SL fundamentals strong for frontier revival; Budget must focus on fiscal reforms momentum

• CAL Group CEO lauds Government’s wider tax net, significant revenue gains, fiscal discipline
• Urges shift to capital spending, tax moderation to draw private investors; effective tax on distributed profits at 40%
• AFC says 17% fall in SL stocks in Dollar terms this year overdone; headwinds external, not structural
• CAL’s 51% acquisition of AFC opens door to $ 900 b GDP footprint, in strategy to reach $ 1 t by 2030

Sri Lanka’s economy is on a strong footing on the back of fiscal discipline and significantly higher Government revenue, and is well placed to gain as frontier markets enter a new cycle of global investment, executives of Capital Alliance Holdings PLC (CAL) and Asia Frontier Capital Ltd., (AFC) said yesterday.

Speaking at a media briefing on CAL’s acquisition of a 51% stake in the Hong Kong-based fund manager, Group CEO Kanishke Mannakkara said the fiscal responsibility framework must continue through the upcoming Budget.

“The Government has made some very laudable efforts at widening the tax net, and the level of Government revenue in the country has increased very significantly,” he said.

Mannakkara called for a healthy primary surplus, a contained fiscal deficit and a shift from recurrent expenditure to capital investment, including through changes to procurement rules. With slightly more fiscal space, he said, the Government should consider moderating, rather than cutting, taxes to attract private investors.

“Right now in Sri Lanka, if you make 100 rupees of profit, by the time you pay your corporation tax and your dividend distribution tax, you pay 40%. It’s not 30%,” he said, noting that many countries set personal tax rates above corporate rates.

Mannakkara said Sri Lanka had strong momentum early this year before tensions in the Middle East hit prices, and that it and a few other frontier markets remained on course for significant growth that would restore investor confidence. “Of course, the big caveat is that things can change for the worse in the Middle East, and then all bets are off.”

AFC Fund Manager Ruchir Desai said Sri Lankan equities were down around 17% in US dollar terms this year, against about 1% for Pakistani stocks, and the Rupee had also weakened, but the sell-off looked overdone given the country’s economic position.

“The primary headwinds for Sri Lanka right now are external and geopolitical rather than structural domestic issues. Once tensions in the Middle East subside, I expect Sri Lanka and neighbouring regional markets to regain upward momentum,” Desai said.

He said the market would probably have posted solid gains this year had the war not occurred, as Sri Lanka had been recovering well since the 2022 crisis, with lower inflation and better political stability. Global geopolitics remained the main swing factor, he added. AFC’s own monthly updates attributed a 7.9% fall in its flagship fund in March 2026 to Middle East uncertainty that unsettled investors in Vietnam, Bangladesh, Pakistan and Sri Lanka, followed by a 6.3% rebound in April after a ceasefire announcement.

Mannakkara said valuations were now near cyclical lows, and even in fixed income, higher interest rates meant lower entry prices for buyers. “Across the board, Sri Lankan assets have re-priced attractively, presenting viable opportunities across both equities and fixed income,” he said, cautioning that what looks attractive today could look different in six months, depending on where the economy sits in the cycle.

He said far more global capital had been allocated to frontier markets 12 to 14 years ago than today, as allocators exited the asset class. “These things do move in cycles, and we think this is probably the start of a cycle for frontier again.”

With global money flowing disproportionately into AI infrastructure, Mannakkara argued that frontier markets’ weak or negative correlation with the rest of the world made them a natural diversifier, and that their perceived risk exceeded actual risk for investors with a presence on the ground.

CAL Global Markets and Investment Banking Managing Director Deshan Pushparajah said global markets were volatile, driven largely by AI trades, while frontier economies rooted in real goods and resources offered international investors a counterbalance.

Desai said Sri Lanka was in a strong position and should maintain its momentum, noting that past Budgets had been marked by unstable tax policy. “Whether it’s this Budget or next year’s Budget, what matters is policy stability, to give investors confidence.”

AFC Founder and CEO Thomas Hugger said that while portfolio investment mattered, Sri Lanka needed foreign direct investment from multinationals and large corporations, and should use its strategic location to attract it. Citing Uzbekistan, where the current President opened the country, scrapped visa requirements for visitors and allowed investors to enter and exit freely, he said Sri Lanka must make it easy for foreign investors both to invest and to exit.

CAL’s wholly owned Singapore subsidiary CAL Global Pte. Ltd. signed a Share Purchase Agreement on 2 November, 2026 to acquire the 51% stake for approximately $ 2.5 million, subject to conditions precedent and regulatory approvals, including from Hong Kong’s Securities and Futures Commission.

AFC managed approximately $ 125 million as at 30 September, 2026, through the multi-country AFC Asia Frontier Fund and dedicated funds for Vietnam, Uzbekistan and Iraq. 

The flagship fund invests in listed companies with their principal business in 20 Asian frontier markets where favourable demographics, rising incomes and high GDP growth are driving consumption: Bangladesh, Bhutan, Cambodia, Georgia, Iraq, Jordan, Kazakhstan, Kyrgyzstan, Laos, the Maldives, Mongolia, Myanmar, Nepal, Oman, Pakistan, Papua New Guinea, Sri Lanka, Timor-Leste, Uzbekistan and Vietnam. 

According to AFC, its USD A-shares returned 27.1% in 2023, 23.1% in 2024, 19.7% in 2025 and 9.25% in the first nine months of 2026, while the AFC Iraq Fund returned 175.6% in the three years to March 2026.

Mannakkara said AFC had effectively doubled in size over the last four years, while CAL’s assets under management rose roughly 15 to 17 times over eight years to more than $ 1.2 billion across Sri Lanka and Bangladesh.

He said the deal addressed the complexity that kept global capital away from markets such as Sri Lanka, Bangladesh and Pakistan, as AFC already had the infrastructure for global investors to take positions in frontier markets easily. “Having the plumbing is useless if you don’t have the deals. AFC gives the plumbing.”

With Sri Lanka’s GDP at about $ 100 billion and Bangladesh’s just under $ 500 billion, Mannakkara said AFC’s three markets added a further $ 900 billion or so. At its initial public offering in April 2025, CAL set a target of serving economies with a combined GDP of over $ 1 trillion by 2030.

“Sri Lanka itself is too small to really be interesting for global capital. It’s by incorporating Sri Lanka into a bigger picture and a bigger story that you can really add value,” Mannakkara said.

Pushparajah said CAL’s presence in Bangladesh had already opened that market to Sri Lankan investors and companies, and AFC would take the group into Southeast, Central and West Asia, connecting frontier markets with one another.