Sri Lanka was likely to shift its economic focus after the election of a new, more left-leaning government at the weekend that could alter the island's two-year programme of privatising state assets and courting investment.
President Chandrika Kumaratunga's United People's Freedom Alliance - which includes the Marxist People's Liberation Front (JVP) - was likely to form a minority government after voters ousted the pro-business party of Prime Minister Ranil Wickremesinghe.
"Fiscal discipline coupled with the peace process is an essential factor to carry forward economic growth. How well they can implement those things, we don't know," said Hasitha Premaratne, an analyst at HNB Stockbrokers.
Wickremesinghe's main achievement was signing a cease-fire with the Tamil Tiger rebels after 20 years of civil war.
That helped him turn the economy around to an estimated 5.5 percent growth last year and attracted aid pledges of $4.5 billion.
But his sell-off of assets including the state insurer and petroleum company, and abandonment of subsidies left him open to the charge he was neglecting common people, something the new government is likely to change.
"In terms of the privatisation's there will be quite a bit of arguments internally.... (and) if they want to keep low prices for farmers the government may have to bear a significant subsidy," said Premaratne.
He added the JVP had already tempered its leftist rhetoric in the course of the campaign, and may shift further toward the centre once it is involved in policy-making.
But analysts said despite the fact the new government's economic policies were still largely an unknown, the prospect of instability arising from its minority mandate and the loss of a business-friendly prime minister could hit markets.
The tiny Colombo bourse has gained nearly 80 percent since the February 2002 truce, but posted its biggest-ever one-day fall after Kumaratunga seized the defence ministry last November, and plunged another 13 percent in February after she dissolved parliament and called the snap poll.
"The fall could be quite significant. It's speculative, but that's what drives the market," said Amal Sandaratne, who heads Frontier Research, a financial advisory firm.
Markets are closed on Monday because of a holiday and with local New Year holidays shutting down the country for much of the following week, analysts said liquidity could be light, with little buying interest to offset a panic sell-off.
"People who went on short-term might be forced to sell, but then I think it will stabilise - there is no threat to peace at the moment," said Naren Godamunne, a broker at DFCC Stockbrokers.
Analysts agreed that no matter what the policy shifts of the new government, the key to growth was maintaining the peace bid that has seen tourism rebound and investor confidence return.
"In terms of the economy, the key will be whether the no-war situation can be sustained. That's the number one factor that can impact the economy," said Sandaratne.
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