Global Trade Rebalancing – The Commodity & Currency Effect 0 797

By : Kenneth De Zilwa

Global markets are a buzz with fear being mooted about a “contagion” and China debt trap sweeping across Asian markets, the currencies have become a quick focus by analysist and it seems to be the go to button to push towards weakening of the currencies and dampening import demand, more so, Chinese import demand. This could be a strategic call given the rebalancing needed from a geopolitical point of view. The China and USA tussle for market share is at the forefront of this new “contagion” mantra.

Global Trade Rebalancing - 01

Source: Thmosonreuters

The US has in fact declared war on trade and have undermined the WTO framework in the process as it does not suit their re-balancing agenda. Asian stocks have slipped to a 14-month low as at 12th Sep (Wednesday) with investor confidence chilled by the latest round of verbal threats in an intensifying U.S.-China trade conflict

China too is seeking WTO sanctions. China stocks fell on Wednesday morning, dragging the Shanghai Composite and the blue-chip CSI300 indexes down to new multi-year lows, as worries over escalation in the U.S.-China trade war hit investor sentiment.

Global Trade Rebalancing - 01
Source: Thmosonreuters

Despite the rhetoric global trade volumes remain healthy (as indicated by the Baltic Dry Freight Index) and commodities seem to be rallying on the back of the trade wars, this price movement is fundamentally seen as markets discounting long term geo political risk to the Global economy,  as both USA and China both still show signs of strong balance sheets and improving corporate profitability. Thus, the two largest consumer markets don’t seem to be dented as yet as the play  for Asian market share continues,  the winner of this bout would depreciate their currency to sustain the shift in market dominance and profits.

 

Leave a Reply

Your email address will not be published. Required fields are marked *

Gold Trend in the Coming Month 0 1036

By : Kenneth De Zilwa

Gold has lost its value from its high of USD 1858 per ounce as at August 2011  to its current levels of USD 1225 January 2019

The markets do seem to read more into dollar positive news than anything else and  thus the sell off in Gold (XAU) now seems to be now nearing its end with further global weakness trickling into the global markets. Any sign of a global meltdown could spur a rally in Gold as that is the safe haven when times are uncertain.

The geopolitical tensions between China and US too caused further shocks in global markets. More so in stock markets. As we saw global Stock markets fall by 16pct in 2018, and metals prices slumped to their lowest in a year, however with signs of a trade deal on the table between US and China we could see metals gain in the short term. Econsult expects Gold to test USD 1350 before we see the next move.

Gold Trend In the Coming Month

Recommendation by Econsult – We feel that the bottom for is safe and that a short burst in Gold is very much on the cards. So we would recommend to buy Gold for a rally to USD 1400

Are we there yet? 0 1080

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..

Subscribe the BiZnomics magazine for full article