Easter Attack Creates Fear & Frustration Comments Off on Easter Attack Creates Fear & Frustration 629

Love and Compassion, was the response to Sri Lankans on the Easter Sunday attacks in several churches in Sri Lanka where people gathered to celebrate the risen Christ through worship and praise during holy mass.

The Arch Bishop of Colombo Malcolm Cardinal Ranjith condemned the Easter Sunday attacks as an insult to humanity and urged people to show kindness, restraint, love and mercy to others as a sign of respect for all the victims. In conducting his mass with an appeal to peace and unity he said that he will pray for this country so that there will be peace and co-existence and understanding each other without division.Easter-Attack-Creates-Fear-&-Frustration-01

“We are not fully aware as to who is actually behind this. Just like the tip of the iceberg, we do not know the whole picture. There might be a more powerful group behind this unfortunate group of youth. Maybe those involved might not belong to the said nationality. Therefore we must not make this an opportunity to harass or assault anyone. If any wrong was committed by anyone, such individuals should be brought before the law. The law must be enforced”.

 

Sanctions on Oil Supply

The US government announced that it would end waivers granted to several countries including China, India, Japan, South Korea, Turkey and several other nations to import Iranian oil. This move could alter the outlook for trade flows, access to financial markets and currency movements.

Easter-Attack-Creates-Fear-&-Frustration-02 The US administration introduced sanctions on Iranian oil last year. The expiry of concessions on May 2nd could reduce the global supply of oil. Asian economies led by India and China are most affected as Asian consumption accounts for more than 35 percent of global demand. China and Turkey have opposed the imposition of unilateral sanctions. Oil supply concerns are also affected by US sanctions on Venezuela.

Oil prices continued their upward trend approaching the Brent crude price towards USD 75 per barrel in the last week of April 2019 – the highest in six months

 

Elections in Two Large Emerging Economies

On April 17th nearly 192 million Indonesians went to cast their election vote. For the first time, the Presidential, and the People’s Consultative Assembly (i.e. Parliament) and regional elections were held on the same day. Official elections results are expected by 22nd May. Indonesia – the world’s most populous Muslim country is projected to become the fourth largest economy by 2030 with a GDP of USD 10 trillion. Experts predict that it will be three times the size of the Australian economy by that time.

Additionally, from April 11th to May 19th about 900 million voters in India are expected to cast their votes in the Indian general elections that take place in seven phases of which already 4 phases have been conducted. The counting is scheduled on 23rd May and results are expected on the same day. India – the world’s most populous democracy is projected to be the third largest economy by 2030 with a GDP of USD 46 trillion. It is projected that India will surpass China as the world’s most populous country.

 

Polarization in Belt and Road Forum

The second Belt and Road Initiative Forum which was concluded on 26th April in Beijing, promising to work together as a global initiative to promote trade and investment is expected to enter the next phase. The first forum held from 14th -15thof May 2017, was attended by 29 Heads of States while the second forum was attended by 45 with Portugal, Austria, UAE, Singapore, and Thailand among new signatories to the joint communiqué.

Easter-Attack-Creates-Fear-&-Frustration-03However, India remained a notable absentee. Germany, France and the United Kingdom did not sent their top leaders and particularly Germany and France have been the most vocal in expressing concerns. Top leaders of Djibouti, Egypt, Ethiopia, Kenya and Mozambique were present at the forum. South Asia remained notable in abstaining with top level representation. India was no show as it was deeply concerned that the China, Pakistan economic corridor passes through territory occupied by Pakistan but claimed by India. Among South Asian countries only Pakistan and Nepal sent their Heads of Governments. The Japanese Prime Minister and South Korean President were notable blank spots. The United States did not send any representation from Washington to this gathering. The newly appointed President to the World Bank too did not attend the forum.

Sri Lanka Tourism to Take a Heavy Toll

The Sri Lanka Government indicated that the income from the tourism industry may suffer by USD 1.5 billion in 2019 or a reduction of earnings by 35pct, following the devastating attack on Easter Sunday. The US, Canada, UK and India have cautioned their citizens about travelling to Sri Lanka. The Hotels Association of Sri Lanka has indicated that about 20% of hotel bookings are being cancelled with more expected.

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The industry has expressed concerns as this is the first time tourist hotels have been targeted in this manner. However, Hiran Cooray Chairman of Jetwing hotels investments said that the tourism industry will come out of the impact of this calamity which even during the 26 years of war Sri Lankan has not experienced. Sri Lanka recorded 2.3 million tourist arrivals with USD 4.2 billion foreign earnings in 2018 – a sharp scale of expansion in comparison to the arrivals of 300,000 with USD 400 million earnings prior to ending the war in May 2009.

By: BiZnomics Special Economic Correspondent

Past is a Reflection of the Future – History does repeat itself 0 927

By : Kenneth De Zilwa

The Global Stock Markets have rallied beyond its mean of 50.45 pct on three previous occasions and on all three we have had a significant correction lower, with balance sheets wiped out.

The same is witnessed in 2016-2017; the Market Capitalization is currently at 97 pct of GDP. While Gross Fixed Capital Formation as a percentage of GDP is indicating a declining trend (Blue line). This is indicative of a trend going against fundamentals and the ability generates such high market capitalization gains remains questionable.

Past-is-a-Reflection-of-the-Future---History-does-repeat-itself

Therefore, Econsult expects 2019 to be a year of lower corrections in the global stock markets. This downturn can signal another deeper adjustment in global GDP as our Sri Lanka too must be watchful, as our external finances can be under stress.

Moody’s Credit Rating 0 1939

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