US and European crisis. How will it affect Sri Lanka and the CSE?

anubis

anubis

Senior Manager - Equity Analytics

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Please excuse me for bringing up this topic again, I discussed about it a couple of days back on a different note:
http://forum.srilankaequity.com/t6719-market-could-be-red-tomorrow

You can refer nkalansu's post on what is this US debt business is all about:
http://forum.srilankaequity.com/t6719-market-could-be-red-tomorrow#45553

Now after reading this post I read more and more about what is going on in US and I just can't help myself thinking what would happen if US defaults on its debt? specifically what impact it would have on CSE?

I know that when US and Europe were hard hit by recession, it didn't have much of an effect on CSE (or did it? I am quite a new investor). Most investors here would say something similar to what ShareShares said earlier:

http://forum.srilankaequity.com/t6719-market-could-be-red-tomorrow#45816

But I cannot understand how a market like Sri Lanka can be so much independent of the rest of the world! how can it be? I would be more than happy to believe this idea if someone can systematically explain why Sri Lanka is so much independent and that there is nothing to fear, but I did not see that kind of an explanation yet.

If an economic expert can shed some light on this matter, that would be awesome! Cool

Many thanks.[right]

Sat Jul 16, 2011 3:41 pm by Genting · Sat Jul 16, 2011 3:41 pm by Genting

As we all know all countries are linked to each other and one country's actions has impacts on other related counties.
ex: due to the Tsunami in Japan, it's stock market came down and it had a impact in US and other related countries. Japanese government will focus on rebuilding its economy and they may not allocate much funds for countries like us. So we will loose some amount of future foreign inflow.

China is the largest creditor to US. If US defaults it debts they will be defaulting to china. It will have a serious impact to china and other creditors. Then, the ripple effect will come as china cutting down their funding projects in countries like us.

However, there is a positive side for this. when US defaults it debts, global investors, fund managers will get out from US and may invest in other countries, especially emerging economies. If our CSE starts performing, we may be able to attract some of those funds.

Sat Jul 16, 2011 3:49 pm by StocksWatch · Sat Jul 16, 2011 3:49 pm by StocksWatch

Good post anubis. Let me contribute my two cents but I am not an economic expert.

IMHO when there is an economic crisis in the developed world, it will certainly affect the developing countries like Sri Lanka which operates an open market economy. There will be a decline in demand in developed countries for imports from developing countries. This will have direct two-fold effects, firstly a dent in the foreign reserves of the country and secondly a decline in the business of export-oriented companies.

As far as the Stock Exchange is concerned, if the crisis is not managed properly, there will be an uncertainty growing among the investors and they may sort less-risky investment options and moving out from SE. The SE will also be indirectly affected by the reduced earnings generated by the companies affected by the economic crisis in developed world.

So in conclusion, I don’t believe the Sri Lankan economy or the SE is completely immune to what is happening in US or developed world.

Last edited by StocksWatch on Sun Jul 17, 2011 3:06 pm; edited 1 time in total (Reason for editing : spelling)

Sat Jul 16, 2011 4:14 pm by anubis · Sat Jul 16, 2011 4:14 pm by anubis

Thank you both for your input, my suspicions are not unreasonable after all Wink

I also had a hunch that there might be a positive side of this crisis as Genting hinted, but my guess is that the impact of a crisis of that scale on local industries (as StocksWatch pointed) will far out-weigh the benefits brought in by foreign investors.

Let's wait and see where this train is headed Suspect

Sat Jul 16, 2011 4:57 pm by chamith · Sat Jul 16, 2011 4:57 pm by chamith

I also saw on BBC, that USA may default in debts. Even Obama announced that they will plan on spending cuts. Thats what Uk is already doing. Government is not allocating much money to councils and they are forced to close swimming pools, library etc.

I think now USA will have to follow same as UK.

I also read that China may be heading for a hard landing. It seems like China's GDP is reducing now. In next couple of Qs the GDP will decline it seems.

Sat Jul 16, 2011 7:03 pm by Academic · Sat Jul 16, 2011 7:03 pm by Academic

IMHO, this has a mixed effect on CSE. This situation affects globally, hence the CSE will also get affected negatively in short-run as economies are inter-related. However, current research on ICAMP (International Capital Asset Pricing Model) shows CSE has small impact from global issues (we could observe this in previous US credit crunch in first decade of 2000s and eastern economic crisis in 1990s, where CSE was marginally affected).

But this has a positive effect in long-run. Eastern economies (except japan? which has more links to west) would outperform west and share prices in east may increase. Many economists agree on that coming century is for Asia. Be happy about that.

They, (except Germany?), don't have strong economy to hold the power. So colonial-era including neo-colonization would soon end. Establishing European union and all other efforts (including channel 4) are rescue missions to keep their power.

Sat Jul 16, 2011 8:20 pm by **Antonym** · Sat Jul 16, 2011 8:20 pm by **Antonym**

In the attached link, analysts say that there is a 10% probability of the US government defaulting on its debts. The impact of such an event on global financial markets is also assessed.
http://www.standishmellon.com/assets/pdf/US%20Credit%20Event.pdf

My advice would be to review your exposure to companies that are dependent on US consumer spending - especially on non-essential items.

Sat Jul 16, 2011 9:15 pm by Academic · Sat Jul 16, 2011 9:15 pm by Academic

See this also

April 12 (Bloomberg) -- Stephen Roach, nonexecutive chairman of Morgan Stanley Asia, talks about risks to the U.S. recovery, Federal Reserve monetary policy and economic lessons from the experience of Japan. Roach speaks with Carol Massar on Bloomberg Television's "Street Smart." (Source: Bloomberg)

https://www.youtube.com/watch?v=lQu9J9IQCWM&NR=1

Sat Jul 16, 2011 9:24 pm by Think9 · Sat Jul 16, 2011 9:24 pm by Think9

would like to contribute my thoughts as well .

1st ! we`re not independent at all. we ve high import / export ratio and the % of locals working in overseas re higher. USA debt issue is gonna be a big impact for international inflation which includes SL as well .

This s how the story starts. USA owns 80% of their debt to China n Japan they ve use the debt capacity 100% and they re plannin to double it on 2nd of august. but the republic party is against and if OBAMA fails to agree with the oppositions USA gonna fall badly. ( BIG TIME) . if USA falls rest of the countries gonna fall as well, specially Europe. bad to worse. Asia as well.

due to their country issues already SL TEA s suffering coz the amount of tea they export to Egypt and Greece had got hit badly. so think how would it when USA n europe start reducing the production ?? Its gonna make a big impact for all the productions which we export. High inflation gonna increase the prices of the products we gonna import n eventually it ll create a high inflationary situation in Sri Lanka..

Thats y i feel ASI wil come down heavily if USA failed to doubled the debt capacity.

and i dont agree with "Genting". CSE wont be able to attract those investors. IF USA economy fails, global economy gonna collapse ( specially this time coz europe s already in trouble ) . if so investors wont invest on anything and they will hold cash in hand until things get sorted out. this is how inflationary situation gonna turned out to a "high inflationary situation.

Sat Jul 16, 2011 10:59 pm by **sanjeewa88** · Sat Jul 16, 2011 10:59 pm by **sanjeewa88**

How it will be affected to the Sri Lankan economy?

What will happen to exports and tourism businesses?

Sun Jul 17, 2011 6:07 am by UKboy · Sun Jul 17, 2011 6:07 am by UKboy

sanjeewa88 wrote:How it will be affected to the Sri Lankan economy?

What will happen to exports and tourism businesses?

Same as issues at CSE, Crisis in Europe something were expected to happen by many people.
Greece, Iceland, Ireland Portugal, Spain, UK and most recently Italy are struggling hard to manage one of the basic theories in finance world. "Balancing the budget". There a numerous reasons for this crisis. Thankfully Germany still exists as a financial super power in europe region. Otherwise this crisis would have been worse than current levels.

Since domestic issues are out of control, these european countries will donate less financial aids to developing countries like Sri Lanka.
Middle class people in europe countries have less money to spend for coulour things in life. Such as go abroad for holidays, cloths, electronic appliances etc.
I think crisis in europe have some indirect effects to Sri Lankan economy. But its bit early to identify the numbers.
However if you check the YoY tourist arrivals from UK & Germany you can notice that improvements are quite modest.

Sun Jul 17, 2011 12:12 pm by ananda95 · Sun Jul 17, 2011 12:12 pm by ananda95

Sri Lankan economy has gone through so much and how good it weathered the financial crisis was also due to the resistance it developed throughout three decades.

While I agree PIGS continue to worsen the European economy, it will be interesting to understand how USA is going to get through next few months as they are in the brink of getting their sovereign debt downgraded. US continue to experience higher unemployment rates and their economic conditions has not exceeded the levels that prevailed at the beginning of 2008. Probably rating agencies will downgrade the US sovereign debt rating.

Sun Jul 17, 2011 12:28 pm by **wallstreetguy** · Sun Jul 17, 2011 12:28 pm by **wallstreetguy**

If the Euro gets hit badly, everyone suffers, it will include SL aswell.

Sun Jul 17, 2011 2:11 pm by anubis · Sun Jul 17, 2011 2:11 pm by anubis

Antonym said: "My advice would be to review your exposure to companies that are dependent on US consumer spending - especially on non-essential items."

Since Europe is also under stress, I would say this is a good judgement. Like not expecting a hotel rally... Wink

Thank you all for your inputs Smile

Sun Jul 17, 2011 5:05 pm by xhora · Sun Jul 17, 2011 5:05 pm by xhora

Crisis of Credit Visualized.. Nice informative video
https://www.youtube.com/watch?v=bx_LWm6_6tA&feature=relmfu

Mon Jul 18, 2011 8:39 am by Think9 · Mon Jul 18, 2011 8:39 am by Think9

@UKboy : i do not agree with the statement. " most recently Italy are struggling hard to manage one of the basic theories in finance world." . Italy is quite larger than Greece. Some economist making some statements saying the debt capacity of Italy is equal as Greece and spreading unnecessary rumors. But Italy is quite large and they ve enough capacity to balance their economy.

I feel USA is spreading those news to cover up their reputation and to put Europe in to trouble. But i think the tactic is quite effective but too late. now USA is on the edge of the bridge. Anyway this is an intersetin topic which would be more interstin if we all can sit back n talk with a beer. Smile

@sanjeewa88 : there re many effects for SL economy :

1. Inflow from locals who wrk in overseas gonna get reduced.
2. Export gonna come down
3. Exchange rates will effect the export good. ( if an inflationary situation occurs )
4. Tourism rate gonna come down
5. Import prices re gonna rise up as when they increase tax from the country we gonna export.
6. Foreign investors gonna sell up their shares when they see the ASIAN stocks re coming down.
7. low foreign investments in SL.
8. new entrepreneurs gonna struggle to find buyers in global mkt.

etc.... etc........ etc........... Smile

thought of sharing this article as well : http://www.bloomberg.com/news/2011-07-18/asian-stocks-decline-on-u-s-economic-concern.html .