Finance & Business World

European Union leaders said the Group of 20 nations should agree on binding rules backed by national sanctions to curb bank bonuses, a week before a summit of the top industrial and emerging nations in Pittsburgh.

The EU agreement on the need for action failed to include details of how such curbs would be achieved, leaving any details to be negotiated at the G-20 summit. Leaders of the 27 EU states said voters would react with anger if bankers were allowed to award themselves large bonuses while relying on public money for their survival.

“The bonus bubble burst,” said Swedish Prime Minister Fredrik Reinfeldt, whose country holds the EU’s rotating presidency, after chairing the meeting in Brussels late yesterday. “We have agreed to say that ‘enough is enough’ and that we need to move away from the current culture of compensation based on short-term performance.”

Leaders agreed that bonuses should be tied to a bank’s performance and that guaranteed bonuses should be avoided. The “major part” of bonuses should be deferred and “could be canceled in case of a negative development in the bank’s performance.”

Luxembourg Prime Minister Jean-Claude Juncker said that the U.S. and the U.K. don’t like the idea of imposing ceilings on bank bonuses.

‘Means Nothing’

“The British have problems with it, likewise the Americans,” Juncker was quoted as saying by Agence France- Presse. “So we have agreed on this formula which means nothing, that we are going to study the question.”

U.K. Prime Minister Gordon Brown said officials were still negotiating over whether bonuses should be kept to a proportion of revenue instead of profits. He said a “limitation on individual bonuses” was also being discussed.

“People have put forward a number of proposals,” Brown said. “What we are looking for are common international rules that can suit every country with the minimum of interference and a maximum of impact.”

Asked whether Europe would go it alone if the G-20 failed to agree on curbing bonuses, European Commission President Jose Barroso said the EU’s executive arm has already “put on the table” some “precise rules on bonuses.”

These are “not only recommendations but legally binding proposals,” Barroso said. “So whatever the result of Pittsburgh, the commission position is: ‘yes,’ we should adopt in Europe some of these rules.”

Difficulties

Yet differences over bonuses highlight the difficulties the world’s leading industrialized and emerging economies face as they seek agreement on measures to prevent a recurrence of the worst financial and economic crisis since World War II.

Michael Froman, a deputy assistant to U.S. President Barack Obama said two days ago that the U.S. is reluctant “to set individual compensation levels.”

Also, even though Brown has joined German Chancellor Angela Merkel and French President Nicolas Sarkozy this month in calling for G-20 leaders to impose binding global rules on bonuses, and back “sanctions” for banks that refuse to cooperate, other differences remain.

The U.K. has rejected signing up to proposals that would have any national government set a cap on bonuses, suggesting countries will implement any agreement in different ways.

Rejecting Cap

Chancellor of the Exchequer Alistair Darling earlier this month signed up to a G-20 pledge to ask regulators to study ways of tying a bank’s bonus pool to regular wages, rejecting a cap for individual firms.

“We need a cap for the bonuses as part of your income, or part of the revenue of the company” that a person is working for, Reinfeldt said. “We, of course, know that the United States is very often against this idea.”

Merkel said bonus payment limits are one of her top goals for the G-20 summit.

“I’m optimistic that we can make clear that bonus payments must be tied to long-term profitability,” Merkel said, adding that such payments can’t be granted when companies make losses.

Europe and the U.S. may also struggle to reconcile their views on capital requirements for banks. BNP Paribas SA Chief Executive Officer Baudouin Prot said the “very high” capital ratios proposed by the U.S. would put French and other European lenders at a disadvantage to their U.S. competitors.

Raise Capital Rules

Sarkozy said that imposing tougher requirements on banks to maintain capital reserves would help curb bonuses.

“The idea of raising capital requirements in proportion with speculative activities, which are generating these so shocking bonuses, seems a more efficient capping method,” Sarkozy said

At a preparatory meeting of European finance ministers and central bank governors in London on Sept. 5, French Finance Minister Christine Lagarde said the G-20 should amend and enact the so-called Basel II rules before discussing any new rules.

Leaders of advanced and emerging economies will discuss steps to regulate markets, curb executive pay and raise capital requirements for banks at the Sept. 24-25 summit in Pittsburgh, the latest bid to coordinate the global response to the crisis.

Merkel, speaking in Frankfurt yesterday, urged G-20 members to agree “that no financial center, no financial institution and no financial product remains unregulated.” Capital requirements must be designed to limit banks’ size, she said.

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The Organization of Petroleum Exporting Countries should maintain existing output quotas and improve compliance when the 12-member group meets today, the group’s production-monitoring committee recommended.

“We need more compliance” with existing production targets, Kuwaiti Oil Minister Sheikh Ahmed al-Abdullah al-Sabah told reporters in Vienna. “I don’t foresee any cut,” he said, when asked at what price level the group might consider a further supply reduction.

Saudi Arabian Oil Minister Ali al-Naimi, who represents OPEC’s biggest and most influential producer, said current oil prices are “good for everybody, consumers, producers,” adding to comments from other members of the group pointing to no change in output. All 26 analysts surveyed by Bloomberg News forecast OPEC will leave production quotas unchanged for a third time at today’s meeting.

Oil rallied from a low of $32.70 in January to peak this year at $75 a barrel on Aug. 25. Crude for October delivery was trading at $71.07 on the New York Mercantile Exchange at 10:49 a.m. in Singapore. Al-Sabah said current prices are “OK” and said a supply cutback is unlikely in the near future even though the market is “oversupplied.”

OPEC’s Ministerial Monitoring Committee met for an hour yesterday evening at the group’s Vienna headquarters to review data on OPEC oil supply and demand. The MMC, comprising officials from Iran, Nigeria and Kuwait, often recommends a course of action for the full meeting of OPEC ministers, which convenes at 9:30 p.m. local time, after dark because the summit falls in the Muslim holy month of Ramadan.

Compliance Percentage

The MMC also recommended no change in quotas when it met before OPEC’s May meeting. OPEC Secretary General Abdalla El- Badri and Iran’s incoming Oil Minister Masoud Mir-Kazemi both left the meeting without commenting.

The group agreed late last year to cut production targets by 4.2 million barrels a day after prices crashed more than $100 a barrel from a record of $147.27 in July 2008.

The 11 OPEC members bound by quotas are currently complying with about 68 percent of their promised cutbacks, Al-Sabah said, adding that “75 percent would be fine free credit scores.”

Those members, all except Iraq, pumped 26.055 million barrels a day in August, according to estimates in a Bloomberg survey, which indicates quota compliance of about 71 percent. Only Saudi Arabia, Kuwait and Qatar pumped less than their target. Iran, Angola and Venezuela are the biggest quota busters.

Non-OPEC Criticized

Qatari Energy Minister Abdullah bin Hamad al-Attiyah, while backing no change to OPEC’s targets, criticized the lack of support from non-member producers such as Russia.

“We heard a lot of oral support, we would like to see physical support,” from non-OPEC suppliers, Al-Attiyah said as he arrived in Vienna yesterday.

Russia’s oil exports are surpassing those of Saudi Arabia for the first time since the Soviet Union’s collapse as Prime Minister Vladimer Putin exploits OPEC cuts to gain market share.

Exports of crude and refined products from Russia rose to about 7.4 million barrels a day in the second quarter, according to Energy Ministry data. Saudi shipments fell to about 7 million barrels a day, International Energy Agency estimates of output and domestic demand showed.

Investors had expected Russian supplies to decline this year after Putin’s deputy, Igor Sechin, told the Organization of Petroleum Exporting Countries in December that his government was ready to limit production to support prices. Instead, the country is providing tax breaks for new fields in Siberia. OAO Rosneft, OAO Lukoil and BP Plc’s Russian venture TNK-BP pumped more to take advantage of a 59 percent gain in prices so far this year.

The extra barrels may undermine OPEC efforts to reduce inventories and keep members from exceeding their quotas after the group meets in Vienna tomorrow. Oil will fall 4.7 percent from the average so far this quarter to $64.50 a barrel in the third, according to the median of 34 analyst estimates compiled by Bloomberg.

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The services sector shrank again in August, but an index measuring activity was at its highest in nearly a year, according to an industry report released Thursday.

The Institute for Supply Management said its services index rose to 48.4 in August from 46.4 in July. That was slightly above the 48 median forecast of 70 economists surveyed by Reuters.

A reading above 50 indicates expansion in the sector. The last time the index was at the 50 mark was September 2008 best auto loan rates.

The index’s business activity component rose to 51.3, up from 46.1 in July. The August reading was its first above 50 since last September.

The services sector represents about 80% of U.S. economic activity and includes businesses such as banks, airlines, hotels and restaurants. 

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China’s central bank may be forced to tighten its “loose” monetary policy in the second quarter of 2010 when inflation is expected to reach 4 percent, according to Citigroup Inc.

“China worries about inflation more than asset market bubbles,” Shen Minggao, Citigroup’s chief economist for the Greater China region, said in an interview in Hong Kong yesterday. Rising prices may spook low-to-medium income groups and threaten social stability, he added.

The People’s Bank of China may issue bills to soak up cash or raise its capital reserve ratio when inflation exceeds the government’s 4 percent target, Shen said. Consumer prices in Asia’s second-largest economy, which declined for a sixth straight month in July, may start to increase again in the fourth quarter, he said.

In 2008, the Chinese central bank slashed interest rates and reserve requirements to help shield the economy from the global recession business card. Premier Wen Jiabao also unveiled a 4 trillion yuan ($585 billion) stimulus package to buoy growth.

China’s top economic planning agency, the National Development and Reform Commission, on Aug. 27 denied the country faces a sharp and sustained increase in prices. The agency called on local governments to “strengthen price monitoring” on consumer goods.

Consumer prices in China plunged 1.8 percent in July from a year earlier, the biggest decline since 1999. The key one-year lending rate is 5.31 percent and the nation’s biggest banks are required to set aside 15.5 percent of their deposits as reserves.

Citigroup’s Shen expected consumer prices to rise 3.2 percent next year. The median estimate of 16 economists surveyed by Bloomberg News is for a 2.7 percent increase in 2010.

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The Philippine central bank will probably end its longest series of interest-rate cuts since at least 2002 as the global economy recovers.

Bangko Sentral ng Pilipinas will hold its benchmark interest rate at a record low of 4 percent today, according to 13 of 15 economists surveyed by Bloomberg News. Two expect a quarter-point cut.

A nascent recovery from the worldwide recession has increased prospects of a revival in inflation, prompting countries from Thailand to South Korea to pause after slashing borrowing costs to revive growth. The Philippines will aim for a “controlled shift in the direction of our policy stance,” Governor Amando Tetangco said Aug. 11.

“Inflation has bottomed out already and will start to go up,” said Luz Lorenzo, an economist at ATR-Kim Eng Securities Inc. in Manila. “Commodity prices are the bigger risk as economies recover.”

Easing inflation allowed the Philippine central bank to cut its key interest rate by 2 percentage points from mid-December to July to bolster growth as exports collapsed. Consumer-price gains slowed to a 22-year low of 0.2 percent in July.

“Disinflationary forces” will dissipate as the year progresses, Tetangco said July 29. The price of oil, which in the Philippines is almost all imported, has risen about 50 percent this year.

Growth Outlook

The Philippines’ $167 billion economy expanded 0.4 percent in the first quarter, the weakest pace in a decade. The government, which will report second-quarter gross domestic product data on Aug. 27, has said it expects growth to improve in the coming quarters.

“I wouldn’t encourage them to do more rate cuts,” Economic Planning Director Dennis Arroyo told reporters in Manila today, even as he said the economy may have contracted 0 car insurance quotes.1 percent last quarter. Government spending should “kick in” and third-quarter data indicate an “upswing,” he said.

The Philippine Stock Exchange Index fell 1.5 percent to 2,720.18 at the close of trading at noon, contributing to a 4.6 percent decline for the week, the biggest drop in nine weeks. Tomorrow is a holiday in the Philippines.

Asian nations from Taiwan to Malaysia have reported smaller declines in exports as the world recovers from its worst slump since the Great Depression. China’s economy grew 7.9 percent last quarter from a year ago, while Singapore’s expanded an annualized 20.7 percent from the previous three months.

Completed Easing

The Bank of Korea kept its benchmark interest rate unchanged at 2 percent for a sixth month last week after its economy expanded at the fastest pace since 2003 in the second quarter. Australia’s central bank this month kept borrowing costs unchanged for a fourth time.

“Like other central banks across the region, Bangko Sentral has likely completed its easing cycle,” said David Cohen, an economist with Action Economics in Singapore. “With inflation subdued, they should remain patient, maintaining interest rates steady into next year, before likely raising rates around mid-2010.”

Bangko Sentral will likely keep borrowing costs at 4 percent for six months to a year, ATR-Kim Eng’s Lorenzo said.

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Australia’s central bank Governor Glenn Stevens may not wait for signs that unemployment has peaked before raising borrowing costs from a half-century low.

“I’ve never seen written down or heard in discussion some rule of thumb that says we wait until unemployment is peaking before we lift the cash rate,” Stevens said in Sydney yesterday. “Hopefully” policy makers will find “a suitably timely way of returning to normal when the right time for that comes.”

Australian stocks and the currency rose after Stevens also said the economy may rebound faster than the central bank forecast six months ago as consumer and business confidence surges. Traders boosted bets on the size of future interest-rate increases.

Stevens “basically said he’s not going to wait for unemployment to peak before raising rates,” said Rory Robertson, an economist at Macquarie Group Ltd. in Sydney. “That’s a fairly controversial thing for him to say,” and reflects the fact “the world is a much brighter place than it was three months ago.”

In the past two decades policy makers have never lifted borrowing costs at a time of rising unemployment, Robertson said.

Investors forecast the overnight cash rate target will be 112 basis points higher in a year, a Credit Suisse Group AG index based on swaps trading showed at 10:16 a.m. in Sydney. Before Stevens’ speech, they tipped 98 basis points of gains. A basis point is 0.01 percentage point.

Currency, Stocks

The Australian dollar rose yesterday after the speech to 83.38 U.S. cents, the highest in ten months. The currency traded at 82.45 cents as of 10:23 a.m. in Sydney.

Australia’s benchmark S&P/ASX 200 Index of stocks rose 0.7 percent yesterday as shares of retailers including Billabong International Ltd. jumped following Stevens’ remarks. The world’s largest publicly traded surfwear maker advanced 5.5 percent and Harvey Norman Holdings Ltd., the nation’s biggest electronics retailer, gained 1.5 percent. The index was down 0.3 percent today.

It appears “that the downturn we are having may turn out not to be one of the more serious ones of the post-War era, in contrast to the experiences of so many other countries,” the Reserve Bank chief told a function organized by the Australian Business Economists low fee payday loans.

“We can much more easily imagine upside risks to the outlook, to balance out the downside ones, than was the case six month ago.”

‘Not Beholden’

The government forecast in May that the jobless rate, which rose to 5.8 percent in June, will hit 8.5 percent in a year. The central bank, which also forecast in May that unemployment will climb without specifying a rate, is due to revise its economic predictions next month.

Stevens is saying “that he’s not going to be beholden to one particular variable if the weight of evidence is in the other direction,” said Joshua Williamson, a senior economist at Citigroup Inc. in Sydney.

“The downturn has been much less acute than feared, we’ve had a mountain of monetary and fiscal policy” and Stevens has “to make policy that’s relevant now and not based on some historical artifact.”

The governor left the benchmark overnight cash rate target at 3 percent on July 7 for a third month amid evidence a record 4.25 percentage points of cuts between September and April and A$12 billion ($9.9 billion) of government cash handouts to low and middle-income earners helped the nation skirt a recession.

‘Glass Half Full’

Signs of a rebound in Australia’s economy, which unexpectedly grew 0.4 percent in the first quarter after shrinking 0.6 percent in the fourth quarter, may prompt the central bank to revise its forecast for gross domestic product on Aug. 7.

In May, the bank predicted GDP would contract 1 percent this year before expanding 2 percent in 2010.

“It is becoming more common for Australians to see the glass as half full than as half empty,” Stevens said yesterday.

Stevens’ comment that there is no rule that the bank can’t raise rates before the unemployment rate peaks “makes us wary that he is preparing to break from convention,” said Felicity Emmett, an economist at Royal Bank of Scotland Group Plc in Sydney. “We have to be open to the Reserve Bank tightening.”

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The Bank of Canada will probably keep its benchmark interest rate at a record low today, and may say the strengthening Canadian dollar threatens a recovery that has been stronger than policy makers expected.

The target rate for overnight loans between commercial banks will stay at 0.25 percent in a decision due at 9 a.m. New York time, said all 23 economists surveyed by Bloomberg News. The central bank will probably reiterate a plan to keep that rate unchanged through June 2010, economists said.

“There is room to bring in a slightly more optimistic tone, but caution is the overarching theme,” said Stewart Hall, an economist at HSBC Securities in Toronto. “There is no interest in withdrawing stimulus anytime soon,” he said, because “there are gobs of excess capacity not only in the Canadian economy but the U.S. economy.”

Governor Mark Carney predicted in April the economy will shrink 3 percent this year, the most since 1933 during the Great Depression, and recent figures suggest the economy may soon expand again.

The economy will grow at a 1 percent annualized pace this quarter, said Jonathan Basile, an economist at Credit Suisse Holdings Inc. in New York, compared with the central bank’s April prediction of a 1 percent contraction. The median estimate of economists surveyed by Bloomberg is for a 0.5 percent expansion.

Economists surveyed by Bloomberg predict the economy will shrink by 2.4 percent this year, less than the 3 percent the Bank of Canada forecast last quarter.

Stronger-Than-Expected Data

Reports this month showed employment fell by less than economists expected, and the economy posted larger-than-expected gains in building permits, business spending and housing starts.

A year ago, the central bank’s benchmark interest rate was 3 percent, and the bank said the economy would grow 2.3 percent in 2009. Carney cut his forecast three times as the recession emerged.

The central bank may also repeat its concern, first stated June 4, that strength in the Canadian dollar could cancel out improvements in financial markets and consumer confidence.

The currency saw its biggest monthly gain in more than 50 years in May. Today, it trades near the level where the bank first noted its concern. That statement helped weaken the currency by as much as 5 percent over the following five weeks, before its recent gains.

Dollar Hits Competitiveness

The stronger currency makes Canada’s factory goods less competitive, in a year where the bankruptcies of General Motors Corp free car insurance quotes. and Chrysler Group LLC shut Canadian plants, dealers and parts suppliers. Factory sales have dropped by 29 percent since last July, and manufacturers fired 221,500 workers in the 12 months through June, an 11 percent drop.

Exports will fall 21 percent this year, the government’s export financing agency said July 9.

“There is still some skepticism in the consumers,” said William Lane, Chief Financial Officer at Imvescor Inc. in Moncton, New Brunswick, which operates restaurant chains including Baton Rouge and Mikes. “Our customers keep coming, but maybe they decide to have a glass of wine instead of a bottle.”

There are clearer signs of a financial-market recovery, meaning Carney probably will repeat he has no plans to use so- called quantitative easing, where the central bank creates new dollars and purchases assets to try to encourage new lending. Bond dealers last week declined to take up all of the central bank’s liquidity offerings for the first time in 43 auctions.

Businesses Optimistic

Canadian businesses are the most optimistic about future sales growth prospects in almost a decade, and obtaining new loans is becoming less difficult, Bank of Canada surveys published July 13 showed.

“We shouldn’t overplay at this stage the green shoots, to use the popular term, and we shouldn’t underestimate the scale of the challenge,” Carney told reporters June 11 in Montreal, referring to the prospects for a global economic recovery.

The central bank’s mandate is setting interest rates to keep inflation at 2 percent annually. It said in April inflation will average negative 0.8 percent this quarter, and not return to target before the second half of 2011. The bank traditionally gives highlights of its updated forecasts in the rate statement, and details its forecasts in the Monetary Policy Report two days later.

“We haven’t shaken off the shackles of the recession yet, so it’s a little bit early to send the all-clear signal,” said Doug Porter, deputy chief economist with BMO Capital Markets in Toronto. “Even if they change the decimal place a little bit, this is still a very serious recession.”

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The U.S. economy appears poised to resume expansion in the second half of this year with “subdued” growth, Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, said in a commentary in the Atlanta Journal-Constitution.

“I see the economy beginning to recover in the second half of this year,” Lockhart said in the printed commentary. “However, I expect growth to be relatively subdued for some time after it turns positive.”

Lockhart said he believes the recession is continuing, though “the pace of decline has slowed.” There are “some signs of stabilization” in housing, manufacturing, employment and consumer spending, he said quick payday loan.

Employers in the U.S. cut 467,000 jobs in June, more than anticipated by economists, pushing the unemployment rate to the highest in almost 26 years, the Labor Department reported July 2. The jobless rate of 9.5 percent has already met Fed policy makers’ projection in April that unemployment would peak at between 9.2 and 9.6 percent in the fourth quarter.

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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.”

Source

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