Are we there yet? 0 435

Are-we-there-yet

BiZnomics Research Team, being a body of professional Economic and business researches, felt it opportune to discuss national economic conditions including the country’s total debt stock (domestic and foreign borrowings), and the revenue-generating solutions including Hambantota port as an asset in stimulating economic growth takes the opportunity to speak to Dr. Kenneth De Zilwa, a business Cycle Analyst who has over 17 years of experience at all functional levels in senior management positions at banking and a senior consultant at the China Harbor Engineering as the subjects are very current and relevant to the ongoing discussions on the objective making the general public aware.

What is Sri Lanka’s  economic condition?

To answer this we need to understand the models of development used by the two governments.  Sri Lanka has witnessed two economic models in the past 10 years, namely, investment driven, local supply based and local enterprise driven economic model of 2010-2014 and a more liberal, external supply based consumption model ushered during 2015 to 2019. The resultant outcomes of these two are now in the public domain and could be compared and contrasted. In the 2010-2014 period the average GDP growth rate, which is the approximation used to indicate overall expansion of the country’s production, was at 6.78pct. The average growth rate in 2015-2019 was 3.70pct; indicating a 45pct decline from the earlier period. This implied a significant slowdown of real economic activity in the country. To put this in context we have to understand that the 2010-2014 growth was achieved despite the many global shocks, namely, we witnessed the food crisis, the second great depression of 2008 (second since the Grest Depression of the 1930s) which saw the global financial system collapse  and the global oil crisis. In contrast, in the past 5 years we had not witnessed any external shocks, apart from the depreciation of the Turkish Lira and its aberrations on global markets. 

Are-we-ther-yet-01Similarly, we find price volatility in interest rates and exchange rates. The commodity volatility had been passed on to the real economy, making input cost of production and consumables more expensive despite the dramatic fall in global crude oil prices. In fact it was observed by the Central Bank of Sri Lanka that the rupee depreciation by 18pct in 2018 viz a viz the US Dollar brought about a LKR 1,000 billion loss to the economy during 2014 to 2019 i.e. while during the last 5 year period, the total depreciation cost to the country was LKR 1,780.0 billion incremental debt servicing cost to the country. The erratic behavior of markets can thus be costly for the development agenda. Therefore we can argue that the free markets based model adopted in 2015-2019 was 

not conducive for the real sector development and economic growth. Going forward we envisage that a new business model will be introduced for Sri Lanka to kick start the economy with an emphasis on properly aligned macroeconomic policies which will stimulate local Agro-Industrialization and unleash the entrepreneurial activity across multiple sectors. This will lift the GDP growth rate to well above its historic average of 4.75pct.

 

How much is Sri Lanka in debt and what is the solution for this? Are-we-there-yet---03

Sri Lanka debt has been a talking point since 2014 and the reason for that was the rapid development that was undertaken during the 4-year period after the war. This clearly brought about an increase in the national debt stock. The country’s total debt stock (domestic and foreign borrowings) increased from LKR 4,590 million to LKR 7,390 million with significant amounts of funds utilized in the creation of balance revenue asset and capacity building, for the country needed to be integrated and the journey towards industrialization undertaken . Many of such capital intensive projects have a long term payback period and the cash flow from such projects was gradually building up, with less stress on the fiscal front of government business.  In 2015 however, the new government moved away from adding capital assets to the country’s economy and was focused on shifting economic policy towards less state led investment capital. They therefore, commenced disposing of already created assets via long term lease agreements to various foreign countries. Hambantota port is a classic example where the port’s revenue-generating business venture was leased back to the construction company at the cost of construction and not based on the discounted future cash flow method. The argument was that asset disposing was necessary given the country’s debt burden.

Similarly, we find price volatility in interest rates and exchange rates. The commodity volatility had been passed on to the real economy, making input cost of production and consumables more expensive despite the dramatic fall in global crude oil prices. In fact it was observed by the Central Bank of Sri Lanka that the rupee depreciation by 18pct in 2018 viz a viz the US Dollar brought about a LKR 1,000 billion loss to the economy. In fact during 2010-14 i.e.last 5 year period, the total depreciation cost to the country was LKR 1,780.0 billion adding to the incremental debt servicing cost and debt stock of the country.

Cont..

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SL Enters the global map as best travel destination Comments Off on SL Enters the global map as best travel destination 463

Sri Lanka with its unique blend of diverse culture, bio diversity and friendly people enters the global map as The Best Travel destination and retains its proud identity despite recent setback following 4/21 destruction of life and property. The Lonely Planet – the best-selling magazine featured Sri Lanka in 2019 – 10 years after a sustained upbeat in tourism nearly three decades after ending conflict in 2009.

Sri Lanka - Lonely PlanetThe country that was torn by war has entertained 2.4 million tourists by the end of 2018 benefiting nearly 300,000 direct and indirect employment and livelihoods,. A large number of them being small and medium entrepreneurs engaged in supply chain activities, investments in the development of leisure facilities, transport and logistics, urban and rural property development. This sector also accounted for USD 4.2 billion in foreign exchange earnings marginally lower than the country’s single largest industrial export income of USD 5.3 billion from textile and garment exports. In 2009, this now buoyant industry accounted for a mere USD 349 million.

The Lonely Planet ranked Sri Lanka as a top country to visit in 2019, stating “Already notable to intrepid travellers for its mix of religions and cultures, its timeless temples, its rich and accessible wildlife, its growing surf scene and its people who defy all odds by their welcome and friendliness after decades of civil conflict, this is a country revived.” The Lonely Planet recognises new highways and railroads help connecting critical areas of the country. It has also recognized that Sri Lanka’s tourism industry is developing properties around the island with more international hospitality brands.

Tourist interest in beaches are expanding to places like Tangalle, and going beyond popular places like Unawatuna and Weligama. Another attraction highlighted in the best-selling Lonely Planet Magazine is the train between Nanuoya and Ella passing through the hill country area beautified with the lavishness of tea plantation and natural environment. The ancient ruins of Anuradhapura with a wider attraction to the sacred Ruwanweliseya Stupa built in 140BC during which time Buddhism had flourished to its peak. The country’s history is enriched with leaders so devoted to empowering the island by Buddhist philosophy and culture with massive stupas and temples.

Lonely-Planet--02Economically the culture was supported by agriculture with amazing engineering talents to create its agricultural infrastructure with tanks and canals. The Sacred Temple of the Tooth is the holy place protecting the Tooth Relic of Load Buddha which is another attraction for visiting tourists. Both Anuradhapura and Kandy are two of the most holy places visited by many Sri Lankans as well. Showcasing the cultural extravaganzas every August the Trustees of Tooth of the Temple of the Tooth hold the Kandy Essla Perahera. Peradeniya Botanical Garden – the largest and oldest botanical garden in the country introduces the glamour to make Kandy which has been around for several 100 years as a tourist city.

The Eastern Tourism corridor spanning from Yala to Kuchchaveli through Pasikuda and Arugam bay is well known for the best waves in Sri Lanka. Surfing enthusiasts enjoy this area from April to October.

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Moody’s Credit Rating 0 1211

By : Kenneth De Zilwa

Moody’s Credit Rating Agency on the 23rd of November 2018 announced that they have downgraded Sri Lanka’s sovereign credit by one notch from B1 to B2. Many political statements have been made of this downgrade.Let us examine what it really means to Sri Lanka.

Table-1-Credit rating range From Aaa to Ca

Moodys Credit Rating - 01

Source: Econsult & moody’s

Each country is rated based on their governments likelihood to default on their external borrowing obligations.  The credit rating therefore looks at the default probability  of the state. In doing so Credit rating agencies take into account GDP growth, per capita growth, monetary conditions, fiscal deficits, external debt burden and a host of other quantitative and qualitative data in arriving at the credit rating political risk is also one such variable.

Moody’s have an established rating score which is Aaa which indicated the highest quality of credit  with a  probability of default of 0.03 percent while speculative grading’s are from Ba1- Ba3 with a probability of default 2.60 percent.  The lowest credit score is classified as High risk or Highly  Speculative obligations which are rated by Moody’s as B1, B2 and B3 (probability of default 9.58 percent).  With the lowest and most riskiest being Carated sovereign credits (two year default probability of 35.9 percent).

Sri Lanka Credit Rating B1 to B2

In this regard Sri Lanka was already rated as a high speculative country B1 (stable) since July 2013 and later the rating  outlook downgraded from stable to negative rating reaffirmed in 2016, 2017 and 2018 . Therefore Sri Lanka  a B1 credit was below investment grade to begin with the outlook changing from ‘stable’ in 2013 to ‘negative’ from June 2016. (Source: countryeconomy.com).  The corrective action plan could have reversed this outcome; however, the trajectory was unadjusted.

Moody’s appears to place a higher weight on GDP growth, inflation, growth in per capita income in order to achieve a higher grade rating, while lower inflation and lower external debt also consistently relate to higher ratings.

Therefore the overall credit rating of Sri Lanka in terms of its high risk rating has become more pronounced as the external debt and external foreign reserves situation has decreased since 2014 with warnings not heeded by persons responsible for managing the external debt. Added to this our external Foreign exchange reserves too has continued to decline and has declined by 30pct from USD 9.9 billion in April  2018 to 7.0 billion as at November 2018

Chart-1-External Debt Maturities

Source: Econsult & moody’s

Putting the Impact into perspective

The credit rating impact thus must be seen as a testimony of the shift in the economic model which has seen a shift to consumption demand which is supplied by external sources, thus this has lead to the trade deficit widen to USD 14 billion. Non-consumer import  demand during the past three year have witnessed an increase by 47pct growing from  USD 1,700 million to  USD 2,500 million over the period 2012-2014, 2015-2017 With the rupee depreciation rapidly to stem the imbalance in the overall current account.

Therefore the reason for the downgrade is three fold a) Sri Lanka’s growing debt to GDP ratio which had increased from 71% of GDP in 2014 to 85% of GDP as at 2018 June and b) its deteriorating external finances and c) the deterioration in GDP growth from 9% in 2012 to 3.1% in 2017 and also a stagnant per capital growth over the past 3 years.

Internal

Chart-2-All Share Index and USD/LKR price behavior


Source: Reuters

In fact the financial markets had already factored the credit downgrade of Sri Lanka since June this year  (Chart-3) as depicted in the Colombo Stock Exchange All Share Index breaking the 6000 mark (Yellow line) and the flight of foreign bond holders from the government debt securities market which resulted in the Rupee depreciating by 15% on year to date basis  (Purple line) therefore it is not professionally correct to underpin the downgrade to the last two weeks of political swings

External

Chart-3- Sri Lanka Sovereign Bond secondary market behavior

Source: Econsult & moody’s

The deterioration in the country’s external finances also had a significant bearing the ability raise finance as the 2025 USD Bond with a coupon of 6.875pct witnessed a sell off in the secondary market. The sell off of the Sovereign bond (ISIN 85227SAQ9) was witnessed since January 2018 but exacerbated during the past one month, reaching a yield of 9.04pct

This negative sentiment has thus prevented Sri Lanka tapping the Euro bond markets for refinancing its external maturities. This can pose a short term stress condition.

While it also provides Sri Lankan risk takers with the opportunity to buy the Sri Lanka credit at a discounted value, and factor in high yields as part of their investment portfolios