Kate’s Sapphire Gives Royal Boost to Sri Lanka’s Exports

November 18, 2011, 7:19 AM EST

By Anusha Ondaatjie

(Updates stocks in fifth paragraph.)

Nov. 18 (Bloomberg) — It’s a good thing for Sri Lanka that Kate Middleton didn’t get cold feet.

Prince William’s choice of a Ceylon blue-sapphire engagement ring for Middleton, publicized ahead of their April royal U.K. wedding, became the centerpiece of a Sri Lankan marketing campaign that saw gem exports jump 37 percent in the year through October. The National Gem and Jewellery Authority says the value totals $77 million so far this year, boosted by Middle East demand for blue sapphires.

The drive is part of a broader strategy to reconnect Sri Lanka with global commerce after a 26-year civil war ravaged the economy, which includes a record port-building campaign financed in part by China. Officials aim to double shipments abroad, which make up one-fifth of the economy, to $20 billion by 2020, and in next week’s budget may unveil measures to help exporters.

“Sri Lanka is favorably located on international shipping lanes, which make it a natural export and transshipment hub” with access to 1.5 billion people in its neighborhood, said Mark Mobius, who oversees about $40 billion in emerging-market assets as executive chairman of Franklin Templeton Investments’ Emerging Markets Group. Mobius said that his company is studying the Sri Lankan market for purchases of public equity stakes and private investment, with “interesting” industries including property, hotels, consumer goods and retail.

Stock Performance

The country’s Colombo All-Share Index has fallen about 8 percent this year, less than the 16 percent decline in the MSCI Asia Pacific Index. The benchmark rose 0.7 percent as of 2:23 p.m. local time today.

Exports are likely to reach $10 billion this year, beating an earlier government target of $9.2 billion and the 2010 value of $8.3 billion, said Janaka Ratnayake, Chairman of the Export Development Board. The organization is aiming for shipments to reach $20 billion by 2020.

To achieve those targets, the government established a “Pure Ceylon Cinnamon” trademark for the island, the world’s biggest producer of the spice, and will host the Sri Lanka Expo in 2012. Kate’s ring is the focus of promotional material on the Ceylon Sapphire website and at overseas trade fairs.

William, known since his marriage as the Duke of Cambridge, used the sapphire ring that belonged to his late mother Diana, Princess of Wales. Sri Lanka’s fame for its gems is historic, with Italian explorer Marco Polo credited with praising the island’s rubies and sapphires.

Vulnerability Risk

“The policy of targeting exports is necessary,” said Jay Shankar, Mumbai-based chief economist at Religare Capital Markets Ltd. Still, the country needs to ensure it doesn’t become “overly dependent on exports,” making it vulnerable to a slowdown in global demand, he said.

The government may give tax breaks or cheaper financing to exporters in its 2012 budget to be unveiled on Nov. 21, said Sanjeewa Fernando, an analyst at CT Smith Stockbrokers Pvt.

Sri Lanka, located 31 kilometers (19 miles) southeast of India and on the main shipping lanes linking Asia and Europe, is targeting investment of about $3.4 billion to expand ports and create facilities capable of competing with Singapore and Dubai. China has committed at least $3.7 billion since 2005 for projects from ports to a power plant, pledging $307 million in 2007 to the initial phase of the tax-free port in Hambantota.

Retail Supplier

Textured Jersey Lanka Ltd., which supplies knitted fabrics to Marks Spencer Group Plc and Limited Brand Inc.’s Victoria’s Secret, and Ceylon Tea Services Plc, which sells the Dilmah brand, are among companies benefiting from Sri Lanka’s export boom, according to CT Smith Stockbrokers in Colombo.

Ceylon Tea’s shares climbed 16 percent in the first half of 2011, more than the 2.9 percent increase in the benchmark stock index, before declining in the following months as investors sold emerging-market assets on concern the European debt crisis and a faltering U.S. recovery will lead to a global slowdown. Sri Lanka’s export growth has eased to 19 percent in August from 72 percent in January.

Local exporters also have to face a strengthening currency and the loss of trade privileges previously offered by Europe as they seek growth. The European Union in August 2010 withdrew tariff concessions for Sri Lankan goods including apparels due to alleged human rights violations, while the rupee has climbed about 4 percent since President Mahinda Rajapaksa’s government crushed the Liberation Tigers of Tamil Eelam separatist forces in May 2009.

Energy Cost

High energy costs in Sri Lanka, with “electricity tariffs being amongst the highest in South Asia,” will also reduce the island’s global competitiveness, said Shankar.

Still, the EDB has drawn up a 170-page strategy document laying out guidelines to reach an interim target of $15 billion in exports by 2015, through doubling overseas shipments of items ranging from gems and jewelry to business processing and spices.

The government may give tax cuts to lenders including Commercial Bank of Ceylon Plc in next week’s budget, releasing more funds for concessionary loan schemes to industries including agriculture and fisheries, said Bimanee Meepagala, a Colombo-based analyst at NDB Aviva Wealth Management Ltd., the nation’s biggest non-state fund.

Sri Lanka’s $50 billion economy may expand 8.3 percent this year, faster than the 8 percent growth in 2010, according to the central bank, a performance unmatched in International Monetary Fund data for the nation since at least the 1970s.

Unemployment needs to be reduced from 4.3 percent, Central Bank of Sri Lanka Governor Ajith Nivard Cabraal said Nov. 2. Almost 10 percent of the island’s 20 million people live on less than $1 a day.

“Our challenge is to maintain an 8 percent to 10 percent economic growth in the next five years,” Rishad Bathiudeen, Minister of Industry and Commerce, said in an e-mail. The government hopes per capita income will rise to $4,000 in 2016, he said.

–With assistance from David Merritt and Cherian Thomas. Editors: Stephanie Phang, Chris Anstey

To contact the reporter on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net

To contact the editors responsible for this story: Hari Govind at hgovind@bloomberg.net; Stephanie Phang at sphang@bloomberg.net]

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