Sri Lanka has downgraded its growth forecast for 2009 in line with a global meltdown, but the local markets are hoping a quick end to the drawn-out separatist war will restore confidence.
The Central Bank of Sri Lanka said on Friday it was revising GDP projections by a full percentage point to five percent in 2009 compared to the forecasted six percent in 2008, when fighting between troops and Tiger rebels escalated.
But Geeth Balasuriya, of privately run HNB Stockbrokers, said the government's capture of the Tamil Tiger political capital Kilinochchi on Friday had made the market bullish. It had lost 40 percent of its value during 2008.
"We can expect the positive sentiment to get a boost with stronger volumes next week," Balasuriya said. People partied in the streets of capital Colombo and elsewhere, while the tiny stock market roared to life as news of the military capture of Kilinochchi was announced.
The All Share Price Index gained 5.02 percent on Friday.
Brokers said investors are hoping a military victory will boost investor confidence and attract foreign investment into the war-hit island, which has been battling the insurgency since 1972.
"The anticipation of a final solution close at hand could trigger a mini-rally, with interest in infrastructure and tourism-related companies, which have been hurt the most," said Alastair Corea, of Orion Fund Management.
Tourism, Sri Lanka's fourth largest foreign exchange earner, fell 18.2 percent to 36,901 visitors in November 2008 over the same period in 2007, as the fighting scared off holiday-makers from Europe and Asia.
The construction and housing industry is reeling from high interest rates and double digit inflation, which ended at 22.6 percent in 2008 - largely due to the government's high military spending. "A near end to the war or the anticipation that we are getting there soon, will give some breathing space to the public and investors, who have cut costs to fund the war," said Mohan Thangarajah, analyst at First Guardian Equities.
An opinion poll conducted by privately run TNS Lanka last month showed the government has overwhelming public support for the war and most people believe the rebels will soon be defeated. "Public sentiment is that the government has consistently delivered on the war, despite the economic hardships, high inflation, job cuts and slowdown in investments," said Thangarajah.