Op-ed/Special Reports

A COVID-19 Recession and Debt Shock in Asia and Sri Lanka: scenario analysis

VIRUS HOSPITAL: A South Korean health official sprays disinfectant in front of a hospital where a total of 16 infections have now been identified with the COVID-19 coronavirus, in Cheongdo county near the southeastern city of Daegu on February 21, 2020.

Monday March 30, 2020 6:07 am

This scenario analysis is by Ganeshan Wignaraja is the Executive Director of the Lakshman Kadirgamar Institute of International Relations and Strategic Studies (LKI) in Sri Lanka. He says South Asia’s government debt to GDP ratio of 66.5 percent in 2019 also exceeded IMF benchmarks with outliers Pakistan and Sri Lanka at about 80 percent. As the pandemic is fast moving with the epicentre spreading from China to Europe, an shaped Scenario 2 seems more likely than V-shaped Scenario, he says

MARCH 2020 – Developing Asia is famous for engineering V-shaped recoveries following the 1997 Asian financial crisis and the 2008 global financial crisis as well as emerging as a key engine of global growth. The severity of the COVID-19 pandemic has sparked concerns about whether global growth will be V, U, L or I shaped and what it means for Asia.

China, the initial epicentre of COVID-19, accounts for 17.3% of global cases while lagging South Asia has 0.5% (26 March 2020).The rapid transmission of the infectionis linked to globalization of the world economy and the advent of global travel. It has triggered a public health emergency and an unexpected economic shock. Stock markets across Asia have tumbled and China-centred global supply chains are collapsing. Travel bans and lockdownshave disrupted daily life. Unemployment and income inequality are rising.

Asia grew at 5.6% in 2019 and in January 2020 the IMF projected that this figure would uptick to 5.8% in 2020. It is premature to assess the full economic impact of COVID-19 on Asia as economic data is lacking and forecasting models are not adequately specified to analyse the disruption from the pandemic. The IMF will update its forecasts during the virtually held Spring Meetings in mid-April 2020.

Projections made in astudy on the medium-term outlook on Asia’s growth and the prospects for middle income countries are being updated using leading indicators (e.g. the manufacturing purchasing managers index) in an attempt to predict significant changes in economic activity. Preliminary research suggests two economic scenarios for Asia and world with the depth of downturn depending on the effectiveness in containing the pandemic.

Scenario 1: a short outbreak and a limited economic impact on Asia. The spread of COVID-19 in Asia is checked within a few months through lockdowns, social distancing, virus testing, quarantine and medical treatment. A vaccine is available ahead of schedule. Asia’s growth could be in the range of 4.0-4.5% in 2020. This is above expected global growth of 2.3-2.5%. An upturn in Asia could be likely in 2021. Nonetheless, Asia would fall into recession as defined as two consecutive quarters of decline in a country’s real gross domestic product (GDP).

Scenario 2: A long outbreak and a prolonged economic impacton Asia. COVID-19 continues to spread rapidly in Asia, the interventions are partially successful in containing the infection, another virus season could start with new mutationsand vaccine development takes longer than expected. The decline in Asia’s growth may be in the range of 2.0-2.5% in 2020 and remain sluggish in 2021. This is worse than the bottoming of Asian growth to 2.8% in 1997 during the global financial crisis. Meanwhile, global growth could slip to 1.0-1.5% in 2020.This would constitute a lengthy recession.

As the pandemic is fast moving with the epicentre spreading from China to Europe, an L-shaped Scenario 2 seems more likely than V-shaped Scenario 1. Amid such a bleak outlook, central banks in Asia have cut interest rates and are buying assets to support financial markets.Governments are also undertaking fiscal stimulus and welfare measures.

Looking at Asian debt dynamics helps to grasp why they are intervening.IMF technical work in the early 2000s conservatively suggested prudential benchmarks on public debt of a debt to GDP ratio of 60% for developed economies and a debt to GDP ratio of 40% for developing economies. While not officially endorsed by the IMF, it was thought that breaching these benchmarks would threaten fiscal sustainability.

With a government debt to GDP ratio of 58.8% in 2019, Asia has exceeded the benchmark for developing countries and is approaching that for developed economies. China’s government debt to GDPratio of 60.9% in 2019 is argued to significantly understate the total debt to GDP ratio of 303% when corporate and household debt are included.

The pandemic has led toconcerns about high debt in state-owned enterprises and corporates held in a fragile shadow banking system. South Asia’s government debt to GDP ratio of 66.5% in 2019 also exceeded IMF benchmarks with outliers Pakistan and Sri Lanka at about 80%.

Interestingly, there is little evidence of a Chinese ‘debt trap’ due to commercial borrowing for infrastructure projects at least in the case of Sri Lanka. Graduation from concessional aid has left Sri Lanka more dependent on commercial borrowing from international capital markets. The pandemic has left indebted South Asian economies facing a triple whammy of rising borrowing costs, falling commodity prices and declining tourism receipts. This has put pressure on limited foreign exchange reserves and increased the risk of debt distress in South Asia.

The current COVID-19 trajectory points to ascenario of a long outbreak and a prolonged economic impact on Asia. Policy makers should upscale health interventions as well as loosen monetary and fiscal policyto save lives and mitigate a deep recession.In doing so, the risk of a debt shock needs to be factored into the policy calculus.

Cancel reply

1 Sri Lanka balance of payments surplus US$1.3bn by April 2024

2 Maldives overtakes UK as second largest tourist source amid VFS Global visa controversy

3 Vietnam Truc Lam Monastery in Sri Lanka takes meditation to all communities

4 IMF Board to take up Sri Lanka program review on June 12

5 Support for AKD drops to SP's level while RW makes gains, Sri Lanka poll shows

Weather and Climate

Water levels rising in Sri Lanka Kalu, Nilwala river basins: Irrigation Department

Sri Lanka Navy assisting in rescue operations (Pic courtesy SL Navy)

Monday June 3, 2024 2:17 pm

ECONOMYNEXT – Sri Lanka’s Irrigation Department has issued warnings that water levels in the Kalu and Nilwala river basins are rising and major flooding is possible due to the continuous rain. People living in close proximity are advised to take precautions.

“There is a high possibility of slowly increasing prevailing flood lowline areas of Kiriella, Millaniya, Ingiriya, Horana, Dodangoda, Bulathsinhala, Palinda Nuwara and Madurawala D/S divisions of Ratnapura and Kalutara Districts, up to next 48 hours,” it said issuing a warning.

“In addition, flood situation prevailing at upstream lowline areas of Ratnapura district will further be prevailing with a slight decrease.

“The residents and vehicle drivers running through those area are requested to pay high attention in this regard.

“Disaster Management Authorities are requested to take adequate precautions in this regard.”

The island is in the midst of south western monsoon.

DMC reported that 11,864 people belonging to 3,727 families have been affected due to the weather in Rathnapura, Kegalle, Kilinochchi, Jaffna, Mullaitivu, Kalutara, Gampaha, Colombo, Galle, Matara, Hambantota, Puttalam, Kurunegala, Kandy, Nuwara Eliya, Anuradhapura, Polonnaruwa, Badulla, Moneragala, and Trincomalee districts.

Meanwhile, the Meteorology Department stated that showers are expected on most parts of the island today.(Colombo/June3/2024)

Politics

UNP gen secy defends call for postponing Sri Lanka poll, claims opposition silent

The UNP party headquarters in Pitakotte/EconomyNext

Monday June 3, 2024 1:59 pm

ECONOMYNEXT — United National Party (UNP) General Secretary Palitha Range Bandara has defended his call for postponing Sri Lanka’s presidential election by two years, claiming that his proposal was not undemocratic nor unconstitutional.

Speaking to reporters at the UNP headquarters Monday June 03 morning, Bandara also claimed that neither opposition leader Sajith Premadasa nor National People’s Power (NPP) leader Anura Kumara Dissanayake have spoken against his proposal.

“I have made no statement that’s undemocratic. My statement was in line with provisions of the constitution,” the former UNP parliamentarian said.

He quoted Section 86 of Chapter XIII of the constitution which says: “The President may, subject to the provisions of Article 85, submit to the People by Referendum any matter which in the opinion of the President is of national importance.”

Sections 87.1, 87.2 also elaborates on the matter and describes the parliament’s role, said Bandara.

“I spoke of a referendum and parliament’s duty. Neither of this is antidemocratic or unconstitutional. As per the constitution, priority should be given to ensuring people’s right to life,” he said.

“Some parties may be against what I proposed. They may criticse me. But what I ask them is to come to one position as political parties and make a statement on whether they’re ready to continue the ongoing economic programme,” he added.

Bandara claimed that, though thee has been much criticism of his proposal for a postponement of the presidential election, President Wickremesinghe’s rivals Premadasa and Dissanayake have yet to remark on the matter.

“I suggested that [Premadasa] make this proposal in parliament and for [Dissanayake] to second it. But I don’t see that either Premadasa nor Dissanayake is opposed to it. To date, I have not seen nor heard either of them utter a word against this. I believe they have no objection to my proposal which was made for the betterment of the country,” he said. (Colombo/Jun03/2024)

Accidents

300 of 100,000 trees in Colombo considered high risk: state minister

Monday June 3, 2024 1:05 pm

ECONOMYNEXT – Trees in Sri Lanka’s capital Colombo are being monitored by the municipal council, Army and Civil Defense Force as the severe weather conditions continue, State Minister for Defense Premitha Bandara Tennakoon said.

“Within the Colombo Municipal Council city limits, there are 100,000 trees. Of these, around 300 are considered high risk,” Tennakoon told reporters at a media conference to raise awareness about the current disaster management situation.

Not all trees required to be cut down he said. “We can trim some of the branches and retain them.”

The problem was that buildings in the vicinity of the tree had cut branches on one side, causing it to become unbalanced, the minister said.

New laws would be brought in so provincial/municipal institutions could strengthen enforcement of building codes.

“We don’t have a single institution that can issue a warning about a tree. Not one to tell us what trees can or cannot be planted near a road.

“Trees should be suitable for the area. Some trees have roots that spread and damage roads, buildings. When the roots can’t go deep, they tend to topple over.

“Now Environment Day is coming up, and anyone can go plant a tree by the road. We have to take a decision about this. We have to enforce laws strongly in future.” (Colombo/June3/2024)