Sri Lanka Information Technologies Report Q2 2012

Market Overview

BMI View: The Sri Lankan IT market growth is expected to moderate in 2012, after benefiting from alocal and regional economic recovery in 2011. However, a projected 2012-2016 CAGR of 16% makes SriLanka one of the fastest growing markets in the region, albeit from a low base. The IT market hasconsiderable latent potential and the restoration of peace and improvements in security have helped torelease enterprise demand for IT solutions as companies look to boost efficiency. For now the largecorporate segment provides the main market for enterprise solutions but the SME sector has the potentialto drive enterprise application spending over the next few years.

Headline Expenditure ProjectionsComputer hardware sales: US$268mn in 2011 to US$302mn in 2012, +13% in US dollar terms.Forecast in US dollar terms unchanged, and, as basic infrastructure improves in areas outsideColombo, there is potential for strong growth in the north and east.Software sales: US$48mn in 2011 to US$55mn in 2012, +15% in US dollar terms. Forecast in USdollar terms unchanged, one restraint being the high level of software piracy, with nine out of 10packages in use believed to be unlicensed.IT services sales: US$74mn in 2011 to US$87mn in 2012, +18% in US dollar terms. Forecast in USdollar terms unchanged with the government, finance and telecoms sectors accounting for at least halfof the total services spend.

Risk/Reward Ratings: Sri Lanka's score was 28.3 out of 100.0. The country ranked in last place in ourAsia region RRR table and had the lowest or joint-lowest score in each ratings category, including ITmarket and Country Risk. Despite this, the country's status as a frontier market with high growth potentialshould see it rise up the rankings over time.

Key Trends & Developments.

Sri Lankan IT spending should continue to benefit from the government's cut in taxes and duties onelectrical products, which resulted in a double-digit surge in demand for computers in H111. We forecastcontinued double-digit growth in all segments of the IT market.

The government's 2012 Budget, delivered in November 2011, envisaged a key role for ICT indevelopment of all sectors, a continuation of the seven-year e-Sri Lanka programme and island-wideavailability of broadband. Computerisation has only just started in many areas of government and theInland Revenue Department, for example, is required to be fully automated by 2013.

Growth in IT spending will be stimulated by the ongoing modernisation of Sri Lanka's banking sector,which should provide opportunities for IT vendors. The tourism industry is also projected to grow rapidlyand technology is a key part of plans to assist the sector to improve efficiency and cope with increasingdemand. Liberalisation and more competition in the telecoms sector should have a multiplier effect withregard to demand for IT.