Sri Lanka investors to weather truce collapse

By Peter Apps - Analysis

LONDON (Reuters) - Sri Lanka's unilateral withdrawal from an already moribund ceasefire with Tamil Tiger rebels will likely deepen its international isolation, but it may do little to dent investor sentiment towards the island.

The Norwegian-brokered 2002 ceasefire halted two decades of conflict, but effectively collapsed in late 2005 and early 2006 into outright war across swathes of the minority Tamil dominated north and east, with occasional bombings in the southern Sinhalese heartland and capital.

But the truce continued to exist on paper until Wednesday, when the government announced it would pull out of after the latest in almost daily bombings by suspected Liberation Tigers of Tamil Eelam (LTTE).

"We already knew the ceasefire was over," said Jennifer Harbison, South Asia desk head for London-based consultancy Control Risks. "It is perhaps a curiosity ... but I don't think it makes any actual difference."

After a government air raid killed the Tiger political leader and chief negotiator in November, shadowy rebel leader Velupillai Prabhakaran said he no longer held out hope of a negotiated settlement with President Mahinda Rajapaksa's government. He renewed his call for an independent Tamil state.

Other analysts and diplomats said the official end of the ceasefire might usher in further escalation in a conflict that has killed more than 5,000 people since early 2006, bringing the war's total death toll to around 70,000.

Colombo's stock market, lost 6.7 percent last year on weakened international and domestic sentiment, while the rupee fell nearly one percent against a falling dollar.

But the central bank is forecasting growth of 7 percent for the $26 billion economy in 2008 and the sale of a $500 million Eurobond in October was heavily subscribed. Economists say the war has had relatively little impact on activity in the south.