Global economic prospects and impact on Sri Lanka

Chairman of KPMG International Michael Andrew addressed the Press Club of the Sri Lanka Press Institute at the Lower Crystal Ball Room of the Hotel Taj Samudra recently.

He was addressing an audience of senior journalists, business leaders, foreign diplomats and policy makers of the country on ‘Evolving Global Landscape, Impacts of the Financial Crisis on Emerging Markets and Growth Trends’.

Sri Lanka Press Institute Chief Executive Office Imran Furkan in his opening remarks highlighted that the fact that the global financial crisis in both its manifestations as the credit crisis of 2008-’09 and the sovereign debt crisis of 2010-2011 had replaced terrorism as the foremost news items of recent times.

He disclosed that as per Central Bank figures, the EU had replaced the US as the main export market for Sri Lanka and therefore the economic turmoil in Europe will have an impact on Sri Lanka in the coming months and years.

He also highlighted the fact that China whose is now Sri Lanka’s leading lender had invested US$ 1.14 trillion of its US$ 3 trillion in US debt instruments and posed the question that if there were to be a crisis that was prolonged in the US which leads to diminution of the value of its reserves, whether China would be as willing to led to developing countries like Sri Lanka in the future.

Eurozone

Andrew started his address by commenting on the economic outlook for Europe where according to him, “another day doesn’t go by without another chapter being written on the Eurozone crisis”.

He believes that the countries of Europe have still not united to develop a cohesive plan to tackle the Eurozone crisis. He recounted how as the Global Head of KPMG he had urged the stakeholders in the Eurozone and in the greater EU to recognise the real value of the debt on the balance sheets of their countries’ banks, which had dropped dramatically in value and had reached 50 cents on the dollar at one point.

He recounted the fierce resistance he met to this suggestion by many regulators who feared that this would lead to the bankruptcy of many banks since their balance sheets wouldn’t be able to absorb the losses.

He posed a question on who would rescue these banks as the Chinese and Middle Eastern Investors stung by losses suffered as result of rescuing U.S banks after the credit crisis of 2008 have sighed away from attempting to rescue European banks this time around. However he did see a silver lining to this European sovereign debt crisis, which was the emergence of Germany as the point of stability and its increasingly leading role in establishing fiscal discipline in the EU.

The US

Commenting on the outlook for the US, Andrew emphasised that the US was faced with a public sector debt problem where both the federal government and state governments were spending more than they were taking in from taxes and that he felt that the political will to tackle the issue was not there and would not emerge till the 2012 presidential election was concluded and hence he felt that the US debt problems would not be solved in the near term. He however disclosed that the corporate balance sheets in the US were healthy and were deleveraged.

According to research undertaken by KPMG, the US economy has been showing signs of recovery and their statistics have been disclosing a healthier picture than the official US statistics, with investors coming back into markets and a restart in the US housing market also occurring.

Japan

Turning his attention to Japan, he identified two major structural changes underway there. He felt that in his recent trip to Japan he saw signs of industry consolidation taking place where players were combining their resources and increasing scale to tackle changes in the global markets.

He also highlighted another trend where Japanese companies which suffered massively due to the disaster at the Fukushima Nuclear Site and the floods in Thailand where Japanese car manufacturers had large manufacturing bases were looking to diversify their sourcing and production locations. He felt this was an opportunity for countries like Sri Lanka to try to get these manufacturers to relocate their production facilities here.

Tectonic trends

Andrew also spoke of five tectonic trends in the global economic landscape-

The move from East to West: According to him the global economy was dominated by the East in three of the last five centuries and the 19th and 20th centuries were mere blips in the course of history and that countries like China and India feel that they are now back in command of the global economy, where they should have been in the first place. He had given a speech in Beijing recently where he had advised Western companies to learn the culture and way of Eastern companies if they are to succeed in the global economy.

The emergence of a new silk road where economic growth is driven by trade between emerging economies and countries. He cited two examples of this: The largest single infrastructure project in the world which was a port in the Myanmar-Thailand border and the second largest such project, which was a railway between Tanzania and Zambia, both funded by China.

Fiscal deleverage: Due to regulatory changes like the Basel 3 regulatory regime and global economic changes, global banks were relooking at their business models. These banks will shrink their balance sheets and look at projects and investments that will give them the best return and divest from traditional businesses. This will provide opportunities for strong domestic banks to look beyond their own borders for investment opportunities.

Significant shortages of commodities: He stated that the world has not discovered significant oil reserves since 1964 and that global discussion today talks of the world running out of oil by 2034. He also that the world would see shortages of food, metals and water in the coming years. He said Sri Lanka could benefit from growing food and other products from commodities.

The emergence of smart business models: Companies around the world are focusing on geographical regions as opposed to individual countries and therefore they are looking at where they can place their centralised IT function and where they can get an educated and competent workforce to locate their global knowledge centres and shared services centres. He felt Sri Lanka needed to market itself as part of a region as opposed to a single country.

Economic opportunities for Sri Lanka

Commenting on the economic opportunities for Sri Lanka, he felt that the country now possesses political stability, a 22 million strong talented and educated workforce and a correct focus on tourism and services, and hence the opportunities were bright.

However, he felt we were in a very competitive global and regional economic landscape and there needed to be a re-education of the global investment community on the opportunities in Sri Lanka.

He concluded that the outlook for the 2012 for the global economy was going to be a challenging one and that 2013 would be at best a bit painful at times for some countries. However, he believed the long-term sustainable growth in China and high growth markets and the trend of the movement in the global economy from East to West would represent opportunities for Sri Lanka and other countries.