Emerging economies under threat

by Sunil KARUNANAYAKE

Amidst the continuing chaos in the global economy much hope was based on emerging economies such as China, India and Brazil which demonstrated higher growth, low inflation and active stock markets, however with the never-ending Euro crisis and disputes, strong growth prospects seem to be diminishing. Even the US economy recovery is under threat. The economies across the world are struggling ,while the Euro Zone is far from settled. Euro Zone Banks are facing a major threat from defaults. The much-threatened Greek exit may further destabilise the already affected Euro Zone.

A file photo taken on June 16, 2012 shows people attending a demonstration against bank fraud in Madrid. Not content to sit out the economic crisis cushioned by their pensions, the elderly are joining in a wave of social protests in Spain, protesting noisily in support of younger fellow citizens. AFP PHOTO JAVIER SORIANO

"A global recovery that falters so soon after the previous recession points towards widespread stagnation". The EU worlds biggest economic area could plunge in to a spiral of Bank busts,defaults and depression leading to a financial calamity"

Within limited alternatives investors are said to be rushing for bond issues in USA, Germany and America. Economies have weakened across the globe amidst a totally unsettled Euro Zone. Euro Zone banks are under threat from possible defaults and Bankruptcy.

Some of the best performing stock exchanges in the world are now struggling. Even the US economy that showed early promise is now slowing down and facing a crisis. The much-talked of Greek exit if implemented may further destabilise the Euro Zone crisis.

In Asia, both China and India recovered well after the global financial crisis to record impressive growth and BOP surpluses to emerge as leading economies in the world. Amidst a deteriorating global economy, India which expected to be an economic powerhouse in 2020 is now experiencing a low growth regime. Consequently, losing its strength with declining private investment and GDP growth. Most emerging economies that made a promising recovery following the 2008 global financial crisis are now going on the reverse.

The Indian government comprising a coalition of different parties, politicised bureaucracy and the rigidity of civil service too has become an obstacle in implementing reforms to arrest the declining trends.

"Instead, the dreary conclusion is that India's feeble politics is now ushering in several years of feeble economic growth. Indeed the politician's most complacent belief is that voters will just put up with feeble growth because the public is only concerned with handouts" Sri Lanka after a tremendous comeback, the economy beamed with a new found enthusiasm, booming stock market, oversubscribed IPOs and much-need infrastructure development.

However, a loose credit policy resulted in the upsurge of imports that put the Balance of Trade to unmanageable levels prompting the government to implement tough policy measures that was even welcomed by the IMF.

Government borrowings from the Banking sector too rose to higher levels. In brief Sri Lanka was also feeling the global meltdown with diminished demand for exports and rising import costs.

The Government also made use of the opportunity to raise fuel prices to provide some relief to the ailing CPC. At present, the Ceylon Electricity Board (CEB) is in a deep financial crisis due to the high cost of fuel and the adverse effect on the hydropower capacity.

The Government is also losing revenue on the badly managed loss-making State Owned Enterprises (SOE), these SOE's are suffering from lack of good governance, incompetent personnel and political interference. It is to the credit of a few SOE's such as the Bank of Ceylon, Peoples Bank and Sri Lanka Ports Authority which are well-managed that provides surpluses. The only recipe for sick and ailing SOE's are competent personnel in management and flooding the SOE's with political supporters.

The latest review assessment by the rating agency Standard and Poor(SandP) seems to be over critical in their latest report released on the 19th.

They have stated that our economic risk score for Sri Lanka reflects a 'Very high risk' assessment of economic resilience and credit risk of the economy and a high risk assessment of economic imbalances. S and P's adverse comments on Central Bank regulations, governance and transparency of Banks too seems unrealistic. S andP was also critical of the Central Bank overseeing the Employees Provident Fund. However, the Central Bank responded almost on the same day disagreeing with S and P and explaining the rationale of the Central Bank's role.

The Government has been successful in sailing through a series of price increases sans any major public upheaval. Like in India, Cricket has been the great leveller to keep people happy!