COLOMBO, Oct 10 (Reuters) - President Mahinda Rajapaksa is
under fire from the U.N. Human Rights Council, which adopted a
U.S.-sponsored resolution that calls on it to ensure government
troops who committed war crimes during the final stages of its
war against Tamil rebels are brought to justice.
At home, Rajapaksa bowed to international demands in May,
releasing from jail his rival and former army chief Sarath
Fonseka, who immediately vowed to fight for the government's
downfall.
RATINGS: (Unchanged unless stated)
S&P: B+/B
MOODY'S: B1 with positive outlook
FITCH: BB- with stable outlook
Following are the key political risks to watch:
WAR CRIMES, RIGHTS SQUEEZE?
Earlier this year the U.N. Human Rights Council adopted a
resolution put forward by the United States urging Sri Lanka to
implement the recommendations of an official Sri Lankan probe.
That commission called for the prosecution of soldiers guilty of
misconduct.
The government said in July it would take up to five years
to try those accused of atrocities, a step critics denounced as
a bluff to reduce international scrutiny.
Tens of thousands of civilians were killed in 2009 in the
final months of Sri Lanka's 25-year civil war, a United Nations
panel said last year, as government troops advanced on the
ever-shrinking northern tip of the island controlled by Tamil
forces fighting for an independent homeland.
Washington wants to force Colombo to address allegations of
war crimes as part of wider ethno-political reconciliation to
forestall renewed conflict, while Sri Lanka wants more time to
pursue its own domestic process.
Adding to worries that the government is taking a
heavy-handed approach to human rights, police shut down two
anti-government news websites at the end of June, a move press
groups said was intended to intimidate critics of President
Mahinda Rajapaksa, and which drew statements of concern from the
U.S. and EU.
A week after that, the government said it would tighten its
media law to regulate all websites, not just printed material. A
new line of confrontation may be opening with the judiciary,
after a senior judge was beaten with pistols in early October,
triggering a one day strike by judges, who were already angry at
perceived political interference in the courts.
What to watch:
- How Sri Lanka responds to the U.N. resolution, and whether
it comes under greater international pressure.
- Whether Sri Lanka fully implements the local commission's
report, and whether international pressure recedes when the
government implements some of those recommendations.
- Tension between the judiciary and government, and if it
rises further.
FONSEKA'S RELEASE
Though Sarath Fonseka is not an immediate political threat
to Rajapaksa, the former general is still popular among many Sri
Lankans for his outspoken criticism of the government.
The U.S. had long demanded Fonseka's release, calling him a
political prisoner, while rights groups have accused both
Fonseka and the president in shooting surrendering Tamil Tiger
rebels in the final stage of the war.
Fonseka is, however, capable of causing massive damage to
Rajapaksa's popularity, given that great numbers of Sri Lankans
believe the former soldier could deliver in politics after
helping to win the 25-year war.
A politically savvy Rajapaksa has only remitted his
sentence, ensuring Fonseka is unable to stand in an election in
the next seven years. Undeterred by that, Fonseka has started
public campaigns to meet his supporters, and discuss Rajapaksa's
alleged policy lapses. He has openly called for a wider
opposition alliance to topple the government.
What to watch:
- Fonseka's moves against the Rajapaksa government. Whether
opposition parties rally around Fonseka, or the bickering
opposition fragments even more if Fonseka forms his own party.
SLOWING ECONOMIC GROWTH
In late September the central bank downwardly revised its
projection for 2012 economic growth to 6.8 percent, a second
reduction from its original 8 percent.
Treasury Secretary P.B. Jayasundera has predicted it will be
a minimum 6.5 percent depending on the impact of a drought that
has started in early 2012. Growth last year was a record 8.3
percent, but 6.4 percent in the second quarter of this year was
Sri Lanka's slowest since the fourth quarter of 2009. [ID:
nL4E8KO62R],
The government will cut spending from the 2012 budget to
keep the fiscal deficit to a targeted 6.2 percent, Jayasundera
has said. By April, Sri Lanka's budget deficit was 285.8 billion
rupees ($2.14 billion), almost 61 percent of the full-year goal
of 468.9 billion rupees, raising concerns it may miss the
target.
The International Monetary Fund in June lowered its growth
forecast to 6.75 percent, down from an earlier estimate of 7.5
percent, due to tough policy measures the country has
implemented since February.
The IMF fully disbursed a $2.6 billion IMF loan to Colombo
in July, and the global lender is in preliminary discussion with
the government about arranging a new credit.
Another key lender is Beijing. In August, the government
said it would borrow more than $1.12 billion from China for a
new port and railway construction.
The bank has raised key policy rates twice since February to
more than two-year highs, and restricted banks' lending, as it
tries to keep down inflation and reduce its trade deficit.
At street level, higher costs of living have led to greater
demands from trade unions, in the state sector and outside, for
pay rises. The opposition, weakened by Rajapaksa's two-thirds
parliamentary majority, has some traction with the public on the
issue.
In July, after selling a $1 billion, 10-year sovereign bond,
the central bank said Sri Lanka would maintain a flexible
exchange rate, allowing flows to determine trends, but the bank
would intervene should fluctuations in the value of the rupee
become too sharp. [ID: nL4E8IP37K]
The rupee has fallen 14 percent since Nov. 21 last year
after the government devalued the currency by 3 percent, before
allowing flexibility on Feb. 8. The currency fell 4 percent in
the second quarter of 2012 alone.
Inflation accelerated to a 42-month high of 9.8 percent
year-on-year in July. It eased to 9.1 percent in September as
the government reduced some import taxes on essential foods.
What to watch:
- How quickly the government can address the cost of living
issues.
- The scope of protests and whether opposition parties can
find common ground to target the government.
- Whether the government maintains its hardline stance
against protests.
THE TEHRAN-WASHINGTON OIL SQUEEZE
Despite the tension with Washington, Sri Lanka has been
given an extended waiver on imports of Iranian crude after it
cut imports from Iran by up to 38 percent, switching to
alternatives from Oman and Saudi Arabia.
However, it will have to abide by certain conditions
including a further reducing imports during the six months to
Dec. 31 if it wants the waiver to be extended.
Oil Minister Susil Premajayantha has said Sri Lanka, which
is dependent on crude imports, took steps to reduce Iran crude
purchases during the first six months of 2012 to eight cargoes
per year from 13, buying four cargoes from Oman and one from
Saudi Aramco.
He has also said the government will refurbish its only oil
refinery to process oil from other origins.
Last year, Sri Lanka imported 93 percent of its crude from
Iran, so if a waiver is not agreed it could suffer badly from
sanctions on Iran.
What to watch:
- How Sri Lanka reduces Iranian imports further, and how it
pays for imports from elsewhere.
- Deals with other nations for crude cargoes.
(Editing by Daniel Magnowski)