COLOMBO, Sri Lanka (AP) – Sri Lanka’s prime minister said late last month that the island nation’s debt-laden economy had “collapsed” as it runs out of money to pay for food and fuel. Short of cash to pay for imports of such necessities and already defaulting on its debt, it is seeking help from neighboring India and China and from the International Monetary Fund.
Prime Minister Ranil Wickremesinghe, who took office in May, was emphasizing the monumental task he faced in turning around an economy he said was heading for “rock bottom.” On Saturday both he and President Gotabaya Rajapaksa agreed to resign amid mounting pressure from protesters who stormed both their residences and set fire to one of them.
Sri Lankans are skipping meals as they endure shortages and lining up for hours to try to buy scarce fuel. It’s a harsh reality for a country whose economy had been growing quickly, with a growing and comfortable middle class, until the latest crisis deepened.
HOW SERIOUS IS THIS CRISIS?
The government owes $51 billion and is unable to make interest payments on its loans, let alone put a dent in the amount borrowed. Tourism, an important engine of economic growth, has sputtered because of the pandemic and concerns about safety after terror attacks in 2019. And its currency has collapsed by 80%, making imports more expensive and worsening inflation that is already out of control, with food costs rising 57%, according to official data.
The result is a country hurtling towards bankruptcy, with hardly any money to import gasoline, milk, cooking gas and toilet paper.
Political corruption is also a problem; not only did it play a role in the country squandering its wealth, but it also complicates any financial rescue for Sri Lanka.
Anit Mukherjee, a policy fellow and economist at the Center for Global Development in Washington, said any assistance from the IMF or World Bank should come with strict conditions to make sure the aid isn’t mismanaged.
Still, Mukherjee noted that Sri Lanka sits in one of the world’s busiest shipping lanes, so letting a country of such strategic significance collapse is not an option.
HOW IS IT AFFECTING REAL PEOPLE?
Tropical Sri Lanka normally is not lacking for food, but people are going hungry. The U.N. World Food Program says nearly nine of 10 families are skipping meals or otherwise skimping to stretch out their food, while 3 million are receiving emergency humanitarian aid.
Doctors have resorted to social media to try to get critical supplies of equipment and medicine. Growing numbers of Sri Lankans are seeking passports to go overseas in search of work. Government workers have been given an extra day off for three months to allow them time to grow their own food.
In short, people are suffering and desperate for things to improve.
WHY IS THE ECONOMY IN SUCH DIRE STRAITS?
Economists say the crisis stems from domestic factors such as years of mismanagement and corruption.
Much of the public’s ire has focused on President Rajapaksa and his brother, former Prime Minister Mahinda Rajapaksa. The latter resigned in May after weeks of anti-government protests that eventually turned violent.
Conditions have been deteriorating for the past several years. In 2019, Easter suicide bombings at churches and hotels killed more than 260 people. That devastated tourism, a key source of foreign exchange.
The government needed to boost its revenues as foreign debt for big infrastructure projects soared, but instead Rajapaksa pushed through the largest tax cuts in Sri Lankan history. The tax cuts were recently were reversed, but only after creditors downgraded Sri Lanka’s ratings, blocking it from borrowing more money as its foreign reserves sank. Then tourism flatlined again during the pandemic.
In April 2021, Rajapaksa suddenly banned imports of chemical fertilizers. The push for organic farming caught farmers by surprise and decimated staple rice crops, driving prices higher. To save on foreign exchange, imports of other items deemed to be luxuries also were banned. Meanwhile, the Ukraine war has pushed prices of food and oil higher. Inflation was near 40% and food prices were up nearly 60% in May.
WHY DID THE PRIME MINISTER SAY THE ECONOMY HAS COLLAPSED?
The stark declaration in June by Wickremesinghe, who is in his sixth term as prime minister, threatened to undermine any confidence in the state of the economy and didn’t reflect any specific new development. The prime minister appeared to be underscoring the challenges facing his government as it seeks help from the IMF and confronts criticism over the lack of improvement since he took office weeks earlier. The comment might have been intended to try to buy more time and support as he tries to get the economy back on track.
The Finance Ministry said Sri Lanka had only $25 million in usable foreign reserves. That has left it without the wherewithal to pay for imports, let alone repay billions in debt.
Meanwhile the Sri Lankan rupee has weakened in value to about 360 to the U.S. dollar. That makes costs of imports even more prohibitive. Sri Lanka has suspended repayment of about $7 billion in foreign loans due this year out of $25 billion to be repaid by 2026.
WHAT IS THE GOVERNMENT DOING ABOUT THE CRISIS?
So far Sri Lanka has been muddling through, mainly supported by $4 billion in credit lines from India. An Indian delegation came to the capital, Colombo, in June for talks on more assistance, but Wickremesinghe warned against expecting India to keep Sri Lanka afloat for long.
“Sri Lanka pins last hopes on IMF,” read a June headline in the Colombo Times. The government is in negotiations with the IMF on a bailout plan, and Wickremesinghe has said he expected to have a preliminary agreement later this summer.
Sri Lanka has also sought more help from China. Other governments like the U.S., Japan and Australia have provided a few hundred million dollars in support.
Earlier in June, the United Nations launched a worldwide public appeal for assistance. So far, projected funding barely scratches the surface of the $6 billion the country needs to stay afloat over the next six months.
To counter Sri Lanka’s fuel shortage, Wickremesinghe told The Associated Press in a recent interview that he would consider buying more steeply discounted oil from Russia.
Kurtenbach, the AP’s Asia business editor, contributed from Bangkok.
Soft landing hopes for U.S. economy brighten outlook on stocks – The Globe and Mail
Optimism is seeping back into the U.S. stock market, as some investors grow more convinced that the economy may avoid a severe downturn even as it copes with high inflation.
The benchmark S&P 500 has rebounded about 15% since mid-June, halving its year-to-date loss, and the tech-heavy Nasdaq Composite is up 20% over that time. Many of the so-called meme stocks that had been pummeled in the first half of the year have come screaming back, while the Cboe Volatility Index, known as Wall Street’s fear gauge, stands near a four-month low.
In the past week, bullish sentiment reached its highest level since March, according to a survey from the American Association of Individual Investors. Earlier this year, that gauge tumbled to its lowest in nearly 30 years, when stocks swooned on worries over how the Federal Reserve’s monetary tightening would hit the economy.
“We have experienced a fair amount of pain, but the perspective in how people are trading has turned violently towards a glass half full versus a glass half empty,” said Mark Hackett, Nationwide’s chief of investment research.
Data over the last two weeks bolstered hopes that the Fed can achieve a soft landing for the economy. While last week’s strong jobs report allayed fears of recession, inflation numbers this week showed the largest month-on-month deceleration of consumer price increases since 1973.
The shift in market mood was reflected in data released by BoFA Global Research on Friday: tech stocks saw their largest inflows in around two months over the past week, while Treasury Inflation-Protected Securities, or TIPS, which are used to hedge against inflation, notched their fifth straight week of outflows.
“If in fact a soft landing is possible, then you’d want to see the kind of data inputs that we have seen thus far,” said Art Hogan, chief market strategist at B. Riley Wealth. “Strong jobs number and declining inflation would both be important inputs into that theory.”
Through Thursday, the S&P 500 was up 1.5% for the week, on track for its fourth straight week of gains.
Until recently, optimism was hard to come by. Equity positioning last month stood in the 12th percentile of its range since January 2010, a July 29 note by Deutsche Bank analysts said, and some market participants have attributed the big jump in stocks to investors rapidly unwinding their bearish bets.
With stock market gyrations dropping to multi-month lows, further support for equities could come from funds that track volatility and turn bullish when market swings subside.
Volatility targeting funds could soak up about $100 billion of equity exposure in the coming months if gyrations remain muted, said Anand Omprakash, head of derivatives quantitative strategy at Elevation Securities.
“Should their allocation increase, this would provide a tailwind for equity prices,” Omprakash said.
Investors next week will be watching retail sales and housing data. Earnings reports are also due from a number of top retailers, including Walmart and Home Depot, that will give fresh insight into the health of the consumer.
Plenty of trepidation remains in markets, with many investors still bruised from the S&P 500′s 20.6% tumble in the first six months of the year.
Fed officials have pushed back on expectations that the central bank will end its rate hikes sooner than anticipated, and economists have warned that inflation could return in coming months.
Some investors have grown alarmed at how quickly risk appetite has rebounded. The Ark Innovation ETF, a prominent casualty of this year’s bear market, has soared around 35% since mid-June, while shares of AMC Entertainment Holdings , one of the original “meme stocks,” have doubled over that time.
“You look across assets right now, and you don’t see a lot of risks priced in anymore to markets,” said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management.
Keith Lerner, co-chief investment officer at Truist Advisory Services, believes technical resistance and ballooning stock valuations are likely to make it difficult for the S&P 500 to advance far beyond the 4200-4300 level. The index was recently at 4249 on Friday afternoon.
Seasonality may also play a role. September – when the Fed holds its next monetary policy meeting – has been the worst month for stocks, with the S&P 500 losing an average 1.04% since 1928, Refinitiv data showed.
Wall Streeters taking vacations throughout August could also drain volume and stir volatility, said Hogan, of B. Riley Wealth.
“Lighter liquidity tends to exaggerate or exacerbate moves,” he said.
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Malaysian economy smashes forecasts, growing 8.9 percent in Q2 – Al Jazeera English
Southeast Asian country continues strong pandemic recovery after reopening its borders in April.
Malaysia’s economy grew at its fastest annual pace in a year in the second quarter, boosted by an expansion in domestic demand and resilient exports, but a slowdown in global growth is expected to pose a risk to the outlook for the rest of 2022.
Gross domestic product (GDP) in April-June surged 8.9 percent from a year earlier, the central bank said. This was faster than the 6.7 percent growth forecast in a Reuters poll and was up from the 5 percent annual rise in the previous quarter.
It was also quicker than any annual rate seen since the second quarter of 2021, when GDP was 16.1 percent higher than a low year-earlier base.
Seasonally adjusted GDP for April-June was up 3.5 percent on the previous three months, when quarterly growth was 3.8 percent.
Malaysia’s economy has been on a strong recovery path since the country reopened its borders in April.
“Going forward, the economy is projected to continue to recover in the second half of 2022, albeit at a more moderate pace amid global headwinds,” Central Bank of Malaysia Governor Nor Shamsiah Mohd Yunus told a news conference.
Full-year growth for 2022 would likely be at the upper end of the previously forecast range of 5.3 percent to 6.3 percent, Nor Shamsiah said.
Headline and core inflation were expected to average higher in 2022, though Nor Shamsiah said any adjustments to the overnight policy rate would be measured and gradual to avoid stronger measures in the future.
The central bank lifted its benchmark interest rate for the second straight meeting in July.
Capital Economics said in a note it expected Malaysia’s economic growth to slow in coming quarters, as commodity prices dropped back and the boost from border reopening fades.
“That said, the slowdown is likely to be relatively mild, with the reopening of the international border set to provide decent support to activity,” said Gareth Leather, the group’s senior Asia economist.
The UK Economy, and Sterling, Face Next Big Crisis This Winter – BNN Bloomberg
(Bloomberg) — Headwinds for the UK economy spell trouble for sterling, and the real test for the Bank of England and the currency may still be in store.
The cost-of-living crisis is about to intertwine with the energy crisis this winter, leaving the BOE in a bind. UK wholesale natural gas prices have more than tripled in the last year and are more than four times higher than the seasonal average over the previous five years. Household energy bills are forecast to rise while the government plans for organized blackouts in a worse-case scenario in January.
If the energy crisis gets out of hand, the market might expect the BOE to pivot because rates can only do so much in the face of supply-driven forces such as Russian gas supplies, inventories, and alternate energy sources that are being tested by climate change.
There is also the question of fiscal support and the uncertainty surrounding it. The BOE has forecast inflation topping 13% in coming months and a recession through 2023 as it raises rates. The central bank is an apolitical body that has no say over government fiscal policies, making whoever becomes the next prime minister that much more significant. Front-runner Liz Truss is pledging an emergency budget and more borrowing to stimulate the economy, while the competing former chancellor Rishi Sunak is advising caution while also vowing to offer more cost-of-living support.
Currency traders aren’t convinced that economic data Friday is enough to prove the economy’s resilience, which is why even as money markets are raising their BOE tightening bets, the pound is the second worst-performing G-10 currency against the dollar on the day.
But it’s fair not to read too much into the curious gross domestic product print. A small contraction was expected given the Jubilee bank holiday, but June’s drop is smaller than in comparable periods, as Samuel Tombs, chief U.K. economist at Pantheon Macroeconomics, noted. July data will likely offer a better picture. It’s possible that numbers would either be revised lower or show that the economy has indeed been more resilient than many expect. Looking ahead, however, there aren’t many other concessions that the pound can give way to.
NOTE: Nour Al Ali writes for Bloomberg’s Markets Live. The observations are her own and not intended as investment advice. For more markets commentary, see the MLIV blog.
©2022 Bloomberg L.P.
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