More than two years after declaring victory in one of Asia’s most intractable wars, Sri Lanka is now increasingly focusing on rapid post-war economic revival amid growing international criticism over war crimes and rising labour unrest at home.
Sri Lanka’s debut $500mn 5-year eurobond, maturing in 2012 with a coupon of 8.25%, is now trading at around 2.2% to 2.6 %.
The issue is rated B+ by Fitch.
Following are the key political risks to watch.
The ghosts of war
The end of Sri Lanka’s war with the Tamil Tigers in 2009 is back in the international arena after the United Nations said in May the island nation committed “serious international crimes” on the basis of footage of what appeared to be summary executions. Sri Lanka, which has rejected independent probes into claims of war crimes, said the video was falsified.
In June, Britain said if Sri Lanka does not investigate allegations of atrocities, it could lead to international action against Colombo.
The UN High Commissioner for Human Rights, some Western governments and rights groups are talking about putting Sri Lanka back on the UN Human Rights Council’s agenda to force it to investigate the allegations.
What to watch: Any credible steps Sri Lanka will take to probe war crime evidence, at least to defuse mounting international pressure.
Whether a motion against Sri Lanka makes it onto the rights council’s already busy agenda, and whether Sri Lanka can line up support as it did before to beat back a critical Western-led motion.
Further down the line, will there be an independent investigation and sanctions?
Union trouble
President Mahinda Rajapakse’s government is experiencing its first big labour problem after a protest in late May about pensions turned violent. One demonstrator died after being shot by police.
Unions may call mass protests to demand higher pay, a move which—while unlikely to dislodge the government—would make it tougher for Sri Lanka to sell itself as a post-war destination for foreign investment.
Labour and student unions linked to the Marxist Janatha Vimukthi Peramuna opposition party have been a force in Sri Lanka’s post-independence history, and their actions have traditionally been a bellwether of political unrest.
What to watch:
How far the government is willing to go to satisfy the unions, many of which have been promised wage and benefit increases since Rajapakse came to power in late 2005. They have yet to be delivered.
Whether pro- and anti-government trade unions unite in protests. This would be likely to force the government to agree to their demands, which could make it more difficult for the government to achieve the IMF’s fiscal prudence targets attached to a $2.6 billion loan made to the country.
Whether the unions move past token strikes, and into activities which could be much more harmful to the economy.
Inflation and policy responses
Official inflation numbers are low, but at street level there is near-universal agreement that food prices are among the highest in recent memory, and higher oil prices have already increased the prices of goods and services.
There has been grumbling about the cost of living since late 2009, but no real agitation. Sri Lanka has no history of food riots, but a long one of turning on politicians who do not keep prices in check.
What to watch: If high living costs feed into labour unrest, and whether the grumbling over prices produces more concrete and organised action by labour groups and the affiliated political parties.
Whether the central bank maintains its pro-growth loose monetary policy. In January it shocked the market by lowering its policy rates further.
Whether Sri Lanka matches the central bank’s estimate of 8.5% economic growth this year, the highest since independence in 1948.
Investment climate
Post-war investments have been picking up with first-quarter foreign direct investment (FDI) hitting a record high, thanks to a post-war tourism boom.
Large investments in ports have mainly come from China, which has become the main actor in Sri Lanka’s post-war redevelopment.
What to watch:
The extent of the returns from high investments and whether they reach the poor in the form of new jobs, reduced cost of living and better living standards.
Whether foreigners come into Sri Lanka’s share market, and investors from outside China start big FDI projects.
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