Sri Lanka’s presidential election could boost capital markets: FC

• Outlines four potential scenarios that could shape nation’s fiscal landscape and market performance post-election
• Says scenarios together present an 85% probability of positive results for investments in fixed income and equity market

By Nuzla Rizkiya

As Sri Lanka gears up for its presidential election in September, a capital market expert projected 85 percent likelihood of positive outcomes for the capital markets. 

First Capital Holdings Chief Research and Strategy Officer Dimantha Mathew outlined four potential scenarios that could shape the nation’s fiscal landscape and market performance post-election.

Mathew identified the most probable scenario as a continuation of the current status quo, with a 50 percent likelihood. This would entail a slow pace of the International Monetary Fund (IMF) programme implementation and incremental reforms. 

The second scenario, with a 30 percent probability, envisions a Parliament with a unified majority, potentially leading to more effective execution of the IMF programme.

Describing the third scenario as the “super great highway”, Mathew suggested that it represents an ideal situation where rapid reforms could attract significant foreign direct investment (FDI), reduce interest rates and drive a booming equity market. However, the chance of this optimistic scenario materialising is just 5 percent.

“This is a dream scenario where a pro-capitalistic Parliament accelerates the IMF programme implementation, resulting in extensive privatisations, robust FDI flows and possibly a reverse brain drain. Taxation could decrease significantly due to a reduced fiscal deficit and global support might increase with falling global interest rates,” Mathew said.

Conversely, the fourth scenario – “pothole scenario”, representing the worst-case outcome, involves political instability that could lead to severe economic challenges, such as soaring interest rates, high inflation and a sharp decline in the equity market. This scenario has a 15 percent probability, reflecting Sri Lanka’s history of political turbulence and administrative issues.

Despite these uncertainties, Mathew expressed optimism. 

“We believe that scenarios one, two and three will still yield positive outcomes for investors in the capital markets, whether moderately or highly positive. Thus, these scenarios together present an 85 percent probability of positive results for investments in fixed income and equity markets,” he asserted.

Mathew also highlighted the ongoing uncertainty and unpredictability of the election, emphasising the need for continuity in the IMF reform programme. He noted that unlike the previous governments that often manipulate interest rates and currency reserves in the lead-up to the elections, the current situation requires steadfast adherence to the IMF targets.

“This election differs due to the uncertainties surrounding the IMF agreement and potential government changes. The IMF targets are fundamental and must be met regardless of the government,” Mathew stressed.