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Friday August 19th, 2022

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.

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.

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Sri Lanka schedules 3-hour power cuts for Aug 20, 21: regulator

ECONOMYNEXT – Sri Lanka will impose power cuts of up to three hours on Saturday August 20 and Sunday August 21, Public Utilities Commission (PUCSL) Chairman Janaka Ratnayake said.

All areas (A, B, C, D, E, F, G, H, I, J, K, L, P, Q, R, S, T, U, V and W) will have power cuts of 1 hours and 40 minutes between 10.30 am and 06.00 pm and 1 hour 20 minutes from 06.00pm to 10.00 pm.

Click here for a detailed schedule.

The state-run Ceylon Electricity Board (CEB) said supply interruption time and restoration time will vary within 30 minutes as indicated above.

Sri Lanka’s daily scheduled power cuts that were reduced to one hour in July with power generation from hydro power plants contributing more than 50 percent to the main grid reducing thermal power plant use was extended to three hours last week due to a breakdown at the Norochcholai coal power plant.

According to officials, the breakdown happened in Unit 1 of Norochcholai which will take around two weeks to repair.

The Minister of Power & Energy said Unit 2 is undergoing scheduled maintenance work while Unit 3 will continue to operate. West Coast and other fuel power pPlants will be used to manage the supply, the ministry said. (Colombo/Aug02/2022)

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Sri Lanka guidance peg edges T-bond yield edge down

ECONOMYNEXT – Sri Lanka Central Bank’s guidance peg for interbank transactions edged down on Friday (19), while yields in Treasury bonds picked up slightly and in T-bill remain unquoted in dull trade, a day after the Central Bank announced the policy rates will remain stable, dealers said.

A bond maturing on 01. 06. 2025 closed at 27.95/28.05 percent on Friday, slightly up from 27.90/28.00 percent on Thursday.

No T-bills were quoted on Friday, dealers said.

Meanwhile Sri Lanka’s central bank announced a guidance peg for interbank transactions further weakened by three cents to 361.00 rupees against the US dollar on Friday from 360.97 rupees.

Data showed that commercial banks offered dollars for telegraphic transfers between 368.00 and 370.00 for small transactions.  (Colombo/ Aug 19/2022)

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Sri Lanka records 10 new COVID-19 deaths in 48 hours as case numbers rise

ECONOMYNEXT –  Sri Lanka recorded 10 COVID-19 deaths in the 48 hours from August 17 to 19 taking the country’s pandemic death toll to 16,640, health ministry data showed.

Sri Lanka is experiencing a slight increase in COVID-19 cases with the relaxation of public health restrictions relating to face masks and public gatherings.

Health authorities said the situation will be monitored constantly and have asked the general public to continue to follow basic hygiene measures in order to control the spread of the virus again in the community.

In August alone 2,924 new cases were recorded in Sri Lanka, with 84 deaths attributed to the disease.

So far in 2022, from January onward, health authorities have identified 81,157 patients to date.

Epidemiology unit data showed that 874 patients are currently receiving treatment, out of which 716 are receiving home based care.

The spread of the virus has increased with the use of public transport rising after an easing of a fuel crisis.

Sri Lanka is also facing difficulties in securing essential medicine supplies for the health sector due to a forex shortage.

Health officials said if the number of COVID-19 patients rise to a level the health sector cannot manage,  with the added issues of fuel and medical shortages, the health system might collapse.

“It is the responsibility of us all. There is no use trying to forcibly control people. We all have the responsibility to reduce or stop the spread of the virus before it gets out of control. We have been living with it for the past two years,” Deputy Director General of Health Services Dr Hemantha Herath said. (Colombo/Aug19/2022)

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