Sri Lanka - Presidential Election Update

Sri Lanka held its much anticipated presidential elections on 16^th November 2019, and though there were a record number of 35 candidates, the race was down to Gotabaya Rajapaksa of the Sri Lanka Podujana Peramuna (SLPP) and Sajith Premadasa of the New Democratic Front (NDF). With vote counting complete, the SLPP’s Gotabaya Rajapaksa has emerged as the winner with a decisive victory, having garnered 52.3% of total votes, while NDF’s Sajith Premadasa won 41.9%. The margin of victory (1.3 million votes) for Gotabaya Rajapaksa was more than expected and this points to a decisive win for him.

Gotabaya Rajapaksa and the SLPP gained a lot of political momentum over the past year, especially after the political crises in the fourth quarter of 2018 and the Easter Sunday attack of April 2019. Gotabaya Rajapaksa campaigned on the platform of greater security for the country from extreme elements as well as more stable and decisive policymaking which may have swayed voters towards the SLPP due to the lack of direction for the economy over the past few years. 

Who is Gotabaya Rajapaksa?

Incoming President Gotabaya Rajapaksa is the younger brother of the former President, Mahinda Rajapaksa. Under the previous administration of Mahinda Rajapaksa, he served as the Secretary to the Ministry of Defence and Ministry of Urban Development from 2005-2015.

Gotabaya Rajapaksa – Incoming President of Sri Lanka

What can we expect from Gotabaya Rajapaksa?

Gotabaya Rajapaksa’s campaign was run on the platform of greater security for the country and more stable and decisive economic policies. Hence, once a new government is in power investor expectations will tilt towards seeing more economic reforms, stable and consistent tax policies and greater support for promoting the tourism industry and the infrastructure sector. Stable policy making can also lead to an increase in foreign direct investments which can further build up the country’s foreign exchange reserves. From a foreign policy perspective though, former President Mahinda Rajapaksa built close relations with China, and we believe the incoming President will adopt a more balanced foreign policy given the changing nature of geopolitics in the region. 

Impact on the stock market and economy

With a decisive win and change of guard in the country and expectations of stable and consistent policy making, Sri Lanka could witness the beginning of a positive trend as investors would now expect the economy to get back on track.

At a trailing twelve months P/E of 11.3x, the Colombo All Share Index has been trading at a discount to the region while the performance of the index over the last few years has been below average. This election victory is a key trigger for the stock market and we expect equities to rally in the near term as investor sentiment will see a big improvement. The AFC Asia Frontier Fund is well positioned to take advantage of this as it has increased its weight to Sri Lanka to more than 5% by buying blue chip companies in the banking and consumer sectors. 

Election win expected to boost soft stock market performance

Business and consumer sentiment are also expected to improve as spending decisions were being delayed in light of the elections. With a clear majority for Gotabaya Rajapaksa we can expect a more vibrant business and consumer sentiment to trickle down to the overall economy which should have a positive impact on economic growth in 2020.

Next steps for the country

The presidential election is one of two electoral processes that are now complete and the next step is the upcoming parliamentary elections. The President has the power to dissolve parliament six months before its tenure ends in August 2020. Hence, we expect Gotabaya Rajapaksa will dissolve parliament in February 2020 and call for parliamentary elections in March 2020. As political momentum is now with the SLPP it would not be surprising to see it gain a majority in parliament as well, which would be another big positive for Sri Lanka.

With the incumbent government having a weaker than expected show in the presidential elections it is unlikely they would support a call for early elections before March 2020. Hence, the SLPP will form a minority government at present with Mahinda Rajapaksa expected to be sworn in as the new Prime Minister of Sri Lanka.

Outlook

Weak business and stock market sentiment have been an issue for Sri Lanka over the past few years, but this election result can be a major positive turning point for the country. With expectations of one power centre in both the President’s and Prime Minister’s Office, and a high probability to the end of coalition politics, Sri Lanka looks like an attractive story with a three to five year view as attractive valuations, stable policy making and a recovery in economic and earnings growth can all propel the Colombo All Share Index to higher levels. However, investors will also continue to watch the country’s fiscal deficit and debt levels as they are expected to stay at elevated levels of 5.7% and 83% of 2019 GDP respectively as per IMF estimates. Any measures to bring this number down will be viewed positively by investors.

For further reading below are some important links related to Sri Lanka:

• Sri Lanka elects new president in first vote since deadly bombings
• AFC Asia Frontier Fund - Sri Lanka - at the bottom of the cycle?

For information about the AFC Asia Frontier Fund click one of the following links:

I hope you have enjoyed reading this update. If you would like any further information about the AFC Asia Frontier Fund, please get in touch with me or my colleagues.

With kind regards,
Thomas Hugger
Fund Manager

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