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
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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
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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.