What does Sri Lanka's stock market really feel about President Dissanayake?

On September 23, 2024, Sri Lanka witnessed a historic moment as Anura Kumara Dissanayake, the island nation’s first leftist president, was sworn into office, vowing to restore public faith in politics and navigate the country out of its economic crisis. In the immediate aftermath of his victory, the Colombo Stock Exchange experienced a surge in key indices raising questions about whether this marks the beginning of sustained economic recovery or a fleeting market reaction.

Positive market sentiment

On the day of Dissanayake’s swearing-in, the Colombo Stock Exchange recorded significant gains, with the All Share Price Index (ASPI) rising 158.96 points to close at 11,125.47, marking a 1.45 per cent increase from its previous close. Similarly, the S&P SL20 index, which tracks the performance of Sri Lanka’s top 20 blue-chip companies, gained 65.89 points to close at 3,168.09, reflecting a 2.12 per cent increase. This uptick was seen as a positive market sentiment in the wake of the election suggesting that investors are optimistic about the new government’s potential to stabilise the economy. Stockbrokers, as cited in Economy Next, however, cautioned that “it was too early to comment”, indicating uncertainty about whether these gains were a reflection of lasting confidence or merely a temporary boost driven by post-election enthusiasm.

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Market volatility

Despite the upward momentum in domestic indices, there were signs of volatility, particularly in Sri Lanka’s international financial markets. According to Bloomberg, Sri Lanka’s dollar bonds maturing in March 2029 dropped by 3.1 cents, marking the steepest decline in nearly two years. The bonds fell to 50.2 cents on the dollar, signaling investor concerns over Dissanayake’s potential renegotiation of the International Monetary Fund (IMF) bailout. The uncertainty surrounding the $3 billion IMF bailout package, which Dissanayake has vowed to revisit due to its unpopular austerity measures, has injected caution into the market. The same report also highlighted that the S&P Sri Lanka 20 Index initially dropped by 2 per cent in early trading before reversing course indicating a mixed reaction from investors.

IMF renegotiations and market stability

Dissanayake’s plan to reopen talks with the IMF is central to understanding the market’s reaction. The current bailout programme, which comes with stringent conditions including tax hikes and spending cuts, was deeply unpopular with the Sri Lankan public contributing to Dissanayake’s landslide victory. However, renegotiating the terms could complicate Sri Lanka’s efforts to secure long-term debt relief. As highlighted in Economy Next, “people are waiting to see what will be implemented,” reflecting the tentative nature of the current market rally. Investors appear cautiously optimistic but remain sceptical about the government’s ability to maintain fiscal discipline while addressing voter concerns.

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Short-term optimism or long-term recovery?

While the immediate gains in the ASPI and S&P SL20 indices reflect positive sentiment, questions remain about whether Sri Lanka’s economy can sustain this momentum. The boost in banking stocks and other blue-chip firms, as noted by stockbrokers, suggests that investors may be banking on a more practical approach from Dissanayake’s government. The continued positive momentum from the International Sovereign Bonds (ISB) deal, completed the week prior, may have also contributed to the market’s optimism. However, as Bloomberg highlighted, the steep decline in Sri Lanka’s 2029-dollar bonds shows that international investors are wary of Dissanayake’s economic strategy, especially if IMF negotiations falter.

Uncertainty looms over Sri Lanka’s economic future

The surge in Sri Lanka’s stock market following Dissanayake’s election victory may reflect a temporary boost driven by optimism and relief after months of political and economic instability. However, the mixed reactions in international markets, particularly the drop in dollar bonds, signal that much of the island nation’s economic future hinges on the government’s ability to successfully navigate IMF negotiations and implement policies that foster sustainable growth. While the stock market rally suggests short-term optimism, the long-term stability of Sri Lanka’s economy remains uncertain as both domestic and international investors await concrete actions from the new administration.