Morning Brief – Tuesday 23rd

A lot of sunburned Brits will be headed back to work today after the long weekend. All four nations of the United Kingdom enjoyed their hottest Easter Mondays on record, with Saturday also stealing the 2019 crown for the hottest day so far this year. My thanks go to the Met Office for these statistics that seem to justify my belonging to this universe of work-bound, sunburned, individuals.

Easter Sunday across the globe brought with it an unfolding series of devastating news from Sri Lanka. The suicide bombings that targeted three churches and four luxury hotels leaves at least 310 people dead and many hundreds more injured. Our private thoughts remain on the terror and destruction demonstrated in the nation this weekend.

However, to digest the global impact, let’s examine what this means for a nation that in a little over three weeks will officially mark a decade since the end of a quarter-century civil war.

Sri Lanka has a relatively large debt to GDP ratio for its level of economic development. Government debt is approximately 75% of annual economic output and tourism pays an immense part of bolstering public coffers to repay the interest on this stock pile of debt. At approximately $50bn in absolute size, the forthcoming debt problem from any faltering tourist revenues could not be brushed under the carpet indefinitely.

The outlook for the economy will therefore be determined by the success the government has in designing appropriate measures that balance public freedom and security in order to preserve the attractiveness of Sri Lanka as a tourist destination.

For now at least, with a manipulated exchange rate against the US Dollar, the forex story accompanying the Sri Lankan crisis this weekend is virtually non-existent. However, the long run flight of cash from domestic assets to overseas will put pressure on the artificial valuation and increase the cost to the state owned bank of defending the Rupee’s value against the US Dollar.

Sri Lanka’s stock market this morning is depressed, falling several percentage points from its pre-Easter weekend level. Whether or not selling off a country’s assets is right or not in the face of a public crisis is another debate and one that is constantly evolving, however, this morning’s financial realities should not be overlooked.

Over the weekend in the United Kingdom, Theresa May faced increasing pressure as cross party talks continue. May’s discussions with the opposition will be held with one eye on the rear view mirror as her own backbenchers launch another surge to oust her as Prime Minister. With markets wary of these risks already, the Pound trades relatively level with its close of trade last week.

In the US, President Trump’s decision not to renew waivers that allows certain nations to purchase Iranian oil exports has sent crude oil prices higher once again on supply concerns. With growing tension between the nations, Iran has threatened to close the Strait of Hormuz, a strategic body of water linking the Persian Gulf to the Arabian Sea and Indian Ocean. The Japanese Yen enjoyed a bid in early trading this morning as investors scrambled to price in the tumultuous and elongated weekend.

Discussion and Analysis by Charles Porter

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