Global credit crunch will not hit Lanka seriously -Senior WB Economist

by Gamini Warushamana

The credit crunch felt across the globe would not affect the Sri Lankan market seriously, said Senior Economist, Financial and Private Sector Development, South Asia Region at the World Bank Colombo office Ismail Radwan.

Radwan said that it would be difficult for Sri Lanka to raise money in the international capital market, without having an investment rating. The impact on Sri Lanka will not be very serious because Sri Lanka does not borrow heavily from the international capital market. The rates would not be attractive in the future because with high risk they will re-price lending. The $500 million bond issue will face this problem, Radwan told the Sunday Observer.

The credit crisis that started in the US sub-prime housing market is now spreading to financial markets around the world. Financiers are now reassessing risk pricing and raising the rates for riskier lending. This makes it harder for individuals with poor credit records to borrow money in the US and it is also likely to mean that developing countries will have to pay more for their dollar denominated borrowings in the international capital markets.

In recent years the government has successfully raised large amounts of dollar denominated debt in the capital markets. This is an important step towards achieving middle-income status and eventually "graduating" from donors and international financial institutions.

A few years ago Sri Lanka received a sovereign rating for the first time. The ratings vary by the rating agency but none of them is investment grade. The government, however, has had no difficulty in raising the money at relatively low interest rates, Radwan said.

He said that if the macro economic fundamentals were sound developing countries would not be affected by the credit crisis. If the country maintains the budget deficit below the economic growth rate, maintains a flexible exchange rate and also if other macroeconomic fundamentals are sound those economies would not be affected. Hard hit countries such as Turkey, Indonesia and South Africa had large budget deficits.

Radwan said that the credit crisis would not lead to a world economic crisis because the global economy is growing very fast. The Chinese stock market will not be hit at all because the Chinese market was up by 100% last year. The Malaysian stock market was up by 50% and therefore a 10% correction will not be a problem for these markets. Even though they lost they made much money.

Meanwhile, the foreign investors' participation in the Colombo Stock Exchange (CSE) showed an improvement last week. JKH and Dialog stocks attracted foreign investors, stock market analysts said. Market analysts said that there is no immediate impact on the CSE and the crisis would have a positive impact on the CSE later.

They expect foreign buyers such as California Pension Fund that moved out of the CSE a few years ago to come back. The crisis in US and EU markets, and strong Asian markets attract more foreign investments to the region, they said.

The credit crisis hit Asia last week. By Friday there were sharp falls in Asian stock markets, as the Bank of Japan pumped funds into the banking system for the second day to ease fears of a credit crunch. The Bank of Japan injected 1.2 trillion yen ($10.7 billion) into money markets, which was its third intervention in the week.

Tokyo's Nikkei, Hong Kong's Hang Seng, India's Sensex, Singapore's STI and South Korean KOSPI indices fell on Thursday and Friday.

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