Easter Attack Creates Fear & Frustration Comments Off on Easter Attack Creates Fear & Frustration 396

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

Changing Debt Profile of Sri Lanka 0 615

A Recent History

Over the recent past, the Sri Lankan general public has shown a great deal of interest in the subject of national debt. This has been due to expressions like the country’s “debt trap” and “debt crisis” used extensively in political debates and propaganda. The government in power as well as the opposition has blamed one another for bringing the country into such a debt trap or a debt crisis. A gripping fear of a possibility of debt default with all its adverse consequences has been widely generated. A generally accepted rule of thumb in measuring the gravity of a country’s debt problem has been to indicate the total outstanding debt as a ratio of the country’s GDP.

In this measure, the level of aggregated debt is related to a concept of total revenue generated during a financial year. Such national debt ratio can be considered equivalent to that of a corporate balance sheet ratio of debt to equity. Figure-1 captures the behavior of Sri Lanka’s Debt/GDP ratio during 2002-18. The data indicates that during key points in time, the debt levels have being significantly higher than what it is now. However, no one spoke of a debt crisis or debt trap at those times of high debt to GDP ratio – e.g. during the early 2000s. In fact, after 2004 the ratio has been generally below 100pct. In most years after 2004, the ratio was indeed below its current debt to GDP ratio of 83pct.

The total debt stock, as at 2018, remains at USD 73.7 billion. Of this the foreign currency debt is USD 36.4 billion – 49pct of total debt or 43.3pct of GDP. The remainder is LKR based debt stock. This is still manageable given that Sri Lanka can always roll over its existing LKR based debt without too much of a problem. The banking sector’s appetite for risk free assets is high and there are the captive sources like EPF and ETF. These indeed have been the natural long term players in debt markets.

Sri Lanka’s Shift to Commercial Borrowings

The portfolio of foreign currency loans is categorized into three sub sections, namely, a) concessional, b) non-concessional and c) commercial loans. Prior to 2013, 85pct of foreign borrowings was on concessional terms (see Figure-2). This has changed in 2009 with Sri Lanka successfully entering the international sovereign bond market in its debut. This also amounted to taking the pressure off domestic financing, which until then was the only source apart from donor funding that was available. The concessional external borrowings from multi-lateral agencies and bi-lateral funding sources have continued to be on a declining trend on a net basis since 2008.

Sri Lanka was pushed into international financial markets mainly due to the fact that concessional funding was not available after the country moved up to a lower ‘Middle Income’ country status from around 2004. In fact, IMF, IDA and the World Bank have taken Sri Lanka out of the “financially vulnerable” country status, on the grounds that the country as a ‘Middle Income Country’ has the ability to access international financial markets. Sri Lanka is not among the group of 37 ‘heavily indebted poor countries’ (HIPC), which are eligible for special assistance from the IMF and the World Bank.

As at 2018, Sri Lanka’s total foreign currency debt portfolio was USD 35.4 billion. Of this only USD 9.1 billion was obtained at commercial rates from financial market sources. The remainder is at concessional and non-concessional development funding rates. In other words 53pct of the foreign loans are commercial/non-concessional.

The foreign currency debt mix is dominated by USD borrowings given that our cash inflows from external revenue sources are also predominantly based in USD. This helps the country to manage any exchange rate volatility, as the matching of cash flows does not impact the debt servicing. In 2017, infact, 61pct of the total foreign debt portfolio comprised of USD, while the next largest was in SDR (20pct) followed by Yen loans (12pct) (Figure-3).

The bilateral debt component in Sri Lanka has contributed to modern infrastructure development much more than multilateral debt (i.e. WB). A closer examination of our foreign debt profile indicates that it has long term maturities. More than 75pct of the loan portfolio is maturing beyond 5 years (Figure-5). Market borrowings comprise only 39pct of the total. Refinancing of debt stock per se is not therefore, an issue. Debt servicing is the main concern.

External Debt Holders

The noise around the China debt trap too has found its resurgence since 2014. Given the investment into capital formation pursued by the then government, these investments were undertaken given the dilapidated and outdated infrastructure Sri Lanka had prior to the war ending. Therefore, such investments were paramount in order to create investor appetite for setting plants beyond the boundaries of the Western Province.

However, the data contradicts the China debt trap rhetoric created by politicians and non-academics as it is unsubstantiated and ill conceived; in fact the largest form of external debt is by way of International Bond issuances, while bilateral borrowings are from the ADB, World Bank, and Japan, while China comes in at 4th place (Figure-6). In this context what is important to understand is that all internal bonds are fungible and hence there is no financing risk but a mere cost of financing the stock of bonds.

Debt Servicing

Sri Lanka’s export earnings are one important source of cash flow which technically can be used to service the country’s current foreign debt. The higher the potential for foreign currency earnings through exports, the better it is. The country as potential lenders are unlikely then to be over-concerned about the borrower country’s capacity for repayment. International rating agencies would consider it good for Sri Lanka if our export earnings are growing on a year on year basis at a satisfactory rate. This also reduces the foreign exchange exposure attached with rupee based debt servicing.

Sri Lanka’s foreign currency denominated commercial debt as a percentage of exports, continued to show vulnerability as year on year growth of export earnings declined in 2009, 2012 and 2015. The volatility of our merchandise exports continue. The declines in export receipts (i.e. income) have added significant pressure on the ability to service foreign debt. This has made the cash flow conditions for foreign debt management per se challenging. The need is to secure USD cash flows/revenues from revenue generating activities and assets and / or cutting down USD import expenses further. This appears to be the path towards managing our ability to maintain this debt to equity mix.

Foreign Debt Servicing

The ratio of debt service ratio to merchandise exports is the ratio that gives us comfort on the ability to service our external debt payments (i.e. principal + interest). A country’s international finances are deemed healthier when this ratio is low and ranges between 10pct to 20pct. In other words, the lower the ratio the better, as it indicates that the country consumes less of export earnings to pay off its foreign debt. The ratio of total debt service payments to exports is therefore, an important measure of a country’s ability to service foreign currency loans/debt obligations. This ratio had remained well within the stipulated norms of 10pct-20pct from 2011 to 2015. The ratio has deteriorated, moving out of the applicable norm, from 2016reflecting the impact of bunching of repayments on medium term external debt. The decline of this ratio in 2018 reflects the impact of the rise in merchandise export revenues in that year.

By: Dr Kenneth De Zilwa

BiZnomics Global Out-front Comments Off on BiZnomics Global Out-front 382

Global-Outfront

President Trump offered to meet North Korean leader Kin Jong Un at the demilitarised zone following the G 20 Summit raised prospects for a third face to face meeting between the two leaders.

G -20 Osaka Summit 

14th G-20 Summit – a forum of 19 member countries and European Union was held in Osaka, Japan 28 -29 June 2019 with the participation of heads of G 20 Governments. International Monetary Fund, Asian Development Bank (ADB), International Labour Organization (ILO), Organization for Economic Corporation and Development (OECD), United Nations (UN), World Bank (WB), World Health Organization (WHO), World Trade Organization (WTO), represented in the summit by their respective heads of Institutions. 

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Collectively G 20 nations represent more than 80 percent of global output and 2/3 of its people. Easing the global tension centred around US – China trade dispute, President Trump announced that he has agreed to allow US companies to sell high tech components to Chinese telecommunication giant Huawei. He also announced that China will buy more US farm goods. US President indicated that US will call off raising tariff on Chinese goods and negotiations to end the trade dispute between two countries will continue.

Prime Minister Abe who hosted the G 20 Summit explained that global leaders have affirmed free and fair and inclusive economy and open competition are the principals to lead the world economy in future.

Global-Outfront
Source: IMF Economic Outlook

 

 

Global Outfront
Source: IMF Economic Outlook

 

As estimated by IMF total GDP of G20 nations of nearly USD 60 trillion account for 78 percent of the world total GDP of USD 88 trillion. In terms of population, G20 nations is estimated to have 4.6 billion people in 2019 accounting for 61 percent of the world total population of 7.5 billion. China takes the lead with 31 percent and India accounts for 29 percent making two emerging nations in Asia having 60 percent of the population of G20 nation.

By: BiZnomics research team

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