Aftermath of Japan quake

The Japanese earthquake is still hitting headlines for its devastating impact. However, what most Sri Lankans do not know is that there could be significant economic impacts as a result of the large-scale damage.

There are several interesting discussion points thrown up in a report released by Heraymila Securities that point out short-, medium- and long-term effects of the Japanese earthquake. One of the most obvious outcomes would be reduction of foreign aid to Sri Lanka.

The report notes that Japan is a generous donor, accounting for around two-thirds of the total donations. This could weigh on donor‐reliant industries, such as project financing banks, infrastructure projects and even land mine clearance that are funded by the Japanese. There are also indirect impacts on commodity prices and potential risks to global demand.

Despite the fact that Sri Lanka exports as little as 2% to Japan and receives the same amount in terms of tourists the possible impact was roughly broken down into four points. Namely, heightened short-term risk aversion, impacting on financial markets and commodities, near-term disruption of exports from Japan, particularly high‐tech products, possible impact on Japanese aid to Sri Lanka, increased medium-term demand for building products and longer-term increase in demand for non‐nuclear energy sources.

Heightened risk aversion has led to a significant equities sell‐off in Japan and around Asia. This held the initial risk of contagion to Sri Lanka. Now that Japanese equities look over‐sold, foreign funds may be diverted there, instead of Sri Lanka.

But there is a silver lining for us. Concerns about global growth and risk‐off trades have also impacted on commodity prices more generally. This may be a headwind for plantations companies, but a positive for others who rely on commodity inputs, such as oil (e.g. transportation) and metals (e.g. cable manufacturers). The question is whether Sri Lankan businesses are aware of this enough to take advantage of the opportunity.

In the medium-term, there will be demand for construction materials as the devastated areas are rebuilt. This could add to construction sector inflation, including affecting demand for commodities such as cement, logs, timber, steel and copper. This, together with a possible cut back on donor funds, could place a hurdle before Sri Lanka’s development ambitions as well.

There could be a longer term impact on non‐nuclear power generation, following the still evolving nuclear power station failures in Japan. In the long-term this could reduce the demand for nuclear power, in favour of renewable and thermal electricity generation, which could increase costs for fuel and generation capacity over the next decade or so.

Sri Lanka has an urgent need for more power generation capacity; increases in global demand for thermal power generation capacity may require a closer scrutiny of its longer term power generation plans and increase exposure to renewable sources. An idea that is all the more strengthened by the fact that Sri Lanka is considering nuclear power generation from 2025 onwards. Given the disaster that Japan is currently facing, strong attention has to be paid to minimising the liabilities of nuclear power.

All these challenges can be met by quick changes and long-term planning that are currently weak points for Sri Lanka. How they can best deal with the rapidly-changing global scenario will best decide the level of impact.