Worse than Russia: The Asian country where stocks are in free fall

For the majority of Asia’s emerging markets its been a horror few years. The fragile economies have been hit by a pandemic and are now facing the impact of surging global inflation. But one, in particular, stands out as being in rapid free-fall, and its stock market paints a dire picture.

The brink of collapse

While plunging Russian stocks have attracted significant attention following the sanctions imposed on the country by the West, the Russian stock market was not the world’s worst performing market in the first quarter of 2021.

That title goes to Sri Lanka.

The Sri Lanka Colombo Stock Exchange All-Share Index fell 49.5% in the first three months of 2022. This compares to the Russian Trading System Index (RTS) which fell 35.5%.

Sri Lanka is an emerging market on the brink of collapse, with mass public protest over the Government’s management of the economy breaking out in recent days.

Like its stock market, Sri Lanka’s currency – the Sri Lankan Rupee – has been the world’s worst performing currency this year. It’s down around 30% year-to-date against the USD, hitting new historic lows.

The currency crisis comes as the country faces looming deadlines on international bond repayments. It’s very likely the country will default unless it can secure help from the International Monetary Fund in the coming weeks.

And it’s the Sri Lankan people suffering most.

They’re grappling with double-digit annual inflation rises, with the cost of oil and food plunging hundreds of thousands below the poverty line.

Former Central Bank of Sri Lanka employee explains what’s led to the economic ruin

Vidhura Tennekoon, is an Associate Professor at the Indiana University Purdue University Indianapolis and also once worked for the Central Bank of Sri Lanka.

In an article for The Conversation, he explains how the COVID-19 pandemic saw the fragility of the Sri Lankan economy laid bare.

Tourists, who spent $5.6 billion in 2018 and played a big role in balancing Sri Lanka’s $10 billion trade deficit, disappeared virtually overnight,” he said.

This dealt a massive blow to the economy, especially considering a large tax cut the previous year depleted government coffers. Simply paying interest on that large debt took up 72% of government revenue in 2020, requiring the central bank to print more cash to avoid default, thus fueling inflation.

Fortunately for the government and its citizens, Sri Lankans overseas continued to send home a vital lifeline of remittances, or about $7 billion a year.

But in 2021, as many economists and analysts urged Sri Lanka to seek international aid, the central bank instead focused on borrowing from its neighbors, maintaining the value of the rupee and restricting imports.

Tennekoon says the war in Ukraine has now added fuel to the fire. Not only has it further increased the prices of oil, wheat and other commodities Sri Lanka imports from Eastern Europe, it has also been another major blow for tourism.

Beyond the effect on the cost of imported goods, the war also further threatens Sri Lanka’s tourism industry as flights to Moscow are now suspended. Before the war, Russians frequently made up the biggest share of Sri Lankan tourists, with Ukrainians not far behind,” said Tennekoon

Sri Lankan authorities had few other options than to allow the rupee to depreciate – which is expected to save billions of dollars a year – and seek IMF assistance. Sri Lanka will likely also have to restructure its large debt load – by asking foreign bondholders to accept less than than 100% of the value of their investments – to make it more sustainable.

Turning to China and India for help

With foreign currency reserves now sitting around US$2 billion and an estimated US$8.6 billion in debt repayments due this year, the Sri Lankan Government is currently negotiating a rescue package with the International Monetary Fund.

And it has been turning to China and India.

China has put a $1.5 billion line-of-credit and a $1 billion loan on the table for Sri Lanka. It has also sent 2000 tonnes of rice.

India has provided the island nation a $1 billion line-of-credit for the purchase of essential items.

But it will be little comfort for the people, for whom many essential goods such as food, medicine and fuel remain out of reach.

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