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Sri Lanka election will boost investor confidence if governance improves: Fitch

COLOMBO (EconomyNext) – A peaceful handover of power and the promise of governance reforms by a new administration in Sri Lanka would boost investor confidence, but budgets have to be fixed, Fitch Ratings has said.

The peaceful handover of power was a "positive signal for political stability," Fitch said.

"Low governance standards are a key weakness for Sri Lanka, as reflected in its ‘BB-‘ rating; a smooth presidential transition may boost foreign investor confidence and mark the start of reforms needed to improve fiscal credibility," the rating agency said.

The new administration of President Maithripala Sirisena has promised constitutional reforms that will re-establish rule of law and make the judiciary independent again.

"The quick and smooth transition of power indicates a basic level of political stability, which could bolster foreign investor confidence," Fitch said.

"Sirisena promised to make constitutional changes to abolish the executive presidency and foster other political and governance reforms during his campaign, and these are likely to be a key priority in the early months of his administration.

"However, uncertainty remains as to his ability and willingness to push through with such measures, and the long-term effect these would have on governance standards."

Fitch said the Sirisena had provide "limited clarity on the specifics of his economic agenda so far, and it remains to be seen what impact the new government’s policies would have on the economy and the sovereign’s creditworthiness."

There has been concern over spending plans outlined in a manifesto involving higher state salaries and pensions and giving guaranteed prices to crops including export crops at a time when global commodity prices are plummeting with a strengthening US dollar.

Fitch said public finances were a "key credit weakness" with a relatively low level of state revenues and high state debt ratios as a share of gross domestic product.

"As such, the formulation of a credible budget consolidation path by the new government would be a credit positive," the agency said.

A 500 million US dollar sovereign bond falls due this month.