Election outcome weighs on investor sentiment

• Investors look for stability and direction 
• Govt.’s reform agenda likely to slowdown 
• Analysts expect some fiscal slippage with populist measures creeping in

The Colombo bourse’s indices ended yesterday’s trading in the red territory with the outcome of Saturday’s local government election weighing on the investor sentiment.

The landslide victory by the Sri Lanka Podujana Peramuna Party (SLPP) backed by former President Mahinda Rajapaksa has evidently shocked the reform-oriented coalition government of the United National Party (UNP) and Sri Lanka Freedom Party (SLFP). 

As Mirror Business reported yesterday, the government’s reform agenda—both economic and political—is likely to lose momentum, at least in the short term, if a change in the current parliament’s composition takes place.

Speculation was rife yesterday evening that the UNP will move away from the coalition and form a government of its own with the support of several SLFP parliamentarians, who would cross over. 

However, analysts point out that even if the UNP was able to form a government, its ability to push forward the reform agenda will be highly restricted in the current political context. 

Analysts also said some fiscal slippage can be expected with the government trying to appease the masses with tax cuts and subsidies as higher cost of living was a key slogan of the Rajapaksa faction during their election campaign.  

During a press conference yesterday, Rajapaksa called for parliament to be dissolved for fresh elections despite the constitutional roadblocks for such a move.  

“The uncertainty after the defeat brought down the market. Investors will wait to see some stability and directions on how both the coalition partners are going to go forward with a stable government,” Acuity Stockbrokers CEO Prashan Fernando was quoted as 
saying to Reuters. 

The benchmark All Share Price Index fell 29.30 points or 0.45 percent to close at 6542.99 and the more liquid S&P SL20 Index fell 15.21 points or 0.41 percent to close at 3714.97. The day’s turnover stood at Rs.598 million, well below last year’s daily average of Rs.915.3 million.

Foreign investors, however, bought a net Rs.289.2 million worth of shares, extending the year-to-date net foreign inflow to Rs.5.3 billion.
Asia Securities said crossings accounted for 31 percent of the turnover with three crossings recorded in Softlogic Holdings PLC (Rs150.4 million) and one crossing recorded in Sampath Bank PLC (Rs.31.9 million).

The diversified sector was the highest contributor towards the turnover with Rs.278 million followed by banks, finance and insurance sector and construction and engineering sector generating Rs.241 million and Rs.18 million, respectively. 

Brokers said retail activity was witnessed in counters such as Softlogic Holdings, RIL and Lankem Development. 

MR demands fresh polls after victory 

Mahinda Rajapaksa

REUTERS: Former Sri Lankan President Mahinda Rajapaksa called yesterday for parliament to be dissolved and fresh elections to be held after a party backed by him won local council polls in the strongest rebuff yet to the unity government.

The national election is not due until 2020 and under the constitution President Maithripala Sirisena can bring the vote forward only after two-thirds of parliament endorses it.

But Rajapaksa, who crushed the Tamil Tiger rebels in a 26-year civil war before he was ousted in 2015, said the coalition government led by Sirisena’s party and Prime Minister Ranil Wickremasinghe’s group had lost the people’s confidence.

“These results show people want a change now. The government has lost its mandate,” he told a news conference.

Rajapaksa’s Sri Lanka Podujana Peramuna (SLPP) won the control of 231 local councils out of a total 340 while Wickremasinghe’s centre-right United National Party (UNP) took 34 councils and the rest were split among other parties.

The political uncertainty hurt sentiment on the Colombo Stock Exchange index, pushing it down 0.37 percent at close. Sri Lanka’s rupee fell 0.5 percent to hit a record low of 155.00/20 per dollar, surpassing its previous all-time low of 154.60/70 hit last week.

Rajapaksa’s campaign targeted an uptick in inflation, higher taxes imposed by the government and its moves to privatise state assets.
“To overcome this economic crisis, we are urging the government to hold parliamentary elections immediately in order to set up a stable government,” Rajapaksa said.

As the surprise results came out over the weekend, political analysts said there was a possibility that some lawmakers from Sirisena’s party, which performed the worst, could defect.

Rajapaksa, who was accused of corruption, nepotism, and mismanagement of the economy during his term, has since rallied his support base of rural Sinhala Buddhists to make a political comeback. 

Rupee hits record low on foreign bond sales after poll results

REUTERS: The Sri Lankan rupee ended down yesterday after hitting a record low during the day as foreign investors sold government securities following local election defeats at the weekend for ruling coalition parties.

President Maithripala Sirisena’s centre-left Sri Lanka Freedom Party (SLFP) and Prime Minister Ranil Wickremesinghe’s centre-right United National Party (UNP) suffered defeats, raising concerns over the future of the unity government.

The surprise win by a political party backed by former President Mahinda Rajapaksa, who lost the presidential poll in 2015, could undermine the island nation’s unity government and its reform agenda, analysts said.

Rajapaksa’s Sri Lanka Podujana Peramuna (SLPP) won control of 231 local councils out of a total 340 while Wickremasinghe’s centre-right United National Party (UNP) took 34 councils and the rest were split among other parties.

Rajapaksa yesterday called for fresh elections following the local council polls, which marked the strongest rebuff yet to the unity government.
The rupee, which traded at record low of 155.00 during the day, ended at 154.95/155.05 per dollar yesterday, compared with Friday’s close of 154.27/35 per dollar. It surpassed its previous all-time closing low of 154.60/70 hit on Tuesday. “There were selling on (treasury) bonds by foreigners due to the political uncertainty and also the EU listing of Sri Lanka on a money laundering blacklist,” said a currency dealer.
“Rupee will be under pressure to depreciate until we see a solution to the political uncertainty or giving confidence to the market.”

Last week the rupee held steady compared to the previous week, but it has fallen 0.95 percent so far this year, Thomson Reuters data showed.
Dealers said they expected the currency to be pressured by continued demand by importers for dollars.

They expect a 2-3 percent depreciation in the rupee and higher volatility this year on account of debt repayments by the government. The rupee fell 2.5 percent last year and 3.9 percent in 2016.

President Maithripala Sirisena’s administration must repay an estimated Rs.1.97 trillion in 2018 - a record high - including US $ 2.9 billion of foreign loans and a total of US $ 5.36 billion in interest.

Foreign investors sold a net Rs.6.03 billion worth of government securities in the week ended February 7.

The outflow reversed the foreign holding of government securities to a net outflow of Rs.171.4 million so far this year up to February 7, the Central Bank data showed.

The markets will be closed for a public holiday today. Normal trading will resume tomorrow.