The Need for Risk Taking Appetite and New Risk Takers 0 312

By Dr. Kenneth De Zilwa, Business Cycle Economist and Financial Markets Expert

Business Cycle of Over Production is Coming to an End:

The global economy is now witnessing its second correction in the business cycle, post the 2008 financial crisis, thereby ending the short juglar business cycle. What is important and mostly missed is what the juglar business cycle brought about. It paved the way for two important outcomes; namely, new risk-takers and new production capacities. This means that we will see new global economic leadership, change hands from the USA to China. It is a common secret that this will be a difficult transition for the world to adjust to from a structural point of view; nevertheless, the past decade of trade and investment flows has made this transition relatively easier.  And this is now the new reality. The change in economic leadership would usher in new markets and with it, new consumer segments are bound to emerge. In other words, the business cycle of ‘over-production’ is complete and the legacy of consumer goods and services is at its end.

The brief economic rebound during the period from 2009 to 2019 was problematic as it was mired by the lack of fixed capital formation in many countries and was an indication that the global economy would run into trouble. Once again many Banks and Central Banks of countries refused to accept the reality that balance sheets had not really recovered and continued monetary easing, resulting in inflation rapidly declining. Part of the monetary easing process was the injection of significant amounts of cash i.e. money liquidity, by Central Banks across the world and the reduction of monetary policy rates. During the 2009 period, alone global broad money supply increased from 100.33pct of GDP to 128.11pct of GDP recoding a 11 year high as at 2019. The rush to stimulate the developed world’s economies underscored the rise in global money supply.

The flush of money saw the  global top 1000 banks’ asset base increase from USD 95 trillion in 2009 to 124 trillion in 2018. Since the financial crisis in 2009, the asset base of the USA banking sector had doubled from USD 11.2 trillion in 2009 to 20.3 trillion in 2020 while China’s banking sector assets alone grew four fold from USD 10.3 trillion to USD 41.7 trillion by 2020. It was believed that in order to overcome the financial crisis, as in the past monetary stimulus, there was dire needed to ensure the global economy had the legs to continue. In order to do so it was injected with sufficient steroids (i.e. monetary and fiscal) to overcome the 2009 recession.

As in the case of the USA and China, many other economies too found that their growth in banking sector assets were not matched by commensurate economic growth rates. Central Banks’ multiple monetary and fiscal tools found limited success in stimulating aggregate demand and it did not materialize despite the low-interest rates and wall of money. The global 11-year average of gross fixed capital formation, for 2009-2019, declined to 23.23pct of GDP from 23.89pct of GDP witnessed in 1998-2008. The splurges of cash only limited the scope for any global balance sheet led capital formation expansion and output growth, as overproduction still i.e. excesses, persisted.

The end result was that market was awash with low cost funding that was channeled back into Central Banks and the rest into financial assets i.e. stock markets, as banks provided highly toxic liquidity which saw stock buy back fueling stock market rallies and delighted beneficiaries of such a monetary policy. Not surprisingly we find that the US and Japan stock markets have had their best performance since the 2009 crisis with the US S&P 500 recording a compounded annual growth of 13pct and 12pct respectively, over the past 11 years.

Covid-19 Made the World Playing Field Flat:

Two forms of events are visible in any business cycle that has peaked. The first being, systemic events which are unpredictable but unquestionably negative and can short-circuit expansionary plans. These include wars, commodity price shocks and asset bubbles. The second category, balance sheet events, is to do with the real economy or financial imbalance and eventual financial crisis that is unsustainable and requires adjustment. Excess production based inventory swings can negatively impact growth in the short term. However, these have rarely caused recessions at least in the last few decades. Excesses in production i.e. inventory, need to be large and the associated adjustments needs to impact a broad section of the global economy.  In March this year, the World Health Organization (WHO) announced the Covid-19 virus had reached pandemic status and the world must brace itself for unforetold events of disruption from both the supply side and demand side.

This global dislodgment saw both the systemic and balance sheet events unfold in markets as never seen before. The world economy saw its worst GDP decline since the Great depression, contracting by 4.5pct.  The downward adjustment of global GDP soon meant that corporate balance sheets would deflate, stock markets fall and global commodities follow in this same direction and they did. Stocks across Europe were down on average by 14pct, Japanese stocks by 14pct and UK by 21pct. Crude oil too fell to negative 20.0 USD per barrel as storage capacities were fully utilized and crude oil companies were unable to manage the excess inventory, created due to the lack of demand, and were forced to pay higher prices for storage than their revenue per barrel.

The unravelling of the ‘new normal’ and post Covid recovery started in China by mid April 2020. It had an undeniable effect on both global and domestic growth and balance sheets, particularly for more open economies exposed to trade; while closed economies proved to be more resilient. Self-sufficiency, import-substitution, cashless settlements and cost savings were back on the table.  World economies have been forced to re-examine and re-design new business models as new winners and losers were emerging, with the resilience clocks for economies being re-set and the playing field made flat by the Covid-19 global shut down.  A fresh re-start has now dawned and a new business cycle is rapidly unfolding, with an Asian focus taking center stage.

The Emergence of New Risk-Takers:

As with all unsustainable outcomes, the eventuality would be a steeper and more painful correction as balance sheets need to be leaner and debt reduced for a new start to emerge.  Post the financial crisis of 2009, banks in Europe and US had written down more than USD 2.1trn of assets by the end of 2010 alone. The figure was far less for Asian banks which were just $115bn. Since then, globally banks have been engaged in restructuring corporate balance sheets in order to create the needed space for resurgence in aggregate demand. Chinese banks have already made arrangements to write off USD 490 billion in 2020 accelerating the non-performing asset disposals. U.S. banks too will set aside up to USD 320 billion to cover potential credit losses in 2020 due to the financial strain of the pandemic, according to a new report from Accenture. Therefore, banks in emerging markets are now well-capitalized and well-funded and big enough to be able to compete directly against their western counterparts in the global marketplace.

In fact as the financial crisis (i.e. business cycle) of 2008 took its toll on the US banking system, systematically dislodging many US Banks from the Top 10 list of Global banks by 2020. US Banks such as Citi Bank, JP Morgan, Bank of America and Wells Fargo have been relegated to the bottom of the pile of the Global Top 10 Banks. The top four slots have been secured by Chinese Banks, namely, ICBC, China Construction Bank, Agricultural Bank of China and Bank of China who are placed as the new leaders of the prestigious Global Banking list. Therefore, we are now witnessing greater equalization across the world as never seen before. If the past century of development rested with the USA (as it was indeed the leading economy and accounted for much of the global demand), with the emerging new business cycle the leadership shifts to China as it replaces the US in many key strategic areas such as trade, resources, banking and finance and patents of technology.

Asia with 48 countries, accounting for 30pct of the Earth’s land area, 60pct of world population, average per capita of USD 7,500, accounting for 50pct of the world fishing catch, producing 90pct of the world’s aquaculture-raised fish, home to 65pct of the world’s total IP with regard to industrial design patents and enjoying an average growth rate of 5.7pct; is positioned to capture the ‘new normal era’.  As the global economy looks toward a ‘V shape’ recovery in 2021, it will also be the dawn of a new business cycle: global growth likely to be 5.1pct.  The new Asian risk-takers, namely, China, India and Indonesia are expected to lead the new growth story, growing by 8.1pct, 10.8pct and 5.6pct respectively in 2021 providing the rest of Asia the launching pad. As with all growth stories the entrepreneurial class stands out and by 2020, China and India were collectively home to 430 Dollar billionaires (China 324, India 106). In fact, according to the World Economic Forum, by 2030 Asia is expected to contribute roughly 60% of global growth.

Sri Lankan Bankers and Businesses Must Adopt or Perish:

It is believed that the banking sector mirrors the real economic activity. The recent chain of negative events, both locally and globally, which lead to the economic contraction has prompted bankers to become risk averse as they see their scope narrowly, focusing on 10pct of their non-performing assets. With considerable amounts of time and resources invested in the area of recovery, and understandably so, as it is depositors’ funds. However, depositors are also customers on the asset side of the balance sheet and bank CEO’s seem to be missing out on this aspect. The bigger picture details must be considered by Sri Lankan banks as with their many foreign counterparts. Global banks are busy re-structuring, writing off bad loans, looking at mergers and acquisitions and re-positioning their and customer balance sheets for the next phase in the business cycle. With the emerging Asian take off, Sri Lanka cannot afford to remain complacent or live in disdain.

As witnessed with each new business cycle there always comes an upsurge with the change in the adopted technology, and in this case, energy efficient GT technology, (i.e. we are seeing the unfolding of green tech revolution) and with it new consumer markets, new products that require a new management ethos, and also new risk management tools for doing business. To cater to this journey Sri Lankan CEO’s and Treasurers both in banks and in the private sector have to adopt or will surely perish.

The recent business cycle events have opened up discussions on the ability of Sri Lankan bankers to look beyond the cyclical annual budgeting outcomes and position their banks balance sheets to capture the ensuing global trends and business cycles.  For the 10-year correction phase will soon come to an end by 2020 and would provide a wide range of opportunities to the brave who have understood the nature of business cycles, and positioned themselves to be risk-takers and market-makers instead of being passive players in order to maximize the national potential of the growth phase.

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Active Trade policy for economic development 0 810


Professor W. D. Lakshman

Biznomics-active-trade-policy2Do countries with lower barriers to international trade experience faster growth? This has been one of the most vigorously debated questions in economics and political economy. Mainstream economics since Adam Smith strongly favours free or freer trade. In contrast, different strands of political economy have been critical of these views. Liberal trade has become a policy position pursued by international trade organizations like the GATT (and after 1995, the WTO), and by international financial institutions like the IMF and the World Bank. For many in this line of thinking free trade has become an ideology. Renato Ruggiero, the first Director-General of the WTO, writing in the last decade of the twentieth century, argued that liberalization had “the potential for eradicating global poverty in the early part of the next [twenty-first] century—a utopian notion even a few decades ago, but a real possibility today”. The free trade ideology has attracted traditional elites and economic bureaucracies in many developing countries as well.



The free trade policy prescription is based on the theory of comparative advantages developed by a long series of well-known economists starting from David Ricardo of the nineteenth century. (Ha-Joon Chang in our issue of May-June 2019 presents a lucid explanation of the fundamentals of comparative advantages theory). In reality however, international trading has never been free.  During the period of European colonialism, foreign trade was controlled by the imperial powers and a few large and powerful trading companies. Colonial territories were opened up for foreign trade using imperial power. Countries that could not be brought under direct colonial rule (e.g. Japan and Thailand in Asia) were compelled to open up for foreign trade through unequal treaties which they were forced into signing. Foreign trade in colonies and countries brought under unequal treaties was seriously disadvantageous to the territories concerned.



After World War II and in the era of decolonization, there was the US domination of world trade matters. The currently prevailing pattern of international division of labour and the rules of the game governing international trade are being governed and managed by the set of international institutions referred to earlier, working according to dictates of the US-led bloc of Western powers. Various global forces operate in support of these institutions – the ideological commitment to free trade, bribery and corruption unleashed by MNC-led international capital, and numerous political pressures, occasionally backed up by military power of dominant nations.

Foreign trade has been described as an engine of growth (implying causality) or at least as a handmaiden of growth (implying concurrent movement). Countries which have experienced export-led or outward-oriented growth processes are cited in support of growth-engine or growth-handmaiden hypotheses.  Mainstream theory however ignores inward-oriented import substitution activities which often pioneered the economic growth processes of the countries concerned. The export-led characteristic developed later once production capacities were developed through import substitution. Historically, in the initiation, sustenance and guidance of both these growth processes – import substitution and export orientation – active trade policy has played a crucial and critical role. The effective policy stance here has never been free trade, passively leaving trade flows to global market forces. In effective trade policy stances there were always complex and dynamic combinations of openness and restrictiveness.


A point of great significance in trade policy discussion is that every process of development, taking place over time and space, is unavoidably uneven from one region to another at the country level and across different countries at the global level. As development processes take place at different rates in different countries, some regions and countries have achieved development earlier than the others. In this process, the “developing countries” always have got themselves stuck in a “late development” syndrome, subjecting them to more disadvantage than advantage. The “one suit fits all” type of development policies advocated in different versions of neoliberal packages, are hardly likely to meet the development challenges of all developing countries. This point comes out strongly in the extensive trade policy debates in development theory and practice.


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Banking In a Spot of Bother 0 654

By : Kenneth De Zilwa

The Sri Lankan Banking system credit growth is strongly correlated with the economic activity of the country. The Correlation Coefficient between GDP growth rates and Banking Sector Annual Average Loan Growth is 0.76.

The Banking sector profits have witnessed a 25pct growth from 2016 to 2017. The growth comes on the back of highly volatilize exchange rates and interest environment in the economy. NII of the banking sector to showed a growth 12pct for the corresponding period, thus remaining flat from 2015.  Other income have accounted for 73pct while NII contributes circa 27pct of the total income of the Banking sector.

Banking In a Spot of Bothe

The Sri Lankan economy has recorded an average growth of 4.5 pct over the past 66 years. While only recording above average growth rates of 8pct post war in 2010, 2011 and 7pct growth rates in 2013 and 2014.  In 2015, 2016 and 2017 the economic activity declined and continued to grow marginally above the trend line growing   by 4.8pct in 2015, 4.4pct in 2016 and 4.0pct in 2017. Credit growth has decelerated from 32pt in 2016 to 18.1pct in 2017. Recording a  57pct year on year decline.

Banking sector credit growth has predominantly focused on the Industrial sector which accounts for circa 42pct of which housing and construction accounted for 75pct of the total, while services accounted for 30pct, within which tourism based credit creation was circa 29.3pct while consumption based credit lending stood at  21pct and agriculture 9pct.

Banking In a Spot of Bothe

Therefore Econsult anticipates that the slowing of credit growth would translate to an overall slowing of the real sector and lower GDP growth for 2018 to 3.0pct and 2019 to 3.5pct. On the back of tighter credit controls, declining agricultural supplies,  incremental VAT and taxation ushered in by the New Inland Revenue Act 2017, and the currency depreciations

The rating agency too have indicated that Banks would have to consider supplementing risk capital by cutting down dividend payout and consider further capital raising based on Basel III rules since CAR have come under pressure due to rising NPL’s to equity & reserves. This could mean that Banks would be forced to tighten credit while adopting more secure means of lending. Such outcomes could pose more issues to the already choked real economy. The recent deceleration of the economy is bound to hit the banking sector in Q4 2018 and Q1 2019.

Source : CBSL Annual Report & Thmosonreuters