{"id":45571,"date":"2012-06-17T02:11:12","date_gmt":"2012-06-17T02:11:12","guid":{"rendered":"http:\/\/www.colombotelegraph.com\/?p=45571"},"modified":"2012-06-26T04:57:14","modified_gmt":"2012-06-26T04:57:14","slug":"eurozone-crisis-could-hit-our-economy-harder","status":"publish","type":"post","link":"https:\/\/www.colombotelegraph.com\/index.php\/eurozone-crisis-could-hit-our-economy-harder\/","title":{"rendered":"Eurozone Crisis Could Hit Our Economy Harder"},"content":{"rendered":"\n\n\n
By\u00a0Namini Wijedasa<\/a>\u00a0–<\/strong><\/p>\n
\"\"<\/a>

Namini Wijedasa<\/p><\/div>\n

Sri Lanka\u2019s shaky economy will get another pummelling as the euro-zone sovereign debt crisis worsens, analysts and industrialists warned last week, while urging policy makers to start steeling the country for it.
\nBut Central Bank Governor Ajith Nivard Cabraal said he did not anticipate a major negative impact. \u201cWe don\u2019t need to take any measures right now,\u201d he asserted. \u201cWe are watching the situation very closely. We are conducting a review every two weeks or so and if anything is needed we will be ready to step up policy\u00a0action.\u201d
\nA combination of actors expressed fears about the euro-zone crisis and its repercussions for Sri Lanka. Fitch Ratings said that, among emerging economies, Sri Lanka\u2019s sovereign rating was at most risk from the fallout.
\n\u201cSri Lanka is most at risk due to its high external-funding needs and weak balance sheet,\u201d Bloomberg newswire quoted Andrew Colquhoun, head of Asia-Pacific sovereign ratings at Fitch, as saying. \u201cThe same issues also make India and Indonesia vulnerable compared to similarly graded peers.\u201d<\/p>\n

Be ready for it<\/strong>
\nThe Institute of Policy Studies, a semi-government think-tank, separately pointed out that Sri Lanka\u2019s manufacturing and tourism sectors are \u201cquite dependent on Europe and as a result could face a severe downturn.\u201d For instance, the apparel industry exports 50 per cent of its products to the EU and over 42 per cent of tourist arrivals in Sri Lanka are from Europe.
\n\u201cGiven that apparels and tourism are two of Sri Lanka\u2019s largest income earners (textiles and garments alone amounts to 39.7 per cent of total exports) it is crucial that stakeholders in the Sri Lankan economy take a very close look at the effects of a possible euro-zone break up and ensure that robust plans are in place to mitigate the ripple effects of such an outcome,\u201d said IPS, which also has the Central Bank governor on its board. \u201cClearly, other countries have begun to think ahead \u2013 Sri Lanka must do the same.\u201d
\nThe euro-zone sovereign debt crisis, classified by the Organization for Economic Cooperation and Development as the world\u2019s worst in 2011, is set to deteriorate this year. The situation was building up since 2009 when it was first realized that Greece could default on its sovereign debt. Since then, there are fears that Portugal, Italy, Ireland and Spain could also default on their public debt.
\nLed by Germany and France, the European Union has tried to support these countries with bailouts from the European Central Bank and the International Monetary Fund. These measures haven\u2019t been enough. The very existence of the euro is now under threat. If more countries are unable to meet their commitments, the world could be hit with a worse crisis than in 2008.
\nOne of the main challenges Sri Lanka will face is in the area of external debt \u2013 how much the government can borrow on the open market and at what rates. When the global financial crisis broke out in 2008 resulting in a liquidity squeeze, sovereign bonds were hard to float and they had to be sold at much higher interest rates until the credit crunch eased. Sri Lanka, which borrows significantly from the open market and needs to roll over some of its sovereign debt this year, might have to go for higher interest rates that we cannot afford.<\/p>\n

Expensive loans<\/strong>
\nAccording to Fitch projections, as quoted by Bloomberg, Sri Lanka\u2019s gross external financing requirements this year equate to 95 per cnet of the country\u2019s reserves. In contrast, Indonesia and India both need outside funds totalling at least 30 per cent of their sovereign reserves.
\nIn a comment left on the IPS Talking Economics blog, an informed observer points to the increased integration of Sri Lanka\u2019s financial market with the global financial system \u2013 both through the Government of Sri Lanka borrowing from international capital markets and, increasingly, commercial banks borrowing from abroad. He notes that a lot of this borrowing is tied to LIBOR (London Interbank Offered Rate) or the average interest rate that leading banks in London charge when lending to other banks.
\n\u201cWhen Lehmann crashed in 2008, there was a big increase in the LIBOR,\u201d he said. \u201cAnd even last year, when the euro situation looked bad, the LIBOR almost doubled and has remained at that level. If there is a major credit event in Europe and it causes a sustained increase in risk perception for inter-bank borrowing causing the LIBOR to spike, it could affect repayments on international borrowings that have been made when the LIBOR was at very low levels.\u201d
\n\u201cA dry up on inter-bank borrowings,\u201d he adds, \u201ccould also hurt trade finance, which tends to have a short and sharp impact on global trade.\u201d
\nIndrajith Coomaraswamy, former director of the Commonwealth Secretariat\u2019s Economic Affairs Division, said there were several channels through which Sri Lanka could get affected. This includes trade and tourism. \u201cThe overall impact on risk appetite in capital markets will also have to be considered because these will have implications for decisions made by lenders, international banks that lend money, portfolio investments and foreign direct investment,\u201d he explained.
\n\u201cThere is already now a risk premium attached as a result of the crisis which all countries, including Sri Lanka, will have to pay,\u201d Coomaraswamy continued. \u201cOur capacity to repay may be affected if the euro-zone goes belly up. This is no commentary on the quality of our policies but on the fact that there is much more risk in the global economy which, in turn, means there is a premium attached to money that is being lent.\u201d
\nSo, if the risk appetite of international capital markets comes down because of the euro-zone crisis, it would impact negatively on the global economy which then has implications on the cost of funds for everybody.
\nBut Cabraal said there was no cause for alarm. \u201cThe type of money we are raising means we have a clientele spread right across Asia, Europe and the US,\u201d he explained. \u201cOur view is that, even if there is any kind of reduction of investment appetite, it would be fairly well compensated by the appetite that has been enhanced both in Asia and the US. We don\u2019t expect that also to be a problem.\u201d
\nAsked about the possibility of having to pay higher rates of interest, Cabraal said Sri Lanka\u2019s bonds are trading at \u201cvery competitive rates compared with many other countries.\u201d \u201cThere, again, we don\u2019t expect it to be a major challenge,\u201d he insisted.<\/p>\n

Exports to take a hit?<\/strong><\/p>\n

Garments are our main export to Europe but other products also make their way there. This includes rubber goods and processed fish. It is feared that the\u00a0capacity of affected countries to buy from Sri Lanka would be less.
\n\u201cThere is no question that there will be an impact on exports as long as the euro-zone crisis exists,\u201d said Dawn Austin, chairperson of the Exporters Association of Sri Lanka. But she felt that it will encourage some exporters to innovate and diversify. \u201cHaving lost the GSP Plus, certain industries saw themselves hone their products to reach a higher end,\u201d she recalled. \u201cAnd I\u2019m talking here of the apparel industry.\u201d
\n\u201cI think exporters will start looking for other destinations and obviously for other buyers,\u201d she reiterated. \u201cThat could compensate in the long run.\u201d The problem, though, is that other export-oriented countries will be doing the same so Sri Lanka \u201cneeds to sort itself out and bring down our cost of production.\u201d
\nDemand has already fallen. \u201cIt\u2019s beginning to reflect in the May figures,\u201d Austin said. \u201cBut we are talking of exports to the euro-zone. Don\u2019t confuse it with exports in general.\u201d Asked how they would encourage the government to tackle the situation, she said her association and the chambers are getting their budget proposals together. \u201cThose usually form the basis for what the government will be requested to address but nobody had come out with anything specific yet,\u201d she said.
\nHere, again, Cabraal was optimistic. \u201cWe have done several scenario analyses considering different countries in the euro-zone that have dealings with Sri Lanka,\u201d he outlined. \u201cWe do not do business with the entirety of the euro-zone. We are actually doing serious work \u2013 exports, imports, investments-mostly with the UK, France, Germany and Switzerland. We find that we have very little to do with some of the affected countries. Our main exports go to Germany, UK, somewhat to Denmark and a few others. None of those countries are badly affected.\u201d
\nThe Central Bank\u2019s assessment, therefore, is that if those countries, \u201cdo not get into any kind of serious situation, it is unlikely the euro-zone crisis will have a serious impact on the Sri Lankan economy\u201d.
\nMeanwhile, Coomaraswamy said the euro-zone problem could also reach Sri Lanka through tourism. A large percentage of visitors to Sri Lanka come from Western Europe. If their countries are hit, it is likely that they will not take long haul holidays. Finally, remittances from people in countries such as Italy might reduce.
\nHe expected the next year to be tough. \u201cWhat could happen is that there will be an economic slowdown, interest are rates high, there is a credit ceiling for banks, investment will be less, so growth will be less,\u201d he assessed. \u201cIf that is so, then tax collection will also be less since economic activity will be less. Government revenue will consequently reduce, as will its scope to provide assistance to people.\u201d
\nThis might mean that more sectors will appeal to the government for assistance.<\/p>\n

Lakbima News<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

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