The Sri Lanka Presidential election is on 16 November. Bullish investors hope that the results of the Presidential election, and the Parliamentary election which might follow soon after, result in a clear Parliamentary majority. This will enable the implementation of the relatively straightforward policies needed for this 20mn population economy to more fully realise its potential – fiscal austerity to rebuild confidence in government debt and the FX rate, better security to rebuild the tourism sector and foreign direct investment to drive an upgrade of tourist and transport infrastructure.
With valuations so low, any step towards a government with a stronger political mandate is likely to be greeted favourably. Here, we look at three political chain of events needed to spark an upward investment re-rating.
1. Presidential election – Gotabaya is viewed by many as the favourite because of: (i) the failure of the incumbent government to either sufficiently distance itself from the previous Mahinda Rajapaksa-led government (in terms of anti-corruption, political devolution or civil war era human rights grievances), maintain internal unity (divisions have been publicly aired between President Sirisena and PM Wickremasinghe as well as between PM Wickremasinghe and the Presidential candidate from his own party, Sajith Premadasa) or to match the economic growth achieved under that Rajapaksa government; (ii) the success of the Rajapaksas in keeping their political network well-funded and well organised (evidenced by the formation of their new political party, the SLPP which swept the local elections in early 2018); and (iii) the Easter terror attack which may have made voters more responsive to the security credentials of Gotabaya (who organised the civil war efforts as Defence Minister). Whether this is sufficient to overcome the damage done to the Rajapaksas in the ultimately failed attempt to test Parliament’s confidence in PM Wickremasinghe in late 2018 remains to be seen.
2. Parliamentary election – Note that Sri Lanka is not a presidential system (such as that in the Philippines for instance) and therefore a parliamentary majority is needed to implement policy. The current parliamentary term runs until September 2020. But the President has the constitutional authority to dissolve Parliament after four-and-a-half years (March 2020), or if there is a two-thirds majority of MPs in support.
If the pro-government Presidential candidate Sajith Premadasa wins, it is possible that he will be in no rush to conduct the Parliamentary election early. Of course, if Gotabaya wins then he will likely push for a Parliamentary election as soon as possible.
3. Parliamentary coalition – At the depths of the incumbent government’s unpopularity, the new Rajapaksa-led party, the SLPP, won c40% of the popular vote in the February 2018 local election. In other words, even if the SLPP were to replicate this feat and capture 40% of Parliamentary seats in the next election (whenever that is), then it would still have to establish a stable and coherent coalition with other parties. In turn, this would likely require working with MPs in the SLFP loyal to the current President Sirisena (who is not standing for re-election and is effectively supporting Gotabaya’s candidacy).
5Relations between the Rajapaksas and Sirisena have been inconsistent and there is little to suggest the relationship will be stable in future: (i) Sirisena defected from the coalition led by Mahinda Rajapaksa prior to successfully defeating Mahinda in the January 2015 Presidential election; (ii) Mahinda led the breakaway from the SLFP when establishing his new SLPP before the February 2018 local elections; (iii) Sirisena and Mahinda appeared to reconcile when Sirisena attempted to replace PM Wickremasinghe with Mahinda in late 2018, but this renewed partnership soured when both seemed to suffer from the ensuing constitutional crisis; (iv) even on the eve of Sirisena pledging support for Gotabaya, there were negotiations over whether Gotabaya would campaign under the banner of Sirisena’s party or his own.