Macro Analysis /
Sri Lanka

Sri Lanka: Rajapaksa eyes comeback with ex-Defense Minister as presidential nominee

    Lakshini Fernando
    Asia Securities
    13 August 2019
    Published by

    Gotabaya as presidential candidate, Mahinda Rajapaksa for PM. The inaugural convention of the Sri Lanka Podujana Party (SLPP) was held on Sunday, with Mahinda Rajapaksa taking on the party’s leadership position, ending days of speculation. This was followed by naming the SLPP’s candidate for the upcoming presidential elections, Gotabaya Rajapaksa. His main election promises revolved around (1) heightened national security, (2) creating an environment for private sector growth and (3) quick implementation of government plans. It was also revealed that if Gotabaya is elected, Mahinda Rajapaksa is likely to become Prime Minister.

    Despite the nomination, one of the main questions remain on Gotabaya's eligibility to become President if he is elected given his dual US citizenship. While Gotabaya claims he has the necessary papers to prove his citizenship withdrawal, this has not been clarified by the Election Commission. Our discussions with political analysts indicate that despite the status of his dual citizenship, Gotabaya can still be nominated. However, being elected as President should he win, will depend on the renunciation of his US citizenship.

    In our view, naming Gotabaya as the SLPP’s presidential candidate is a strong move by the youngest political party (which was created in 2016). Gotabaya’s former post as defense minister during the end of the war, 20 years of military service, combined with the backing of Mahinda Rajapaksa, give SLPP an advantage going into the elections following the Easter Sunday terror attacks. We expect the SLPP to leverage greater national security as a main election point after the significant security lapses, which led to the April attacks.

    Continuation of Mahinda Chinthana Programme likely; economic growth a positive. If SLPP wins the presidential elections in December, we expect a continuation of the Mahinda Chinthana 10-year programme (commenced in 2006), which was in play prior to the election of the Unity Government in 2015. Some of the key aspects of the programme were (1) achieving economic growth in excess of 8.0%, (2) Investment/GDP of 32%-38% (c22.0% in 2018), (3) current account deficit of 3.0% (3.2% in 2018). This was mainly targeted through government expenditure-led growth, with foreign borrowings mostly from China, where interests varied between 5.0%-6.0%.

    We expect a similar scenario under a Gotabaya regime. We expect a faster resumption in major infrastructure projects like highways. We also expect higher borrowings in the initial years of the presidency in order to fast track such infrastructure programmes. There is also a high probability of heightened government expenditure on defense in order to increase national security. However, we note that the defense budget was LKR393bn (US$2.1bn) in the 2019 budget, the largest allocation for a single ministry.

    As such, we expect a greater negative impact on debt/GDP and the fiscal deficit in the event of a Rajapaksa regime. However, this will result in higher GDP growth compared with the tepid growth trajectory seen in recent years.

    Heightened policy uncertainty a concern; delays in IMF EFF programme likely. If Gotabaya is elected President, our main concern going into 2020 will be policy uncertainty. In our view, there are likely to be changes to current policies, especially in terms of State-Owned Enterprises (SOE). While the current government has taken a number of steps to reduce the debt burden from SOEs, we don’t expect this to continue if the SLPP comes to power.

    In terms of the IMF EFF agreement, we expect further delays in fund disbursements, especially given that a number of regulations under the EFF include implementing an electricity pricing formula and curbing government expenditure. While we expect the IMF EFF to continue, we expect renegotiated targets together with delays in implementation. We note that during Mahinda Rajapaksa’s tenure as President, there was an IMF programme in place, which saw significant delays owing to slow implementation of policies.

    Strong push for Sajith Premadasa despite opposition by senior UNP members. Meanwhile, the UNP which was scheduled to announce the commencement of the Democratic National Front (DNF) in early August postponed this move as a result of opposition by the UNP working committee. This does not bode well for the UNP, which is yet to announce a presidential candidate. However, while there is a strong push to nominate Sajith Premadasa, our discussions with political analysts indicate that there a number of senior UNP members who are opposed to this, creating friction within the party.