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There are now "two competing power centers" that could see Sri Lanka enter "a constitutional crisis," said Pratyush Rao, senior analyst for India and South Asia at Control Risks. The Rajapaksa-Sirisena camp should now call early parliamentary elections and, as Rajapaksa remains a popular figure among Sinhalese Buddhists, who represent the majority of the population, there is a good chance that he will well, said Rao.
The president's support has diminished, so he could use Rajapaksa to strengthen his government, Rao added.
The Sri Lankan economy is already under pressure – foreign exchange reserves have diminished, putting pressure on the local currency – in the midst of larger problems in global emerging markets. The latest political turmoil could further weaken the confidence of international investors.
"Investors will probably be concerned about the situation as at best it will limit the scope of economic policies / reforms and, at worst, plunge the country into a protracted political crisis," said Shailesh Kumar, director for South Asia at Eurasia Group.
Sri Lanka's parliament was suspended until 16 November. At this point, Sirisena will have enough support to allow Rajapaksa to vote in a no-confidence vote, Kumar said.
Moody's already sounded the alarm on the situation.
Rajapaksa named prime minister "significantly accentuates political uncertainty" and could be "negative for credit" of Sri Lanka's sovereign rating, said Matthew Circosta, a Moody's analyst, in a note. "In addition, any social tensions likely to develop in the coming weeks would have a negative impact on the economy, which is already developing slowly."
