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S&P raises concerns over spending plans of new Sri Lanka President

COLOMBO (EconomyNext) – The election of a new president in Sri Lanka who is backed by parties with diverse economic policies with promises ofhigh spending amid low revenues could cause uncertainty, Standard & Poor’s, a rating agency said.

"The opposition’s coalition parties have not agreed on a common approach to economic policy," S&P said in a statement.

"In the run-up to the elections, Sirisena also promised to expand subsidies and raise welfare payments, which, in the absence of offsetting revenue gains, would jeopardize Sri Lanka’s hard-won progress in reducing its large debt and interest burdens."

Analysts say Sri Lanka can no longer take the fiscal risks it did in the past with heavy dependence on foreign commercial borrowings, with at least 500 million dollars due to be rolled over January.

S&P raised doubts whether a change to a parliamentary system would make it less easy to implement good economic policies, but analysts say during the past 30 years many extremely bad policies have also been implemented by presidents with the same ease as a few good ones.

In 2011/2012 for example a balance of payments crisis was precipitated by a budget decision not to raise power price, which may ultimately have played a key role in defeating the current administration via currency depreciation which undermined real wages and an economic downturn.

The full S&P statement is reproduced below:
    
Sri Lanka’s Presidential Election Result Heralds An Uncertain Evolution In Its Political Landscape

SINGAPORE (Standard & Poor’s) Jan. 9, 2015–The outcome for Sri Lanka’s presidential election–Maithripala Sirisena defeating President Mahinda Rajapaksa–presents some policy uncertainty, said Standard & Poor’s Ratings Services today.

This uncertainty stemmed both from the disparate nature of the coalition that fielded him as candidate and his election promises portending significant changes.

Under Rajapaksa’s tenure, Sri Lanka’s executive presidential system was highly centralized, exerting significant control over the key areas of the economy and the military. This allowed moderate progress in economic reforms and fiscal consolidation.

The opposition’s coalition parties have not agreed on a common approach to economic policy and, in our view, were mainly united by the desire to unseat Rajapaksa. Policy differences are likely to surface when parliamentary elections are called within the first 100 days of president-elect Sirisena’s term, as he had promised.

Aside from the traditional main opposition party, centre-right United National Party, the opposition coalition contains a number of different parties. Among these is the Marxist JVP party.

In the run-up to the elections, Sirisena also promised to expand subsidies and raise welfare payments, which, in the absence of offsetting revenue gains, would jeopardize Sri Lanka’s hard-won progress in reducing its large debt and interest burdens.

In addition, in his election manifesto, Sirisena committed to amending the  constitution to abolish the presidential system in favour of a parliamentary system.

If that happens, Sri Lanka’s history of fractious parliamentary politics with its large number of religion, ethnicity, and regionally based political parties foreshadow a diminished capacity to reach political consensus on key economic policies.

That will in turn constrain policy design and implementation.

We believe the country faces a period of uncertainty following the relative stability that prevailed under Mr. Rajapaksa.

Depending on political developments under the new president and possible changes in fiscal and economic policies, some credit metrics could weaken over the next two to three years.