MONTREAL - Whatever doubts Sri Lanka's local and overseas investors had about
constitutional amendments reinforcing President Mahinda Rajapaksa's already
appreciable powers, they did not show up in the stock market in the week since
parliament approved the changes.
Sri Lanka Stock Market Colombo All-Share Index has risen more than 4.5%,
reaching 6,234 at the Wednesday close this week. It has doubled in the past
nine months, after breaking its previous all-time record high just under 3,000
in early September last year, then retesting it from the upside to confirm it
as a support.
Among the most important changes to the constitution is the abolition of term
limits on the presidency, allowing the incumbent
to stand for office indefinitely into the future. He also acquires the power to
appoint all senior judges, police, the election commission, and the central
In a public statement, he justified these new powers in the name of promoting
economic development and ethnic reconciliation. The main opposition United
National Party (UNP) boycotted the vote, leaving only 17 of the 225-member
parliament to cast votes against, while 161 votes were in favor.
At the end of last month, the head of the International Monetary Fund mission
to Colombo, Brian Aitken, foresaw the country's economy growing 7% this year,
double the rate in 2009, according to the Pakistani newspaper Daily Times.
Consequently, he said, the IMF would release another US$200 million of a $2.6
billion stand-by arrangement approved in mid-2009. That fourth tranche would
bring the total amount lent so far up to $1.2 billion.
The IMF report released last month added, however, that concern remains over
difficulties in reducing the budget deficit, which reached 9.9% in 2009. The
hope is to reduce this to 8% in the current year and then continue decreasing
it until it reaches a "sustainable" level of 5%.
The IMF loan eased concerns over current-account balances and the financing of
external debt and so signaled to foreign investors the international
community's belief that economic reforms and liberalization would continue.
The Standard & Poor's rating company raised the long-term foreign-currency
rating to B+ from B ahead of a $1 billion bond sale, and also its
local-currency rating from B+ to BB-. Both upgrades were given "stable-outlook"
prognoses but are still several levels below investment grade.
Sri Lanka has hired Bank of America, HSBC and Royal Bank of Scotland Group to
arrange meetings with credit investors starting this week and lasting about 10
days, Bloomberg News reported.
The bond issue will increase the island nation's foreign reserves to $6.8
billion, as international investor confidence has increased following the IMF's
package approved last year, itself following by two months the end of the long
conflict with the Tamil Tiger rebels.
The already impressive rate of economic growth may be expected to increase
further in 2011 and 2012 if reconstruction efforts get seriously underway and
foreign direct investment continues to show confidence. Faster growth will be
necessary to increase revenue to met budget deficit targets. The regime will
have to balance lower taxes for investment promotion against that goal. Tourism
has also increased significantly since the end of the civil war.
Yet the president's increase and consolidation of his the powers of his office,
along with moves to establish what looks like a dynasty, have foreign investors
already nervous. The president is himself minister of finance and minister of
defense and holds two other portfolios besides.
His brother Gotabaya is in charge of all military and intelligence services,
and his brother Basil heads the Economic Development Ministry and is in charge
of investment promotion. The British newspaper The Guardian estimated that
"[w]ith dozens more relatives in prominent positions, the net result is that
the Rajapaksas control an estimated 70 percent of the national budget". In
addition, earlier this year the president's son Namal made his political debut
by winning a seat in parliament.
All this is why Forbes magazine is cautioning that "sentiment on the Sri Lankan
economy may be beginning to turn", although there are increasing economic
relations with such countries as Iran and China, which are not known for
concerns over authoritarianism.
The stock market indeed looks due for a rest sometime soon. It is up
phenomenally by over one-third in just the past two months, and by one-quarter
since the cabinet approved the amendments at the end of the last month before
they were submitted to parliament.
This cannot go on forever. Volatility is also to be expected in both
directions. In three trading days near the beginning of August, the index
plunged nearly 7%, ironically in response to the exchange's imposition of a 10%
limit on daily stock moves.
Dr Robert M Cutler (http://www.robertcutler.org),
educated at the Massachusetts Institute of Technology and The University of
Michigan, has researched and taught at universities in the United States,
Canada, France, Switzerland, and Russia. Now senior research fellow in the
Institute of European, Russian and Eurasian Studies, Carleton University,
Canada, he also consults privately in a variety of fields.