Sri Lankan shares retreat after foreign funds pull back

Jan 13 (Reuters) - Sri Lanka's main stock index fell on Tuesday after foreign investors sold shares, expecting greater clarity on economic policy from the newly-elected government led by President Maithripala Sirisena, stockbrokers said.

The main stock index, which gained 0.31 percent earlier in the day, closed down 0.22 percent, or 16.85 points lower, at 7,549.85. The index closed at its highest since March 2011 on Friday.

Foreign investors, who had bought a net 22.07 billion rupees worth of stocks last year, sold a net 404.9 million rupees worth shares on Tuesday.

"Everybody is waiting for economic policies of the (new) government," a stockbroker said.

Sirisena announced an interim cabinet on Monday and said he would carry out reforms to fight corruption in the 100 days to a parliamentary election, likely after April 23.

Ranil Wickremesinghe, the leader of the pro-business opposition United National Party, has been appointed Prime Minister, boosting investor sentiment.

Sirisena defeated former President Mahinda Rajapaksa - who contested for a third term - ending a decade of rule that critics say had become increasingly authoritarian and marred by nepotism and corruption.

Colombo Leasing and Finance Plc fell 6.25 percent, while Union Bank of Colombo Plc lost 3.11 percent, leading the overall index decline.

The day's turnover stood at 1.32 billion rupees ($10.05 million), less than last year's daily average of 1.42 billion rupees, stock exchange data showed.

The markets will be closed for a special holiday on Wednesday in view of Pope Francis' visit to Sri Lanka, while they will be shut for a Hindu religious holiday on Thursday. Normal trading will resume on Friday. 

($1 = 131.4000 Sri Lankan rupees) 

(Reporting by Shihar Aneez; Editing by Biju Dwarakanath)

Election Positive Sign for Political Stability - Fitch

The orderly conduct during Sri Lanka's presidential election, and the peaceful handover of power to newly elected opposition candidate Maithripala Sirisena on 9 January, is a positive signal for political stability, says Fitch Ratings. Low governance standards are a key weakness for Sri Lanka, as reflected in its ‘BB-’ rating; a smooth presidential transition may boost foreign investor confidence and mark the start of reforms needed to improve fiscal credibility.

Other key credit weaknesses for Sri Lanka are low foreign direct investment, a high level of net debt and weak public finances. The country ranks far below its ‘BB'-range peers on political stability in the World Bank's Worldwide Governance Indicators, placing it in the 26th percentile versus a ‘BB’ median of 41st; on accountability, Sri Lanka is in the 29th percentile versus the peer median of 45th.

The quick and smooth transition of power indicates a basic level of political stability, which could bolster foreign investor confidence. That would in turn provide more stable funding for the persistent current account deficit. Notably, with FDI only covering a small portion of the current account, Sri Lanka's net external debt is more than double that of the ‘BB’ peer group median at about 43% of GDP as of end 2014.

The public finances are also a key credit weakness as evidenced by relatively low level of government revenues as a percent of GDP and high government debt ratios. As such, the formulation of a credible budget consolidation path by the new government would be a credit positive.

New President Sirisena has provided limited clarity on the specifics of his economic agenda so far, and it remains to be seen what impact the new government's policies would have on the economy and the sovereign's creditworthiness.

Sirisena promised to make constitutional changes to abolish the executive presidency and foster other political and governance reforms during his campaign, and these are likely to be a key priority in the early months of his administration. However, uncertainty remains as to his ability and willingness to push through with such measures, and the long-term effect these would have on governance standards.
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