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Sri Lanka: Public anger boils over as protestors storm presidential palace

  • Protestors have stormed the presidential palace and set the PM's house on fire in a culmination of months of protests

  • Party leaders are calling for the President and PM to step down and formation of an all-party government within a week

  • Political crisis will further delay restructuring, but could result in more credible government; retain Hold

Sri Lanka: Public anger boils over as protestors storm presidential palace
Tellimer Research
9 July 2022
Published byTellimer Research

Public anger has boiled over in Sri Lanka, with an estimated 100,000 protestors amassing outside the presidential palace and hundreds storming inside. Dramatic images show protestors roaming the president’s compound and jumping in the swimming pool, with President Gotabaya Rajapaksa being forced to flee his residence and his whereabouts currently unknown. The storming of the palace is the dramatic culmination of months of protests, with hundreds of people camped outside the presidential palace since April demanding Rajapaksa’s resignation.

The majority of party leaders have reportedly agreed that both President Rajapaksa and Prime Minister Ranil Wickremesinghe must resign immediately and make way for an “all-party government”, with PM Wickremesinghe tweeting "to facilitate this I will resign as Prime Minister" (though he has not yet submitted his official letter of resignation).

If the President and PM resign, the speaker of parliament will serve as acting president for a maximum of 30 days and parliament will elect a new president from its ranks to serve out the remaining two years of the current term. This means that Speaker Mahinda Yapa Abeywardena will become the acting president, with MP Dullas Alahapperuma tweeting that party leaders have agreed to convene within a week to elect a new president and form a coalition government. The urgency is, of course, welcome.

We have previously highlighted (see here and here) the risk that Sri Lanka’s worsening economic crisis was creating a powder keg for political instability and could cause the government to be overthrown. In the same notes, we said that this could cause delays to the formation of an IMF-backed reform and restructuring programme, given uncertainty over the government’s durability. With today’s events, that risk has materialised.

After two weeks of negotiations with the IMF, led by PM Wickremesinghe in his joint role as PM and Finance Minister, Wickremesinghe’s resignation will likely delay a staff-level agreement even further. After inheriting a poisoned chalice, Wickremesinghe is an unfortunate casualty of the Rajapaksas' economic mismanagement, and had demonstrated an understanding of and willingness to take the tough decisions needed to slowly right the ship. Nonetheless, he is not immune from the public backlash, with protestors lighting his private residence on fire.

That said, if the new government is willing and able to pick things up where Wickremesinghe left off, there could be a degree of continuity. Further, if the public backs the new coalition government, they may prove to be a more credible interlocutor with the IMF and creditors, as there will no longer be the looming risk of its overthrow.

Nonetheless, we affirm our view that the debt restructuring is likely to be a prolonged process (see here for a detailed explanation why), which, alongside elevated political uncertainty, prompted us to affirm our Hold recommendation on Sri Lanka’s eurobonds (excluding the 22s) despite bonds trading near the lower end of our estimated recovery value range (the SRILAN 7.55 03/28/2030s closed at US$30.2 on Friday).

We will continue to closely monitor the political situation and market movements in the days ahead, with bonds likely to drop further amid the unfolding political crisis. This could potentially create an attractive entry point if they drop low enough and it appears that the crisis will be resolved in a way that allows the reform and restructuring programme to proceed more or less unimpeded.

That said, today’s events show that it is likely to be a bumpy ride, and we continue to think that Sri Lanka is a long way from a durable solution to its worsening political, economic and humanitarian crises.

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