June 22 to keep its lending rate unchanged at 1 percentage point above this year’s SDR interest rate.

Purchase Agreements

Interested member states will first need to enter a purchasing agreement with the IMF before becoming eligible to buy notes. Participants must have a “sufficiently strong balance of payments position,” Tweedie said.

The notes will have a maximum maturity of five years along with three-month interim maturities that could be extended by the fund, Tweedie said.

Leaders from the Group of 20 industrial and emerging nations agreed in April to boost IMF coffers by $750 billion to help the Washington-based agency shore up nations roiled by the credit crunch. The U.S. last month agreed to boost its contribution for the IMF by more than $100 billion.

Treasury yields climbed this year and the dollar fell in part on concern that foreign central banks would reduce holdings of U.S. financial assets just as the Obama administration sells a record amount of debt to finance a growing budget deficit and pull the economy from the deepest recession since the 1930s.

China’s central bank last month renewed its call for a new global currency and said the IMF should manage more of members’ foreign-exchange reserves, triggering a decline in the U.S. dollar. Lipsky said on June 6 it’s possible some day to take the “revolutionary” step of making SDRs a reserve currency.

World Bank

SDRs were created by the IMF in 1969 to support the Bretton Woods exchange-rate system that collapsed in 1971. They act as a unit of account rather than a currency. The cash is disbursed in proportion to the money each member nation pays into the fund.

Separately today, the World Bank, formed in the wake of World War II to help nations reduce poverty, said its lending commitments in the 2009 fiscal year reached a record $58.8 billion after $38.2 billion in the previous year.

The bank announced the lending totals in a statement from Washington, citing the global economic crisis as the reason for the increase.

“We expect this to continue well into 2010, as the pace of recovery is far from certain,” said World Bank President Robert Zoellick.

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New Zealand businesses were more optimistic in June amid a drop in borrowing costs and signs of a global recovery that may bolster exports.

A net 8.3 percent of companies surveyed expect sales and profit will rise over the next 12 months compared with 5.5 percent in May, according to a report released by ANZ National Bank Ltd. in Wellington today. The net figure subtracts the number of pessimists from optimists.

More businesses say exports will improve while profit expectations are up among retailers and manufacturers, adding to signs the economy may recover later this year from the worst recession in more than three decades. Reserve Bank Governor Alan Bollard said on June 11 he expects to keep the benchmark interest rate at a record low of 2.5 percent until late 2010.

“The economy continues to contract, but the positive spin is that the pace of contraction is occurring at a slower rate,” said Cameron Bagrie, chief economist at ANZ National Bank.

A net 5.5 percent of the 402 companies surveyed expect the broader economy will improve compared with 1 cheapest personal loan rates.9 percent in the April survey.

Eleven percent of firms say exports will pickup compared with 5.8 percent in April amid signs of a recovery in global markets. Japan’s industrial production climbed 5.9 percent in May, matching a gain in April that was the fastest since 1953, a report yesterday showed.

Still, New Zealand firms remain pessimistic about profits, investment and the labor market, today’s survey showed.

Seventeen percent of companies plan to fire workers this year, compared with 16 percent in May. The ratio of companies expecting reduced profits was unchanged at 24 percent. A net 5.6 percent expect to cut investment over the next year.

ANZ said its composite growth indicator based on profit, hiring and investment intentions remains negative and the labor market outlook is “particularly poor.”

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Argentine President Cristina Fernandez de Kirchner lost power in Congress after voters angry at her handling of a farm strike, crime and a slowing economy favored opposition candidates in mid-term elections yesterday.

Nestor Kirchner, Fernandez’s husband and predecessor, acknowledged this morning that a slate of candidates he led for the lower house of congress in the bellwether province of Buenos Aires was defeated. Partial results indicate the government will lose its majority in both houses of congress, with no party having outright control.

“We’ve said a number of times that we are going to change history, and that day is today,” Buenos Aires province opposition leader Francisco de Narvaez said at a rally last night. “This is a moment to unite, not divide, a moment to join together, not confront.”

Fernandez, 56, relied on her coalition’s control of congress to back an agenda that included nationalizing $24 billion in private pension funds and the country’s flagship airline, Aerolineas Argentinas SA. She angered many supporters when she tried to raise farm export taxes last year, provoking four months of road blockades and protests.

“In a democracy, you win and you lose,” Kirchner said at a post-election rally in Buenos Aires. “This was a very close election. We lost by a little bit.”

De Narvaez’s slate in Buenos Aires had 34.5 percent support compared with Kirchner’s 32.2 percent with 70 percent of the votes counted, the interior ministry said on its Web site. The ruling coalition was also trailing in populous provinces including Cordoba and Mendoza and in Buenos Aires city. In Kirchner’s home province of Santa Cruz, government candidates were losing by 1,700 votes with 71 percent of ballots counted.

Election Moved Up

Fernandez, who succeeded her husband in December 2007, got congress to move up yesterday’s election by four months, arguing it would be “suicidal” to let the campaign drag on while “the world is crumbling into pieces” as a result of the global economic crisis. Opposition leaders said the intent was to hold the vote before Argentines felt the full effects of the crisis.

Kirchner, 59, said during the campaign that the country’s economic growth since a 2001 financial crisis was at risk in the mid-term election. He reminded voters that in 2001, when Argentina defaulted on $95 billion of debt and restricted bank withdrawals, then-President Fernando de la Rua was forced to resign amid riots and looting. The following year, the economy shrank almost 11 percent low cost car insurance.

“This is not just another legislative election, there are two different models for the country at stake,” Kirchner said at a rally on June 17. “We don’t want more frozen bank accounts, more financial instability, more unemployed people, more broken industries. This economic model should be a breaking point between the old Argentina and the new one.”

Farm Strike

The farm strike did more damage to Fernandez than the country’s slowing economy or rising concerns about crime, an issue that de Narvaez campaigned on, pollster Ricardo Rouvier said in a June 24 interview.

Economic growth in Argentina slowed last year to 6.8 percent from an annual average of 8.8 percent during Kirchner’s four-year term. Inflation quickened to what private economists such as Jose Luis Blanco, at Tendencias Economicas research, estimate at 22 percent.

Argentina’s dependence on agricultural commodity exports such as soybeans and wheat has hurt it over the past year as international prices fell from record highs and the global economic crisis hit. Exports fell 18 percent to $5.1 billion in May from a year earlier, while imports declined 49 percent to $2.7 billion.

Fernandez has vowed that the economy will continue to grow even as organizations including the International Monetary Fund predict a recession. The economy will shrink three percent this year, according to the median estimate of seven economists surveyed by Bloomberg.

Boost Spending

Neil Shearing, an emerging markets economist at Capital Economics in London, said the government may react to its defeat by boosting spending on social programs in an effort to build support ahead of the 2011 presidential elections.

“The government will be desperately scrambling for a way to regain authority and will probably try to do that through populist measures,” Shearing said in a telephone interview.

About 28 million people were eligible to vote in yesterday’s election, according to the Interior Ministry. Half the 257-seat lower house and a third of the 72-member Senate were up for grabs. The new lawmakers will take their seats in December.

“What we are hearing from all over the country is support for change,” said Buenos Aires mayor Mauricio Macri, whose Union Pro coalition was leading in the capital. “To the President, I say to you with total respect that I hope you’ve heard the message Argentina sent you.”

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Question: I’m a 56-year-old teacher and my husband recently passed away. I don’t own a home or have a pension or any investments, but I will receive a considerable sum from my husband’s life insurance policy. My question is how should I invest this money? A financial adviser at my credit union wants me to put it into a variable annuity, but I’ve heard that this type of annuity is good only for the person selling it. What should I do? –Val, California

Answer: You’re looking at your situation as if you’re dealing only with an investing issue. And, I suspect, that’s how the adviser at your credit union is viewing it too (and perhaps as a sales opportunity as well).

But as important as it is that you invest this money properly, that task is part of a larger goal. And you really need to take a step back and focus on your eventual aim here. Although you haven’t stated it explicitly, it would appear you ultimately want to assure that you’ll have adequate income to support you when you retire.

So the question you need to answer isn’t just how to invest these life insurance proceeds. It’s what steps should you be taking now to increase your odds of having a secure and comfortable retirement?

That means you’ll have to start thinking about issues such as how much income you’ll need to maintain an adequate standard of living once you retire and whether you can expect the resources available to you (which appears to be Social Security and the proceeds from your husband’s life insurance) to generate the amount you need.

If the income your resources can generate falls below what you require, then you can look into ways to bridge the gap. The measures might include working a few more years, during which you can save for retirement, and postponing collecting Social Security, which can increase the size of your monthly check.

The point is, though, that you can’t look at investing options in a vacuum. How you decide to invest the proceeds of your husband’s life insurance policy will depend on factors such as how well prepared you are for retirement, how heavily you’ll be relying on those funds to generate current income and how large a stash you might want to set aside as a liquidity reserve you can tap for emergencies and to pay unexpected expenses payday loan lenders.

There are some tools that people can use on their own to help develop what amounts to their retirement income plan. To see what you can expect from Social Security at different retirement ages, for example, you can go to the Social Security Estimator tool. T. Rowe Price’s Retirement Income Calculator can help you gauge whether you’re on track to be able to retire at a given age. And Fidelity’s Retirement Income Planner has a nice interactive budgeting tool that can help you develop a retirement budget.

This process can be daunting, though, which is why many people turn to advisers for help. That’s fine. But if the adviser is going to truly advise, then it seems to me that he or she must first spend some time getting to know your financial situation and your needs. In short, the adviser should take you through the process I described above. Without doing that, it’s hard for me to see how an adviser would know what sort of investment is appropriate for you.

So if the adviser you’re now dealing with hasn’t gone through this sort of analysis with you, then you ought to consider one who will. You can search for financial planners in your area here and here.

I purposely didn’t want to turn this column into a yea or nay about variable annuities because they shouldn’t be the primary focus in your case. Before turning to investments, you should first sort out the other issues I outlined.

That said, I do have serious reservations about variable annuities that come with riders designed to pay income for life. When it comes to creating a reliable retirement income, I think a better way to go is to combine a diversified portfolio of mutual funds with another type of annuity (a fixed immediate annuity).

Which is why it’s all the more essential that you find an adviser who’s willing to consider a variety of investments to get you the income, security and cash reserves you’ll need in retirement, rather than one who sees a single investment as the answer to all your needs. 

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Banks should reduce their dependence on external credit-rating companies and improve their own risk assessment procedures, the Bank of England said in its Financial Stability Report today.

Relying on rating firms can cause lenders to hold insufficient capital, or cushions against losses, if their “methodologies and models fail to reflect credit risk accurately,” the central bank said. Twenty-one percent of respondents to a Bank of England survey in May cited a lack of confidence in the firms, up from 18 percent in July last year, the report said.

“A reduction in the use of external ratings in regulatory rules would encourage” banks “to improve their own due diligence and risk models,” the Bank of England said in the report pay day loans.

Rating agencies such as New York-based Moody’s Investors Service and Standard & Poor’s were blamed for failing to alert investors about the dangers of riskier assets, including U.S. subprime mortgages, in the deepest financial crisis since the Great Depression. European Union governments and the European Parliament approved a law that imposes oversight of rating companies in April.

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IBM named one of its executives, a former Morgan Stanley banker, to be its new head of mergers and acquisitions on Tuesday after losing its chief dealmaker to rival Dell Inc, which is beefing up its acquisition efforts.

IBM named Elias Mendoza, who handled mergers and acquisitions in Asia for the computer consulting and technology company, to the top M&A job as it waits for a U.S. federal court to rule on a request that the man he replaces be banned from working for Dell.

Before joining IBM in 2006, Mendoza worked for investment bank Morgan Stanley.

IBM claims that his predecessor, David Johnson, violated a 2005 non-compete agreement by taking the Dell post in May.

“Mr. Johnson has possession of valuable confidential information of IBM and cannot undertake a senior strategy position at Dell without violating his obligations to IBM,” the company said in a statement as it filed its lawsuit last month affordable health insurance connecticut.

A judge in the U.S. District Court of Southern New York could rule on IBM’s request as early as this week.

An IBM spokesman declined to comment on the litigation on Tuesday.

The litigation comes as IBM seeks to rebound after a rare public embarrassment over its M&A efforts, a failed attempt to buy hardware maker Sun Microsystems Inc.

It emerged as the lead contender in March to buy the company but discussions collapsed in April mainly because both sides were unable to agree on guarantees for IBM to be able to walk away should the deal fail to pass regulatory scrutiny.

Software developer Oracle swooped in with a successful bid to buy Sun for more than $7 billion.

(Reporting by Jim Finkle; Editing by Gary Hill)

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Home resales in the U.S. probably advanced for a second month in May as record foreclosures caused prices to drop, economists said before a report today.

Purchases of existing homes rose 3 percent to a 4.82 million annual pace, the highest level since October, from 4.68 million in April, according to the median of 74 forecasts in a Bloomberg News survey. It would mark the first back-to-back increase since 2005.

Tax breaks for first-time buyers in the Obama administration’s stimulus plan, falling property values and lower mortgage rates have helped support the market. At the same time, any recovery is likely to be limited with unemployment rising and borrowing costs shooting back up.

“We’re seeing some early signs of stabilization in home demand but it’s important to emphasize the level of sales remains extraordinarily low,” said Zach Pandl, an economist at Nomura Securities International Inc. in New York. “Housing investment is likely to stop being a drag on growth some time this year but, given the weakness in sales, it’s unlikely to give positive contributions any time soon.”

The National Association of Realtors is scheduled to release the report at 10 a.m. in Washington. Estimates in the Bloomberg News survey ranged from 4.6 million to 5 million.

May traditionally is one of the top three sales months of the year as the weather turns warmer and families prepare to move before the start of the next school year, according to the NAR. The group adjusts the figures for these seasonal variations in order to facilitate month-to-month comparisons.

Record Foreclosures

Foreclosure filings in the U.S. surpassed 300,000 for a third straight month in May and may reach a record 1.8 million by the first half of the year, RealtyTrac Inc. said June 11.

The median price of an existing home has fallen 26 percent from the peak reached in July 2006 as sales slumped and financial institutions auctioned off foreclosed properties. While the loss has devastated some families, others were able to buy a house for the first time because of the drop in values.

The federal government is trying to stabilize the market by offering lenders incentives to modify the terms of delinquent mortgages and the Federal Reserve has pledged to buy mortgage- backed securities to free up funding for home loans.

The Realtors’ group affordability index was at 174 no fax cash advances.8 in April compared with a record high of 176.9 reached in January. A reading of 100 means a household earning the median income could afford the median-priced home at current mortgage rates.

Tax Credit

In addition, the Obama administration’s stimulus plan provided an $8,000 tax credit for first-time home buyers for purchases completed before Dec. 1. About 40 percent of purchases in April were by people buying a home for the first time, the NAR said last month.

Still, soaring unemployment and high levels of debt will put home ownership beyond the reach of would-be buyers even as home prices fall, according to a report yesterday by Harvard University’s Joint Center for Housing Studies.

Mortgage borrowing costs are also starting to climb. The rate on a 30-year fixed loan has averaged 5.42 percent so far this month, up from 4.86 percent in May, according to figures from Freddie Mac. The rate reached 4.78 percent in April, the lowest level since records began in 1972.

The Standard & Poor’s homebuilder supercomposite index has retreated 24 percent since reaching a seven-month high on May 4 as concern mounted that the backup in interest rates will choke off any recovery before it develops.

Construction Steadies

Recent increases in home construction are a sign the market is starting to stabilize, helped by government programs such as the tax credits for first-time homebuyers, Shaun Donovan, secretary of Housing and Urban Development, said June 18.

Housing starts increased 17 percent in May, the Commerce Department said last week.

The Fed is buying as much as $1.75 trillion of housing debt and Treasuries this year in a bid to lower borrowing costs. Total assets on the balance sheet have expanded by $1.18 trillion over the past year to $2 trillion.

The central bank is scheduled to hold its policy meeting today and tomorrow. It has held the benchmark interest rate near zero since December.

Builders are seeing some signs of improvement. While Toll Brothers Inc. and Hovnanian Enterprises Inc. reported second- quarter losses that exceeded analysts’ forecasts, they both noted there were signs of stability in the housing market.

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The Federal Reserve is considering creating a utility to replace the Wall Street banks that handle U.S. repo market transactions, the Financial Times reported on Monday, citing people familiar with the matter.

The proposal is partly motivated by concerns that the structure of the U.S. overnight repurchase market may have exacerbated the financial turmoil that followed the collapse of Lehman Brothers in September.

Fed officials plan to meet next month with market participants to discuss reforms, the paper said.

The newspaper cited people familiar with the Fed’s thinking as saying the central bank is looking into the creation of a mechanism to replace the clearing banks — the biggest of which are JPMorgan Chase and Bank of New York Mellon — that serve as intermediaries between borrowers and lenders.

“The Fed is raising questions about whether the system really protects the interests of all participants,” said a person familiar with the Fed’s thinking quoted by the FT business cards for sale.

Fed officials fear existing arrangements put the clearing banks in a difficult position in a crisis, the paper said. As the value of the securities falls, clearing banks have an obligation to demand more collateral to avoid losses. But in doing so, they could destabilize a rival.

“The clearing banks fear the positions of the investment banks are so large that a default would be difficult for them to manage,” the person familiar with the Fed’s thinking said.

The Fed hopes to have a new repo system in place by October, when its credit facility for securities companies is to close, the paper said.

(Editing by Mike Peacock)

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Sri Lanka’s economy can bounce back from its weakest growth in six years and become the “Hong Kong of India” as the end of almost three decades of civil war boosts business opportunities, HSBC Private Bank said.

Decades of fighting on the Indian Ocean island shackled its $32 billion economy, which according to figures released yesterday expanded 1.5 percent last quarter from a year earlier as the global recession intensified the slowdown. Ports, retailers, apparel and tea exporters could lead a recovery after the Tamil Tiger rebels were defeated last month.

“The rebound will be spectacular,” said Arjuna Mahendran, the Singapore-based chief investment strategist for Asia at HSBC Private Bank, which oversees $494 billion in assets. “To start with, Sri Lanka’s location gives its port a natural advantage.”

Sri Lanka could benefit from its proximity to India, just as Hong Kong profits from being a trade hub to China. Sri Lanka lies just 31 kilometers (19 miles) south east of India, the world’s second-fastest-growing major economy.

Seventy percent of the volume handled by the Colombo port is trans-shipment of goods imported by India and this could be increased because Indian ports don’t have adequate depth, Mahendran said. Sri Lanka has embarked upon a plan to quadruple capacity at the Colombo port in three years.

The Liberation Tigers of Tamil Eelam were defeated on May 16, ending their 26-year struggle for a separate homeland in Sri Lanka. The Tigers, who controlled a third of the country at one point, fell swiftly since January as the Sri Lankan military launched an unprecedented offensive to wipe them out.

‘Lot of Potential’

“It’s something you never expected to happen when you have lived most of your life under the specter of war,” said Otara Gunewardene, who runs Odel, Sri Lanka’s biggest department store. “It’s unbelievable. I see things differently now and see a lot of potential for growth.”

Odel plans to sell a stake in the company to overseas investors and spend $20 million to add another 70,000 square feet to its flagship store in Colombo and open new outlets in other cities in the country.

“We fought terrorism and now the economic war has to be fought,” said Malik Fernando, whose family owns Dilmah Tea Co., among the best-known Ceylon tea brands in the world. “For manufacturers, the cost of doing business is very high because infrastructure, like roads and power, was neglected because of the war.”

Small Economy

Dilmah, for example, operates a bus service in Colombo to pick up their workers from home because “we know that if they use the public transport, they are going to be late, fagged out and stressed,” Fernando said.

Still, Sri Lanka can be turned around quickly as it is a small economy and Dilmah is exploring options to expand in the hotels and tourism business, Fernando added. John Keells Holdings Ltd., the island’s biggest diversified company, said it sees opportunities to grow in all its businesses from property development to banking and insurance online payday loans.

Tea exporters could also benefit from a 30 percent surge in prices this year while the worldwide recession hasn’t sapped demand for the high-end lingerie and apparels the nation sells overseas, HSBC’s Mahendran said.

Sri Lanka, which receives about 500,000 tourists each year, aims to increase that number by at least 20 percent annually through a global campaign entitled “Small Miracle,” said Dileep Mudadeniya, managing director of the Sri Lanka Tourism Promotion Bureau.

More Tourists

The war discouraged travelers from the U.S. and Europe for years from visiting the teardrop-shaped tropical island.

Occupancy rates have been 40 percent in the past two years in Colombo’s five-star hotels, which have a combined capacity of 2,000 rooms, said Jerome Auvity, general manager at Hilton Colombo. As a result, the average room tariff is about $62 a night, he said.

“There is no immediate reaction suggesting business is rising,” Auvity said. “Give it another six months to see whether confidence returns to Sri Lanka’s leisure market. There is still this dark cloud, this debate and issue regarding the displaced people.”

The final battles have left about 300,000 people displaced and living in more than 40 camps across the northern part of the country. President Mahinda Rajapaksa said last month he intends to resettle them in the region within 180 days.

Still, the Board of Investment of Sri Lanka expects foreign direct investments to quadruple to $4 billion by 2012, led by investments in ports, tourism, telecommunication and textiles.

Foreign Investment

“We have been getting encouraging responses from foreign investors,” said Dhammika Perera, chairman of the Board. “We expect three leading hotel chains to sign an investment agreement with us in about three months.”

Sri Lanka’s economic growth can accelerate almost four times the current pace to 6 percent by 2010, says Prakriti Sofat, an economist at HSBC Holdings Plc. in Singapore. Citigroup Inc. economist Anushka Shah expects growth at 5.7 percent next year.

The nation’s benchmark stock index, the Colombo All-Share Index, has climbed 20 percent since the Tamil Tigers were defeated, taking its gains this year to 50 percent as local investors snapped up shares.

The Securities and Exchange Commission is now keen for the likes of George Soros, Mark Mobius and other top fund managers to invest in the country and help the Colombo Stock Exchange double its capitalization to $14 billion in a year.

“It will take a while for people to realize that a 30-year war has ended and the dividends it can bring,” said Channa de Silva, director general of the Commission. “Sri Lanka is a country waiting to unfold and we are confident there will be a lot of interest internationally.”

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Sri Lanka’s economy can bounce back from its weakest growth in six years and become the “Hong Kong of India” as the end of almost three decades of civil war boosts business opportunities, HSBC Private Bank said.

Decades of fighting on the Indian Ocean island shackled its $32 billion economy, which according to figures released yesterday expanded 1.5 percent last quarter from a year earlier as the global recession intensified the slowdown. Ports, retailers, apparel and tea exporters could lead a recovery after the Tamil Tiger rebels were defeated last month.

“The rebound will be spectacular,” said Arjuna Mahendran, the Singapore-based chief investment strategist for Asia at HSBC Private Bank, which oversees $494 billion in assets. “To start with, Sri Lanka’s location gives its port a natural advantage.”

Sri Lanka could benefit from its proximity to India, just as Hong Kong profits from being a trade hub to China. Sri Lanka lies just 31 kilometers (19 miles) south east of India, the world’s second-fastest-growing major economy.

Seventy percent of the volume handled by the Colombo port is trans-shipment of goods imported by India and this could be increased because Indian ports don’t have adequate depth, Mahendran said. Sri Lanka has embarked upon a plan to quadruple capacity at the Colombo port in three years.

The Liberation Tigers of Tamil Eelam were defeated on May 16, ending their 26-year struggle for a separate homeland in Sri Lanka. The Tigers, who controlled a third of the country at one point, fell swiftly since January as the Sri Lankan military launched an unprecedented offensive to wipe them out.

‘Lot of Potential’

“It’s something you never expected to happen when you have lived most of your life under the specter of war,” said Otara Gunewardene, who runs Odel, Sri Lanka’s biggest department store. “It’s unbelievable. I see things differently now and see a lot of potential for growth.”

Odel plans to sell a stake in the company to overseas investors and spend $20 million to add another 70,000 square feet to its flagship store in Colombo and open new outlets in other cities in the country.

“We fought terrorism and now the economic war has to be fought,” said Malik Fernando, whose family owns Dilmah Tea Co., among the best-known Ceylon tea brands in the world. “For manufacturers, the cost of doing business is very high because infrastructure, like roads and power, was neglected because of the war.”

Small Economy

Dilmah, for example, operates a bus service in Colombo to pick up their workers from home because “we know that if they use the public transport, they are going to be late, fagged out and stressed,” Fernando said.

Still, Sri Lanka can be turned around quickly as it is a small economy and Dilmah is exploring options to expand in the hotels and tourism business, Fernando added. John Keells Holdings Ltd., the island’s biggest diversified company, said it sees opportunities to grow in all its businesses from property development to banking and insurance cash advance.

Tea exporters could also benefit from a 30 percent surge in prices this year while the worldwide recession hasn’t sapped demand for the high-end lingerie and apparels the nation sells overseas, HSBC’s Mahendran said.

Sri Lanka, which receives about 500,000 tourists each year, aims to increase that number by at least 20 percent annually through a global campaign entitled “Small Miracle,” said Dileep Mudadeniya, managing director of the Sri Lanka Tourism Promotion Bureau.

More Tourists

The war discouraged travelers from the U.S. and Europe for years from visiting the teardrop-shaped tropical island.

Occupancy rates have been 40 percent in the past two years in Colombo’s five-star hotels, which have a combined capacity of 2,000 rooms, said Jerome Auvity, general manager at Hilton Colombo. As a result, the average room tariff is about $62 a night, he said.

“There is no immediate reaction suggesting business is rising,” Auvity said. “Give it another six months to see whether confidence returns to Sri Lanka’s leisure market. There is still this dark cloud, this debate and issue regarding the displaced people.”

The final battles have left about 300,000 people displaced and living in more than 40 camps across the northern part of the country. President Mahinda Rajapaksa said last month he intends to resettle them in the region within 180 days.

Still, the Board of Investment of Sri Lanka expects foreign direct investments to quadruple to $4 billion by 2012, led by investments in ports, tourism, telecommunication and textiles.

Foreign Investment

“We have been getting encouraging responses from foreign investors,” said Dhammika Perera, chairman of the Board. “We expect three leading hotel chains to sign an investment agreement with us in about three months.”

Sri Lanka’s economic growth can accelerate almost four times the current pace to 6 percent by 2010, says Prakriti Sofat, an economist at HSBC Holdings Plc. in Singapore. Citigroup Inc. economist Anushka Shah expects growth at 5.7 percent next year.

The nation’s benchmark stock index, the Colombo All-Share Index, has climbed 20 percent since the Tamil Tigers were defeated, taking its gains this year to 50 percent as local investors snapped up shares.

The Securities and Exchange Commission is now keen for the likes of George Soros, Mark Mobius and other top fund managers to invest in the country and help the Colombo Stock Exchange double its capitalization to $14 billion in a year.

“It will take a while for people to realize that a 30-year war has ended and the dividends it can bring,” said Channa de Silva, director general of the Commission. “Sri Lanka is a country waiting to unfold and we are confident there will be a lot of interest internationally.”

Source