Effect of Polling results in the SL Economy

Consideration of multiple factors:

1. Initial Bond Sell-Off:
   The announcement of Sri Lanka's election caused an immediate drop in dollar bond values, falling from around 59 to 57 cents on the dollar. This reaction reflected market concerns about potential political instability.

2. Artificial Social Media Hype:
   The sharp decline was likely exacerbated by artificial hype created by JVP troll farms. For two years, these farms generated a false narrative on social media, showing JVP having a 45% approval rating (with some even claiming 80%). This misleading hype raised investor concerns that JVP's candidate, Anura Kumara Dissanayake (AKD), could win the election, creating uncertainty among bondholders.

3. Impact of Handunneththi’s Statements:
   JVP figures, such as Handunneththi, further destabilized the market by making statements about acquiring fixed deposits. This lack of clarification around their economic policies caused investors to fear a shift toward a socialist, more authoritarian economic regime, adding to the bond sell-off.

4. Shift in Market Perception:
   In early August, reliable polling indicated that the SJB candidate was leading the race, and AKD’s actual support was far lower than the JVP’s claims (under 20%). This gave investors confidence in a more moderate outcome, causing bond values to stabilize above 54 cents. The dollar rate remained stable around LKR 300, reflecting a brief period of reassurance.

5. Recent Rumors and Market Volatility:
   In mid-September, rumors spread that AKD was leading by 2%-3%, despite the earlier polling results. This false information created significant market uncertainty, causing bond prices to fall below 50 cents. Simultaneously, the dollar rate surged to around LKR 310, and the market rate rose to LKR 315, reflecting investor panic and fear of a possible JVP-led government, which could imply socialist, anti-market policies.

Predictions Based on Trends:

1. Investor Sensitivity to Political Uncertainty:
   The trend shows that bondholders are highly sensitive to any political uncertainty, particularly regarding the JVP's rise and its economic policies. Stability in leadership is crucial for market confidence.

2. Potential Bond Recovery:
   If more credible polling data confirms that AKD's support is lower than previously thought and that a more moderate, economically stable candidate (like the SJB's) is in the lead, we can expect bond prices to recover again, likely stabilizing above 54 cents.

3. Long-Term Implications:
   Continued political uncertainty will likely keep bond values volatile. A decisive electoral outcome favoring a pro-market candidate should lead to a more sustainable recovery, while any indication of socialist economic policies from the JVP could push bond values even lower.

---

What will happen if a JVP-led government comes into power ❓

Based on the available market indicators and economic trends, if a JVP-led government comes into power it is reasonable to assume that we will be looking potential rationing of essential goods . Here's why:

1. Investor Sentiment:
   Investor sentiment toward a JVP-led government is indeed low, primarily due to the economic policies outlined in their manifesto, which are viewed as highly interventionist and potentially hostile to free markets. Statements made by JVP leadership regarding seizing assets (e.g., Handunneththi’s comments on acquiring fixed deposits) have created fears of a socialist economic framework, which may deter both foreign and domestic investment.

2. Further Sell-Off of Dollar Bonds:
   The uncertainty surrounding JVP’s economic management has already led to a sell-off in dollar bonds, pushing bond prices down. If the JVP takes power, the continued perception of political and economic risk could lead to an accelerated sell-off, causing bond rates to plummet further.

3. Loss of Foreign Exchange:
   Investor distrust in the government’s ability to manage the economy will likely lead to capital outflows and reduced foreign direct investment. This could result in a reduction of foreign exchange reserves, putting pressure on the LKR/USD exchange rate and contributing to a depreciation of the Sri Lankan rupee.

4. Impact on Exchange Rates and Inflation:
   A declining LKR would lead to rising import costs, particularly for essential goods such as fuel. Given that Sri Lanka is heavily reliant on imports for fuel, food, and other key commodities, a weakened currency would result in higher prices and inflation. This could force the government to reinstate rationing for critical goods, including fuel, similar to what was seen during previous economic crises.

5. Domino Effect on Goods and Services:
   As fuel prices rise due to higher exchange rates, the cost of transportation and production across various sectors will increase. This could create a domino effect on the prices of other essential goods like bread, leading to widespread shortages and queues as the supply chains for these goods are disrupted.

6. Fuel Rationing and Economic Stagnation:
   If the government is forced to ration fuel, this will severely impact economic activity, leading to long queues and social unrest. The ripple effects could be felt in all sectors of the economy, from transport to manufacturing, creating a broader economic slowdown.

What does it mean:

If a JVP-led government were to come into power, it’s reasonable to predict a further erosion of investor confidence, leading to continued bond sell-offs, a depreciating currency, rising inflation, and potential rationing of essential goods. This could cause severe economic disruptions and create a climate of uncertainty.

Written by : 🆂🅶

Copyright © 2024 🆂🅶. All rights reserved.