Sri Lanka has been listed as among a group of high-risk financial systems in Asia and the Pacific by Fitch Ratings, a claim rejected by the authorities but endorsed by economists and stock market analysts.
Central Bank Governor Ajith Nivard Cabraal said it was an insignificant statement given that all the countries mentioned as high risk – India, China and Sri Lanka – had all achieved high growth.
“There is huge unemployment in Britain, Europe and the US. Why can’t they (Fitch and other agencies) talk about that (and the high risk in those nations),” he asked.
But analysts said the very fact that these countries (all are Sri Lanka’s main export markets) were going through a major crisis means the country would face a severe crisis next year. “We are talking of high growth next year when most of the developed world is lowering their forecasts,” said an analyst, with an economic background, attached to a leading stock brokerage.
He said while Sri Lanka was projecting a 8.3 % growth next year from 8 % this year, China had lowered growth forecasts for 2012 to 8.5 % from 9.3 % in 2011 while India was forecast to grow by 7.8 % next year, down from 8 % in 2011. Singapore has also dropped its growth forecast figures to 3 % in 2012 from 5.2 % in 2011.
In its Asia Pacific’s Sovereign Outlook released on Thursday, Fitch said while many advanced economies ‘de-lever,’ the speed of credit growth and rising asset prices has led to Asia-Pacific harbouring four of the world’s nine highest-risk financial systems. It said India and Sri Lanka were the only Fitch-rated emerging Asian countries to run deficits on “basic balance” (the current account plus net foreign direct investment).
Analysts said Sri Lanka’s biggest risk factor emanates from the high trade deficit where imports have so far cost US$ 16 billion against export revenue which is just half, at US$ 8 billion.
President Mahinda Rajapaksa told parliament on Wednesday in winding up the budget debate that foreign direct investment so far this year is a phenomenal US$1 billion.
However analysts pointed out that that sum itself was used by the Central Bank to defend the over-valued rupee, which was later devalued. “Apart from keeping the rupee at artificially high rates, the Central Bank is also artificially keeping down interest rates, though pressure is mounting,” the stock market analyst said.
Prof. Sirimal Abeyratne, a senior economist from the University of Colombo, said one of the problems is that both the Current Account and Capital & Financial Account were not performing well.
For example in the Current Account, remittances’ is the biggest contributor when it should be exports.
In the Capital & Financial Account, government borrowings’ is the biggest contributor and not foreign direct investments, he said.
Furthermore, Prof. Abeyratne said Sri Lanka is a small country and growth should come from exports.
However in Sri Lanka, exports have seen a sharp decline in the past five years which is a contradiction of the fundamental economic theory. “In this context, you wonder from where the growth is coming,” he said.