Economy
Explainer-How Sri Lanka spiralled into crisis
Published
6 days agoon
By
letizo News
© Reuters. FILE PHOTO: Vehicles of Sri Lanka’s ruling party supporters are seen in a lake after being pushed into the water during a clash of pro and anti-government demonstrators near the Prime Minister’s official residence, amid the country’s economic crisis, in C
NEW DELHI (Reuters) – Sri Lanka’s economic crisis has turned into deadly violence. Eight people died and over 200 were injured on Monday, the country’s powerful prime minister quit and his brother, the president, is seeking ways out of the chaos.
Anti-government protesters angry over power blackouts, shortages of basic goods and rising prices demand that President Gotabaya Rajapaksa steps down, but the retired military officer has invoked emergency powers in an attempt to maintain control.
The violence and political chaos gripping the island nation of 22 million comes 13 years after a brutal civil war ended in a bloody denouement in which tens of thousands of people were killed.
India, Sri Lanka’s northern neighbour, has extended billions of dollars in loans to help the country pay for vital supplies.
China, which has invested heavily in infrastructure projects in recent years in what analysts say is an attempt to extend its influence across Asia, has intervened less publicly but said it supported efforts for the island nation to restructure its debt.
Sri Lanka’s vital negotiations with the International Monetary Fund (IMF) over a rescue plan, as well as plans to restructure its sovereign debt, could be thrown into disarray.
HOW DID IT COME TO THIS?
Analysts say that economic mismanagement by successive governments weakened Sri Lanka’s public finances, leaving national expenditure in excess of its income and the production of tradable goods and services at inadequate levels.
The situation was exacerbated by deep tax cuts enacted by the Rajapaksa government soon after it took office in 2019. Months later, the COVID-19 pandemic struck.
That wiped out much of Sri Lanka’s revenue base, most notably from the lucrative tourism industry, while remittances from nationals working abroad dropped and were further sapped by an inflexible foreign exchange rate.
Rating agencies, concerned about government finances and its inability to repay large foreign debt, downgraded Sri Lanka’s credit ratings from 2020 onwards, eventually locking the country out of international financial markets.
To keep the economy afloat, the government leaned heavily on its foreign exchange reserves, eroding them by more than 70% in two years.
WHAT DID THE GOVERNMENT DO?
Despite the rapidly deteriorating economic environment, the Rajapaksa government initially held off talks with the IMF.
For months, opposition leaders and some financial experts urged the government to act, but it held its ground, hoping for tourism to bounce back and remittances to recover.
Eventually, aware of the scale of the brewing crisis, the government did seek help from countries including India and China, regional superpowers who have traditionally jostled for influence over the strategically located island.
In all, New Delhi says it has provided support worth over $3.5 billion this year.
Earlier in 2022, President Rajapaksa asked China to restructure repayments on around $3.5 billion of debt owed to Beijing, which in late 2021 also provided Sri Lanka with a $1.5 billion yuan-denominated swap.
Sri Lanka eventually opened talks with the IMF.
Despite outside support, fuel shortages have caused long queues at filling stations as well as frequent blackouts, and some crucial medicines have run low.
WHAT HAPPENS NEXT?
President Rajapaksa has sought support from all political parties in parliament to form a unity government, an offer that many, including the ruling alliance’s allies, have declined.
On Monday, Prime Minister Mahinda Rajapaksa, the president’s older brother, wrote in his resignation letter that he was quitting so that an interim, all-party government could be formed.
The president plans to meet opposition politicians with the expectation of forming a new government within days, according to a cabinet spokesman.
But thousands of protesters, some of whom have camped out on the streets for weeks to the chants of “Gota(baya) go home”, also want the president to step down.
Pro- and anti-government demonstrators clashed on Monday in the commercial capital Colombo in an escalation of violence, and houses and cars have been torched in other parts of the country.
Some Sri Lankan business groups are leaning on the country’s politicians to quickly find a solution.
In a statement on Tuesday, the Joint Apparel Association Forum, which represents Sri Lanka’s vital apparel industry, said it was “critical” for a new government to take charge.
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Economy
Australia’s Ruling Coalition Pledges Improved Budget in Costings
Published
20 mins agoon
May 17, 2022By
letizo News
© Reuters. Australia’s Ruling Coalition Pledges Improved Budget in Costings
(Bloomberg) — Australia’s ruling Liberal-National coalition said it will narrow the budget deficit by about A$1 billion ($700 million) via cuts to the bureaucracy as it announced costings for its election policies.
Treasurer Josh Frydenberg said Tuesday the government planned to increase an efficiency dividend for public service agencies to 2% from 1.5% over the next three years if re-elected on May 21. The measure will cover the costs of all the coalition’s election announcements while leaving the budget better off.
“It’s a responsible approach,” Frydenberg told reporters in Melbourne. “It ensures our budget bottom line actually improves over time.”
The opposition Labor party is due to release its policy commitment costings on Thursday ahead of Saturday’s ballot.
Australia’s books will remain deep in the red over the four-year horizon set out in this year’s budget, reflecting the hit to growth and vast fiscal spending deployed to support the economy through the pandemic. The center-right government, which is trailing in opinion polls, maintains Labor will increase taxes to pay for higher spending.
©2022 Bloomberg L.P.
Economy
ECB to hike deposit rate 25 bps in July, ditch negative rates by end-September: Reuters poll
Published
20 mins agoon
May 17, 2022By
letizo News
© Reuters. FILE PHOTO: European Central Bank (ECB) headquarters building is seen in Frankfurt, Germany, March 7, 2018. REUTERS/Ralph Orlowski
By Swathi Nair
BENGALURU (Reuters) – The European Central Bank is expected to raise the deposit rate for the first time in over a decade in July and bring it out of negative territory at its following meeting in September, despite a 30% chance of recession within a year, a Reuters poll of economists showed.
With inflation hitting a multi-decade high of 7.5% in April and almost every other major central bank having already raised interest rates, ECB President Christine Lagarde backed calls for an early rate hike by policymakers last week.
The bank is now expected to end its bond purchases programme in July and follow that with a 25 basis-point deposit rate hike a few weeks later, according to a majority of economists polled from May 10 to 16.
Until recently, forecasters were expecting the ECB to wait until the final quarter of the year to raise the deposit rate, currently at -0.50%.
Of the 46 of 48 economists who expect the deposit rate to rise in the third quarter, 26 said rates would rise by 50 basis points by the end of the period, implying quarter-point moves at both the July and September meetings.
Another 18 respondents said the deposit rate would only rise 25 basis points in Q3 and two said it would only climb 10 basis points to -0.40% by the end of the quarter.
An even clearer majority expect rates to no longer be negative by the end of the year. About 90% of economists, or 43 of 48, said the deposit rate would be 0% or higher by then, with 44%, or 21 of 48, saying it would be at 0.25% by then and 8%, or 4 of 48, saying it would be at 0.50%.
“There is widespread support for ending negative interest rate policy at the ECB, but they will take a very cautious approach to policy normalisation, in light of substantial macro uncertainty and concerns about a growth slowdown,” said Jens Eisenschmidt, chief European economist at Morgan Stanley (NYSE:MS).
“This will be the first time in over a decade that the ECB is lifting rates – with no support from asset purchases – so taking smaller steps would allow the ECB to observe the reaction in markets, with a possible fragmentation of financing conditions in the euro area likely a key concern”.
The latest poll results are still lagging rate futures, which are pricing in a cumulative 90 basis points of rate increases for the rest of the year or between three and four 25 basis-point moves.
Even that would leave the ECB well behind the U.S. Federal Reserve, which is currently expected to have its federal funds rate around 2.00-2.25% by the end of this year. [ECILT/US]
However, the poll also found the time window to raise rates is closing for the ECB, with a steady median 30% probability of a recession in the next 12 months, as the war in Ukraine pushes energy prices higher and saps consumer spending power.
The bloc’s economy was expected to grow 0.3%, 0.5% and 0.6%, in the second, third and fourth quarters. This is a downgrade from 0.4%, 0.6% and 0.6% predicted last month.
On an annual basis, it was expected to grow 2.7% this year, down from 2.9% and 2.3% next, the same as predicted last month.
The European Commission cut its growth forecast for the euro zone this year to 2.7% from 4.0% projected in February, and upgraded its inflation forecasts to 6.0% this year from 3.5%.
Rising inflationary pressures, driven by a persistent surge in food and energy prices, have deepened the cost of living crisis in the euro zone.
Prices are set to rise 7.7% this quarter, over three times the ECB’s 2.0% target and higher than the 7.3% prediction given last month. It will ease gradually over coming quarters but medians did not show it at target through next year, the forecast horizon.
Asked what impact the cost of living crisis would have on growth, 19 of 25 economists said it would be severe and two said very severe. Only four said it would be mild.
It will be over six months before the crisis eases significantly according to 90% of the respondents to another question.
Despite recession risks, unemployment in the single currency bloc is expected to remain near record low levels at 6.9% and 6.8% this year and next.
Meanwhile, average wage growth was expected to be 3.0% this year, the poll median showed.
“While current dynamics are triggering higher wage demands, companies are still being cautious due to the weakening outlook,” said Bas van Geffen of Rabobank.
“Anecdotal evidence is therefore also pointing to shorter wage agreements so that there’s flexibility to adjust next year, either higher or lower, depending on inflation. So, so far it still seems to be mostly catch-up wage growth rather than forward-looking”.
(For other stories from the Reuters global economic poll:)
Economy
Japan’s Nomura targets up to 90% jump in core pretax income in 3 years
Published
51 mins agoon
May 17, 2022By
letizo News
© Reuters. FILE PHOTO: A logo of Nomura Holdings is pictured in Tokyo, Japan, December 1, 2015. REUTERS/Toru Hanai
TOKYO (Reuters) -Nomura Holdings Inc, Japan’s biggest brokerage and investment bank, said on Tuesday it is targetting an up to 90% jump in pretax income in three years as it plans to beef up digital and advisory services.
Setting out guidance in a mid-term presentation, Nomura said it would target annual pretax income of between 350 billion yen and 390 billion yen ($2.7 billion and $3.0 billion) for its three core divisions in the year to end-March 2025.
That compared to 205.2 billion yen it posted for the year ended in March 2022.
Nomura also said it will create a new digital asset company later this year that will allow institutional investors to trade products linked to cryptocurrencies, stablecoins, decentralized finance and non-fungible tokens.
($1 = 128.9100 yen)
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