MOST LIKELY REGIMES AND THEIR PROBABILITIES
18-Month: Unity Coalition 45%
Five-Year: *UNP-led Coalition 55%
FORECASTS OF RISK TO INTERNATIONAL BUSINESS
 
Turmoil
Financial Transfer Direct Investment Export
Market
18-Month: Moderate B- A- B
Five-Year: Moderate C+ B+ B-

( ) Indicates change in rating.                                    * Indicates forecast of a new regime.

KEY ECONOMIC FORECASTS

Years
Real GDP Growth %
Inflation %
Current
Account ($bn)
2010-2014(AVG) 7.5 6.1 -2.88
2015(F) 6.5 1.3 -1.50
2016-2020(F) 6.6 3.8 -0.90

Political Climate Looking Brighter

The surprise victory of Maithripala Sirisena in the early presidential election held in January 2015 created an awkward governing arrangement. Sirisena, a member of the SLFP, the dominant entity in the then-incumbent UPFA coalition, stood for election as the candidate of an opposition alliance headed by the UNP. After defeating the incumbent president, SLFP leader Mahinda Rajapaksa, Sirisena formed a minority government in partnership with the UNP and its smaller allies, headed by UNP leader Ranil Wickremesinghe. However, his victory also gave Sirisena claim to leadership of the SLPF, creating a situation in which the president headed the party that led the opposition to his government, and held more seats in the Parliament than his legislative allies.

Not surprisingly, the arrangement proved to be unworkable, and Sirisena was forced to call an early parliamentary election, which was held on August 15. The president expressed the hope that the SLFP would join a government of national unity that would control the super-majority required to implement constitutional reforms aimed at restoring a democratic balance to governance and facilitating national reconciliation, while his party set a goal of winning a majority of seats and installing Rajapaksa as prime minister.

The danger of a destabilizing power struggle between Sirisena and Rajapaksa was dispelled when the UNP-led UNFGG coalition won 106 seats, compared to 95 for the UPFA. Although the pro-Rajapaksa faction of the SLFP initially balked at Sirisena’s offer to join the government, they relented when it became apparent that Wickremesinghe would be able to form a government with the support of SLFP lawmakers loyal to Sirisena.

Although there is little risk that political tensions might cost Wickremesinghe his claim to a legislative majority, especially in the near term, the government’s ability to sustain the parliamentary super-majority required to approve constitutional reforms is much less certain. The viability of the UNP-SLFP partnership will be tested almost immediately by international pressure to investigate allegations of war crimes committed during the closing months of the civil war in early 2009. A serious effort will be required if Sri Lanka hopes to end its international isolation, but a thorough probe will not sit well with members of the former SLFP-led government or military leaders at risk of being implicated in abuses.

Even if the government manages to strike a balance that relieves international pressure without driving the SLFP into opposition, some of Sirisena’s policy positions are likely to give investors pause. The president has proposed introducing a windfall tax on company profits, a significant hike in public-sector wage levels, and deep cuts in spending on infrastructure projects to create room for increased social expenditures. Although the suspension of some projects initiated under Rajapaksa has been framed by his successor as an anti-corruption measure, the populist tinge to several of Sirisena’s proposals has produced discomfort among investors.

Economic Forecasts for the Three Alternative Regimes

           UNP-led Coalition      Divided Government       SLFP-led Coalition
  Growth
  (%)
Inflation
    (%)
CACC
($bn)
Growth
  (%)
Inflation
   (%)
CACC
($bn)
Growth
  (%)
Inflation
    (%)
CACC
($bn)
2015 6.5 1.3 -1.50 6.2 1.7 -1.95 5.8 1.8 -2.15
2016-2020 6.6 3.8 -0.90 5.6 6.2 -3.50 5.1 7.3 -3.90