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Summary 2-term President Rajapksa loses despite calling election 2 years early. President Sirisena calls for National Government in ‘Rainbow Coalition’. China’s Economic Influsence likely to be reduced, but any shortfall likely to be made up from elsewhere. India likely to play a more prominent role in economic activity. The election is a milestone in Sri Lanka’s maturing democracy and may well represent a milestone in its economic progression. Background On Thursday January 8th 2015, Sri Lanka went to the polls in a Presidential election. This election had been called 2 years early by President Rajapaksa following evidence of declining support for a President that had once been hailed as a national hero . Indeed, his party’s previous dominance had allowed him to change the constitution and permit his seeking a third term. However, despite this wavering support, few expected him to actually lose the election. In the event, Maithripala Sirisena, a former health minister in Mr. Rajapaksa’s cabinet, won the election and was immediately installed as President. Whilst polls had shown the 2 candidates to be level pegging, this result remained shocking. It is thus necessary to consider whether this is evidence of a maturity in Sri Lankan politics or a dangerous change of course following a period of solid economic advance. The Election Despite rumors that elements of the police and army were intimidating anti-Government supporters prior to the election, the poll went ahead in a relatively peaceful fashion. Around lunchtime on the 9th, President Rajapaksa conceded defeat and left the Presidential Residence. That evening, President Sirisena was inaugurated as President and congratulations poured in on a smooth transition from the country’s neighbours and indeed from US Secretary of State Kerry . However, on January 11th, news emerged that the transition may not have been as smooth after all. An aide to President Sirisena announced that President Rajapaksa had approached the police and military seeking support to remain in office. An attempted coup was claimed . However, even if this is correct, the police and military refused to support Mr. Rajapaksa and a peaceful transition has been effected. It seems highly unlikely that Mr. Rajapaksa will make any further attempt to unseat his successor following his rejection by the security forces. Moreover, it is likely that this initiative will be used by President Sirisena and his supporters led by the United National Party (‘UNP’), as a way of pressuring Mr. Rajapaksa’s Sri Lankan Freedom Party (‘SLFP’) ahead of April’s parliamentary elections. From this perspective, it seems likely that the Rajapaksa family’s dominance of Sri Lankan politics (and indeed business life) is at an end. Winners and Losers The principle losers from this election are the Rajapaksa family and China. It was no secret that members of the Rajapaksa family had benefited from their family connection to the President. Whether by holding official office or by their involvement in business deals, the ‘first family’ had clearly benefited. One of the first questions private equity or strategic investors made was which part of the family would be involved and what their expectations would be. Their involvement in the country’s business life cannot be removed overnight. A comparison may be made with some of the business associates of President Suharto of Indonesia whose influence certainly waned following his removal from office, but didn’t disappear. However, it is equally clear that Mr. Rajapaksa’s loss was at least partially owing to discontent with the nepotism that had marked his rule. Many of the transactions in which they had been involved were with Chinese investors . Indeed, a simple overview of Sri Lanka’s international relations during President Rajapaksa’s rule involves China supplying the armaments and finance required to extinguish the LTTE and in return being given a prominent role in the country’s economic expansion. Whilst this certainly involved providing access to money and equipment that has propelled the rebuilding of Sri Lanka’s infrastructure at a rapid rate, critics pointed to the Chinese investment as being a quid pro quo for securing a naval base in the Indian Ocean. Such Chinese involvement naturally put pressure on Sri Lanka’s relationship with neighbouring India. President Sirisena has already talked about China being a good friend to Sri Lanka but warned about not being behoven to any one nation. Additionally, his election manifesto included the cancellation of the Colombo Port City project, a US$1.3 billion project to reclaim land and build everything from high rise offices and apartments to a Formula 1 Grand Prix track. If he carries out these promises, it is clear to annoy China on both economic and strategic grounds. Indeed some have hailed the defeat of President Rajapaksa as destroying China’s overall Indian Ocean Foreign Policy and placing a dent in its ambitions to build a global network of ports. This is likely to be exaggerating things a little, at least at this stage. It is easy to point to India as being the strategic winner from this election. It understandably held concerns about China’s influence both economically and militarily in Sri Lanka. Additionally, the economic policies of the ruling BJP are more in line with the UNP in Sri Lanka than they were with the more left wing Rajapaksa administration. Additionally, the religious minorities of Sri Lanka were solidly behind President Sirisena, and polls indicate that the size of their turn out was a major influence in his victory. Whilst President Sirisena and his key supporters are Sinhalese, it is likely that their policies will be more accommodative of minorities than had been the case with the previous administration. Hence his call for a ‘rainbow coalition’ Invest or Wait? Let’s consider the key questions at this time: · Will President Sirisena change economic course in Sri Lanka to the detriment of investors? o Highly unlikely. His key supporters (UNP) have a more pro-business posture than the SLFP and have been critical of policies (such as the land reform bill) that were deterring to foreign investors. · What will the impact be of cancelling the Colombo Port City project and the planned integrated resorts (casinos)? o The Port City was certainly a massive project and the construction and engineering would certainly have added to the local economy. However, there were major doubts about its ambition and viability. o Given recent revenue contraction in casinos from Macau to Singapore and the planned launch of casino based projects in many other East Asian countries, it is questionable whether building such projects in Colombo would have had a big impact on tourist arrivals and expenditure. Sri Lanka has a wealth of attractions for tourists and many would argue that it can continue to accelerate its tourism industry without resorting to gambling. · Are the upcoming Parliamentary Elections important? o President Sirisena has pledged to reverse the trend of increasingly centralized Presidential power that evolved during President Rajakasa’s terms and strengthen parliament. However, this may be the largest uncertainty given the composition of the coalition which supported his candidacy. o There is little doubt that this coalition was more ‘anti-Rajapaksa’ than it was ‘pro-Sirisena’. Equally, that Sirisena comes from the left-leaning SLFP but now is supported by the right-leaning UNP creates uncertainty. He talks of a “rainbow cabinet’ but this may turn out to be a more effective sound bite with echoes of Mandela than a sustainable coming together of previous enemies. o President Sirisena now has 3 months during which he must bring together elements of multiple parties into a coalition which will support him and demonstrate leadership prior to the election. This will require an impressive level of political maneuvering and only time will tell whether he can pull this off to create a balanced but effective government. The worst case scenario is for the coalition to fracture and leave him without a power base. o His Prime Minister, Ranil Wickremsinghe, was the driving force behind the selection of Mr. Sirisena and is the leader of the UNP. The day to day relationship between these two gentlemen is going to be critical as if Sirisena is regarded as being a puppet of the UNP, then the coalition could fracture rather easily. · Should we be concerned about China being annoyed? o In a word…’No’. Whilst there is little doubt that a return of Rajapaksa would have been China’s preference, they will not want to endanger their access to this strategically important island. Whilst the military benefits of Sri Lanka were often focused upon, the economic benefits of having a trans-shipment option that is lower cost and arguably more convenient to Singapore or Malaysia is also key to Chinese interests. o As mentioned above, this may also allow India and Sri Lanka to become friendlier, particularly given the friendship of Messrs Modi and Wickremsinghe. It would be no surprise if Mr. Modi was one of the first visitors to Sri Lanka, bringing with him promises of additional trade and support. · What about the response of other Countries? o The removal of Mr. Rajapaksa who was the architect of the crushing of the Tamils may bring Sri Lanka closer to its Commonwealth brethren as well as the US. This may well translate directly into expanded financial support as well as giving the country the ability to face the events that accompanied the ending of the civil war without being punished for retaining as President the architect of these events. o It is likely that international relations will improve under Mr. Sirisena and Sri Lanka may once again focus on promoting its many strengths rather than defend its recent history. Conclusion Whilst there are reasonable uncertainties about President Sirisena’s political leadership and his ability to build a sustainable coalition, the positives from this election exceed the doubts. International investment will be more balanced and strategic investors are less likely to be frozen out by preference for ‘first family’ initiatives or Chinese investment. Despite this, credit has to be given to President Rajapaksa for the great strides that Sri Lanka has made over recent years. The country now has a solid foundation of infrastructure including power generation and transportation from which it can build. In m y previous article , I argued that there were many reasons to be positive about Sri Lanka over the coming decade. I see no reason for concern that these reasons have been diluted and indeed believe that stronger growth can now be achieved. Today, Pope Francis arrives in Sri Lanka on an official Papal visit. The timing is appropriate as he will be being greeted by a President who has made reconciliation between religions a key issue. From this perspective, it is an effective ‘Christening’ of the new administration. Only time will tell whether President Sirisena will reward the electorate’s confidence, but the signs are positive and assuming that he can harness the spirit of co-operation and renewal that Pope Francis is certain to preach, the country is set for strong further growth. Investment options for prospective investors in Sri Lanka remain limited. The Ceylon Stock Exchange is small, illiquid and volatile. In essence, it is more of a private equity market for the time being. However, we believe that this will change over coming months as Sri Lanka focused investment vehicles emerge. To this end, emerging market investors should keep at least one eye on Sri Lanka given its strong potential. Scalper1 News
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