FACTBOX-What to watch for from Sri Lanka's next government

COLOMBO, April 9 (Reuters) - The strong victory of Sri Lankan President Mahinda Rajapaksa's ruling coalition in parliamentary polls should bring much-needed clarity for investors who have been keenly watching one of Asia's newest frontier markets.

Significantly, Friday's victory means the one thing Rajapaksa had told everyone to wait for -- the end of the post-war political season he predicted would give him a much stronger government -- is now here.

Here are major areas to watch and election implications:

* MARKETS: Sri Lanka's stock market .CSE has returned 165 percent since it hit a trough at the end of 2008, spurred by the end of the war and a $2.6 billion International Monetary Fund (IMF) loan that led credit ratings agencies to upgrade the Indian Ocean island's sovereign rating.

The government securities market has seen strong demand since the end of the war and the IMF loan, and bond dealers expect that to rise now that the political wrangling is finished and with upward pressure on the rupee currency LKR=.

Through all of the political turmoil, Central Bank Governor Ajith Nivard Cabraal has given a consistent policy message to investors, taking Sri Lanka's story on road shows and managing the rupee to prevent sharp swings.

Watch for greater investment overall, some changes to the stock market to make it more attractive to offshore investors including potential demutualisation, and further discussion on a proposed commodity market.

* FISCAL REFORM

Of more concern to investors has been Sri Lanka's persistently high debt and big spending, a relic of its socialist roots that routinely hampers growth.

Last week, the central bank said 2009 growth was 3.5 percent but forecast 6.5 percent this year, and 7.5 percent or higher in 2011-13. With increasing investment and the government committed to spend at least $1 billion or more annually on infrastructure development, analysts say the forecast is positive.

Under the IMF loan, Sri Lanka has pledged to trim its budget deficit, but missed its target of 7 percent in 2009 after recording a 9.8 percent deficit, and says it wants to renegotiate.

The 2010 budget will show if Rajapaksa intends to deliver on pledges to make fiscal reforms, improve revenue collection and cut bureaucracy that business say hampers investment.

* PARLIAMENTARY MAJORITY

Since the counting is still going on and one district where results were nullified will be re-polled, the exact majority Rajapaksa will have in parliament remains unclear. However, his alliance has forecast it will get 137 or 138 seats.

That is 12 or 13 seats shy of the 150 votes he will need to make changes to the constitution.

Rajapaksa has a gift for bringing people to his side through charm, patronage and coearcion, so all eyes will be on the political crossovers he intends to engineer.

He has been vague about what changes he will make, but investors expect they will be political -- and of less impact on the markets. [ID:nSGE6360KK]

* A BUDDING DYNASTY

Like other Sri Lankan leaders before him, Rajapaksa has made governance a family affair. His eldest son, Namal, became the third generation of Rajapaksas to go to parliament when he won a seat on Friday. Two of the president's brothers are contesting and one has already won his seat. Another brother remains a top official in charge of the nation's security apparatus, and other relatives are in government.

While to some outsiders this may appear like outright nepotism, Sri Lankans are used to dynastic political families and South Asia has a long history of them. Rajapaksa does not apologise and points out that his family business is politics.

This should bode well for stability, but will from time to time produce complaints that power is too closely held.

* FOREIGN POLICY

Rajapaksa has carried the torch for Sri Lanka's longstanding non-aligned position and will continue to do so.

At the end of the war he skillfully caromed the West off of Iran, Pakistan, Myanmar and China, and in turn played India off of China, to avert pressure while troops fought to the finish.

He also wants to avert plans pushed by the Sri Lankan Tamil diaspora and supported by some Western governments to bring accountability for alleged war crimes at the end of the conflict.

The government does plan to work to get back a European Union trade concession that it is slated to lose in July, after failing to meet human rights standards the European body has prescribed.

Watch for moves he'll take to rebuild Sri Lanka's geopolitical status and strategic position in the Indian Ocean, which has always made it attractive to the world's big powers.

Rajapaksa wants Sri Lanka to return to its former glory as an Asian hub for commerce and trade. (For more on Sri Lanka's election click on [ID:nSGE637H03]) (Editing by Jerry Norton)