Ajith Nivard Cabraal: Convincing.

Bloomberg/Colombo/Hong Kong

Sri Lanka’s central bank governor hailed the island nation’s ability to contain inflation and keep the currency stable as he sought to convince investors its economy is avoiding the pitfalls affecting neighbouring India.

Stable interest rates and prices would help Sri Lanka’s rupee trade with less volatility than many other countries in Asia, Central Bank of Sri Lanka Governor Ajith Nivard Cabraal said yesterday in an interview with Rishaad Salamat on Bloomberg Television. Sri Lanka, an island off India’s southeast coast, has an economy one-thirtieth the size of its neighbour.

“Lots of people look at Sri Lanka and India together, and as a result what happens there is of consequence to us as well,” Cabraal said. “But we have been able to distinguish Sri Lanka’s economy from India, and as a result of that many investors now see us separately.”

Cabraal is part of a delegation visiting Hong Kong to convince foreign investors to buy Sri Lankan stocks, which are among the cheapest in Asia at 11.5 times reported profit. He said the economy was on track to grow 7.5% this year and may expand 8% in 2014 to outpace India, which posted its slowest growth in a decade during the last fiscal year.

“Sri Lanka is definitely in a better position than India,” said Bimanee Meepagala, a Colombo-based analyst at the country’s largest private fund NDB Aviva Wealth Management. “While their economy is slowing, Sri Lanka’s growth is still on a positive trajectory.”

Sri Lanka is “conscious” of the need to keep next year’s inflation rate at between 4% and 6%, Cabraal said at the investor forum in Hong Kong. Last month the central bank kept its policy interest rates unchanged and said inflation is expected to remain in single digits for the rest of 2013.

Sri Lanka’s growth slumped to 6.4% in 2012 on falling demand for the island’s exports, which range from tea to textiles. The economy expanded more than 8% in each of the two years following the end of a three-decade civil war in 2009.

Cabraal said August 28 that the central bank intervened in the currency market as the US Federal Reserve’s plan to withdraw stimulus prompted investors to take out funds from emerging markets.

Sri Lanka’s $59bn economy is “about to take off” and amendments to legislation may help encourage foreign flows, Securities and Exchange Commission Chairman Nalaka Godahewa told Bloomberg Television yesterday.

Foreigners have bought a net $129mn of Sri Lankan shares as of September 5, after net purchases of about $300mn in 2012, according to the data compiled by Bloomberg.

Foreign investors so far this year have accounted for about 38% of market turnover in Sri Lanka, triple the amount from 2011, stock exchange data show. Even so, daily average turnover amounted to about 896mn rupees ($6.7mn) through September 4, down from Rs2.3bn in 2011, the data show.

The benchmark Colombo All-Share Index has dropped 35% from a 2011 high after quadrupling in the aftermath of the civil war. The index fell 0.1% yesterday.

Only one company has sold shares in an initial public offering this year, raising less than Rs1bn. Tax exemptions on interest earned from listed corporate bonds helped prompt 10 companies to raise Rs24bn in debt IPOs in the period.

Five more debenture IPOs are in the pipeline for the rest of this year, and one more initial equity share sale is expected in the next two months, said Krishan Balendra, chairman of the Colombo Stock Exchange.

“The US economy is now starting to gain some traction, so tapering the QE would probably be a good move,” he told Bloomberg Television, referring to the Federal Reserve’s quantitative easing programme.

John Keells Holdings and Commercial Bank of Ceylon, two of the bourse’s five biggest stocks by market value, are among 11 companies that sent representatives to the investment forum in Hong Kong. Similar events were held earlier this year in Mumbai and Dubai.