Sri Lankan President Mahinda Rajapakse swore in one of his party's longest-serving members as prime minister. Since he won a three-decade war last May, Rajapakse has told everyone to wait for the end of the political season before he made big changes. Now he has Sri Lanka's strongest government in decades and a peace that's his to win or lose. Sri Lanka's stock market has returned over 172 percent since it hit a trough at the end of 2008, spurred by the end of the war and a $2.6 billion International Monetary Fund (IMF) loan that brought up Sri Lanka's sovereign ratings. The government securities market has seen strong demand since the war's end and the IMF loan, and bond dealers expect that to rise now that the political wrangling is finished and with upward pressure on the rupee currency. Watch for greater investment overall, some changes to the stock market to make it more attractive to offshore investors including potential demutualization, and further discussion on a proposed commodity market. Of more concern to investors has been Sri Lanka's persistently high debt and big spending, a relic of its socialist roots that routinely hampers growth. The central bank on April 5 said 2009 growth was 3.5 percent but forecast 6.5 percent this year, and 7.5 percent or higher in 2011-13. Under the IMF loan, Sri Lanka has pledged to trim its budget deficit, but missed its 2009 target of 7 percent after recording a 9.8 percent deficit, and says it wants to renegotiate. The 2010 budget will show if Rajapakse intends to deliver on pledges to make fiscal reforms, improve revenue collection and cut bureaucracy that businesses say hampers investment. That should come in either May or June. Rajapakse has 144 seats in parliament, six shy of the 150 he needs to push through constitutional changes. He has a gift for bringing people to his side through charm, patronage and coercion, so all eyes will be on the political crossovers or compromises he's expected to engineer. He has been vague about what changes he will make, but investors expect they will be political and of less impact on the markets. Like other Sri Lankan leaders before him, Rajapakse has made governance a family affair. His eldest son, Namal, is the third generations of Rajapakses to go to parliament. Two of the president's brothers won seats, and one has been been tipped as a candidate for parliament speaker. A third brother remains the nation's top security official. While to some this may appear like outright nepotism, Sri Lankans are used to dynastic political families and South Asia has a long history of them. Rajapakse does not apologize and points out that his family business is politics. This should bode well for stability, but will produce sporadic complaints that power is too closely held. Rajapakse has carried the torch for Sri Lanka's longstanding non-aligned position and that's unlikely to change, no matter whom he names as foreign minister after the previous one was not re-elected to parliament. At the end of the war, Rajapakse skillfully caromed the West off of Iran, Pakistan, Myanmar and China, and in turn played India off of China, giving troops room to fight to the finish. He also wants to crush plans pushed by the Sri Lankan Tamil diaspora and supported by some Western governments to bring accountability for alleged war crimes at the war's end. The government does plan to work to get back a European Union trade concession it is slated to lose in July, after failing to meet certain human rights standards. Watch for moves Rajapakse takes to rebuild Sri Lanka's geopolitical status and strategic position astride the Indian Ocean and one of the world's biggest shipping lanes, which has always made it attractive to the world's big powers.
