Sri Lanka's dollar bonds and stocks sharply declined this morning following the election of Anura Kumara Dissanayake as president, a result that threatens to derail the island’s economic recovery.
Dissanayake’s victory casts serious doubt over Sri Lanka’s ongoing negotiations with the International Monetary Fund (IMF) and its fragile debt restructuring deals, with the self-proclaimed Marxist Janatha Vimukthi Peramuna (JVP) leader vowing to renegotiate the bailout loan.
The impact on Sri Lanka's dollar bonds and stocks was swift. Bonds maturing in March 2029 fell by 3.1 cents to 50.2 cents on the dollar, marking the steepest drop in nearly two years. Sri Lanka’s 2029 dollar notes are set for a nearly 15% slide this quarter alone.
Meanwhile, the S&P Sri Lanka 20 Index, which tracks the nation’s top blue-chip companies, dropped 2% during early trading.
Dissanayake’s win is being seen as a worst-case scenario for Sri Lanka's economic recovery by global analysts.
“A Dissanayake win is the worst possible outcome for Sri Lanka’s bonds,” said Hasnain Malik and Patrick Curran, strategists at Tellimer, in a Sunday report.
The immediate concern is that the new president may push creditors back into difficult negotiations, jeopardizing not only the IMF program but also a debt restructuring agreement reached last week. Sri Lanka announced that it had reached Agreements in Principle on the restructuring of approximately USD$ 17.5 billion of external commercial debt (as of end 2023), a critical step toward stabilizing its finances after defaulting last year.
Members of Dissanayake’s National People’s Power (NPP) coalition have previously opposed key elements of the debt restructuring, and it remains unclear whether the new administration will uphold the agreements with creditors.
Ahead of the election, Sri Lanka’s then State Finance Minister, Shehan Semasinghe warned of an imminent economic collapse if parliament is dissolved and a third review of the much-needed IMF loan is not completed.
Semasinghe stressed that abandoning the deal would jeopardize Sri Lanka's recovery, potentially dragging the country into a crisis similar to the one it faced in 2022.
“We must adhere to what we have agreed. We cannot unilaterally deviate from the program, as that would effectively mean walking out of the agreement,” Semasinghe told reporters during an event in Colombo. “If that happens, Sri Lanka could easily return to the conditions we faced in 2022.”
