The growing unease about policy continuance and political stability post-elections are causing Sri Lankan dollar bondholders to sell off as a risk reduction measure, with some investors aiming to reduce their country exposure over rising political uncertainties before Elections later this month, Bloomberg reported today. This, as concerns grow domestically about political stability and the impact a possible new government may have on Sri Lanka’s IMF bailout agreement, the hard fought external debt restructuring agreement, and the IMF’s next tranche of funds.

“The country’s dollar bonds due in 2030 fell 3 cents on the dollar to 49.9 cents, the lowest level since February, extending their decline from their peak this year to about 15%. Notes due in 2027 dropped more than 1 cent to 49.6 cents. Market pressure has intensified before elections on 21 September as investors worry that a shakeup in leadership could upset debt talks that have stalled near the finish line. Opposition leaders have said they would look to renegotiate the terms of Sri Lanka’s program with the International Monetary Fund.” Bloomberg reported.

“It is looking probable that Sri Lanka will need to further refine the terms of the deal agreed with bondholders” and will struggle to do so before the Election, said Eng. Tat Low, an emerging-market sovereign analyst at Columbia Threadneedle Investment. “Whilst I expect volatility to persist, the sharp selloff we have seen over the past few sessions may attract some ‘bargain hunting’ activities. Anura Kumara Dissanayake, popularly known as AKD, leads the National People’s Power, a coalition of leftist political parties and groups backed by protesters who ousted the Rajapaksa Government in 2022. He is campaigning on a platform of clean governance and eliminating corruption and has vowed to reopen negotiations with the IMF. His party opposes the debt restructuring framework agreed with the multilateral lender. Dissanayake emerged as a key challenger to incumbent President Ranil Wickremesinghe, who remains unpopular for carrying out austerity measures in exchange for an IMF bailout. I think investors are adjusting their positions ahead of the election,” said Fund Manager at Eastspring Investments in Singapore Eric Fang. “We think any big price correction presents an opportunity to buy as the sovereign is on a recovery path and the debt deal presents a fair outcome for both issuer and investors.” Bloomberg reported.

With the Presidential Election less than two weeks away, and a General Election – new government on the horizon by early 2025, investors and bondholders are moving to minimise risk. Some experts worry that such sell offs can have an impact on Sri Lanka’s International Sovereign Bonds (ISB) debt restructuring process, with concerns raised about how it may impact the haircuts Sri Lanka had planned to negotiate for. While such issues may complicate negotiations of debt restructuring, another impact could be that the uncertainty, if coupled with significant deviation from the current undertakings Sri Lanka has made as a sovereign entity in terms of fiscal discipline, state-sector restructuring and revenue raising, will scare off potential investors who are keen on providing Foreign Direct Investment (FDI) to Sri Lanka when the economic situation improves. “One way this trend can impact Sri Lanka is that it may make potential investors more cautious. And it may also have an impact on the stock market. Some may not come; this could be a short term issue. But still in the short term we need investment. Stability and consistency is key. If Sri Lanka doesn’t provide those as an investment destination, there are other competitive locations investors can look at that are low risk” a senior economist opined.

As such, Sri Lanka has much to lose if they do not address the issue about the looming uncertainty of ‘What will happen next?’ Every candidate and political party which supports them at the upcoming Presidential Election, are duty bound to provide Sri Lankans a better life, and better governance. 

As such, key candidates must act now to dispel myths and give clarity to their plans if elected. They need to clearly define their goals, and give clarity, especially on the economy and the ongoing IMF programme, debt restructuring which they plan to enact. Sri Lanka can ill afford such uncertainty moving forward.