Borrowed surplus looming, warns Harsha

Given first half performance, believes several 2012 Roadmap targets will be missed
UNP MP and its chief spokesman on the economy Dr. Harsha de Silva yesterday claimed that most of the Central Bank’s 2012 Roadmap targets were likely to be missed, based on below par performance on the external trade front during the first half.
He said that the revised 2012 Roadmap envisaged full-year export proceeds of $ 11.7 billion but in the first half the figure was only $ 4.96 billion and when averaged out, the full year performance is likely to be $ 9.9 billion. “This means a 15% drop from the envisaged target,” Dr. de Silva told the Daily FT.
When the 2012 Roadmap was originally presented, the CB targeted $ 12.5 billion worth of export proceeds, but given the external developments and Government’s fiscal and monetary policy changes, it was revised downwards to $ 11.7 billion.
Though exporters maintain the second half most often sees a rebound, Dr. de Silva thinks otherwise, as indications from some of the sectors aren’t very encouraging. For example, he said the apparel sector has suffered its sixth consecutive monthly drop in exports. The dip in June was 6% whilst first half performance of $ 1.98 billion reflects a 1.6% dip.
As per external trade data released last week, exports in the first half of $ 4.9 billion were down 2.2% in comparison to the first half of last year. In 2011, exports in the first half grew by a healthy 35% to $ 5.05 billion over 2010’s corresponding period.
With regard to worker remittances, Dr. de Silva said the 2012 Roadmap forecasts a figure of $ 6.5 billion, and based on $ 2.9 billion inflow in the first half, the full-year estimate could be $ 5.8 billion, reflecting a 10.7% or $ 700 million shortfall.
However, first half remittances figure reflected a healthy 17.4% growth over the corresponding period of last year. A year earlier remittances saw a 26% growth to $ 2.5 billion over first half of 2010. The Central Bank has maintained remittances are seasonally higher towards latter part of the year.
The UNP MP also said that in the Roadmap as well as in the June external trade data release, the Central Bank remains upbeat of drawing $ 2 billion in Foreign Direct Investment (FDI) though by the first half only $ 451.7 million has been achieved.
“If the second half remains the same, the country will end 2012 with a FDI inflow of only around $ 1 billion, which makes the $ 2 billion target way off,” Dr. de Silva opined. The Central Bank said FDI inflows in the first half of 2012 were near 15% growth over the corresponding period of last year.
He also expressed doubt over the realisation of the targeted $ 500 million net inflow to Colombo Stock Exchange, given that by end June the amount was $ 187 million.
Dr. de Silva also hinted that earnings from tourism too would be lower than the 2012 Roadmap target of $ 1.2 billion. In the first half, earnings from tourism grew by 24% to $ 460 million. Though the tourism industry’s best period is in the second half with the winter season, the UNP MP envisages end 2012 performance will reflect a drop from the original target.
The only target under the 2012 Roadmap that has been overshot even before the year’s end is inflows to the Government. The Roadmap envisaged $ 2.1 billion, whereas by end of the first half, the figure was $ 2.27 billion, reflecting a 51% increase. Of this figure, net foreign investment in Government securities was $ 842 million in the first seven months. Furthermore, long-term borrowings by commercial banks during January-June 2012 amounted to $ 927.5 million, as against $ 1 billion target for whole of 2012. Early this year Central Bank did express confidence that the annual target will be surpassed comfortably. It also said it was likely to reach over $ 1.4 billion in 2012.
Nevertheless, Dr. De Silva argued: “These high inflows are all borrowing and the surplus that Central Bank is projecting for 2012 will be on borrowed funds judging by what has happened so far as opposed to higher export income, FDI and remittances.”
The Central Bank in its June external data release said net current transfers had continued to help buttress the current account of the balance of payments.
In comments to Reuters last week, Central Bank Governor Nivard Cabraal said strong inflows would help avert a balance of payments crisis this year. “Definitely there will be a balance-of-payments surplus this year,” he said.
The booming inflows and policy measures taken had also strengthened the CB’s conviction that the rupee would stabilise to around Rs. 125 to the dollar.

“We still believe that the fundamentals will support a figure like 125,” Cabraal told Reuters, without giving a specific timeframe. “The fundamentals we are moving towards will certainly support an exchange rate of that level,” he said.
Cabraal said more capital inflows into Foreign Direct Investments and equities and reduced outflows through stringent policy measures would help prevent an exodus of dollars, thus stabilising the rupee.
Sri Lanka has targeted $ 24.5 billion in foreign inflows, including $ 11.7 billion of export revenue, $ 6.5 billion worker remittances from expatriates, $ 2.1 billion Government of inflows, and $ 2 billion of Foreign Direct Investment.
“What we had envisaged is coming in – that set of (inflow) figures supports an exchange rate of a rather more appreciated figure than what it is today. That’s why we are confidently saying that.”
Since April, the Central Bank and Finance Ministry have repeatedly said the rupee should stabilise at around 125 per dollar, given the macroeconomic policy fundamentals after a series of policy reforms this year, including a flexible exchange rate to avert a balance-of-payments crisis.
However, the currency hit a record low of 134.30 on 28 June, before stabilising around the current level of 132 and has fallen more than 16%since November last year.
http://www.ft.lk/2012/08/27/borrowed-surplus-looming-warns-harsha/

Dwindling tax revenues brought on by record joblessness and deep recession will force Portugal to seek breathing space, much like Greece has, on commitments to EU-IMF creditors, analysts say.

In data published on Thursday, the Portuguese budget office said 2012 first half tax receipts dropped 3.5 per cent compared with the same period last year, hit by a fall in consumption as the economy shrank and unemployment reached 15 per cent.

As things stand, the government, which had forecast an increase in revenue of 2.6 per cent this year, is set to miss this year's deficit target of 4.5 per cent, several analysts agreed, if it cannot come up with an extra two to three billion euros (S$3.1 to S$4.7 billion).

Finance Minister Vitor Gaspar, unable to foresee the impact of austerity measures on the Portuguese economy, "has lost the fight", wrote business daily Diario Economico in an editorial.

Paulo Mourao, economist at the University of Minho, said the new data served to "lay the ground" for "needed flexibility on Portugal's rescue programme".

As part of the programme agreed in May 2011, in return for 78 billion euros in rescue loans, to be paid out in tranches over several years, Portugal has carried out deep budget cuts and pursued structural reforms.

In the deal, which followed similar ones for Greece and Ireland, Portugal agreed to bring its public deficit to the EU ceiling of 3.0 per cent of output by 2013 after 4.5 per cent in 2012.

But a key plank of that effort, slashing 13th and 14th month salary bonuses for civil servants and pensioners for three years, was ruled unconstitutional and threw the centre-right government's austerity budget into disarray.

With the controversial measure now impossible, the government must find an equivalent cut in spending, which analysts said was all but impossible within the timeframe set by lenders.

The troika of creditors from the European Union, International Monetary Fund and European Central Bank have made clear their preference for measures centered on spending cuts and structural reforms.

But the Portuguese government, which for now has maintained its targets, acknowledged in June that "a great effort would be required" to do so.

On Thursday, a finance ministry official told the Lusa news agency that the shortfall would not be overcome by the end of the year, and that the government must either adopt more austerity measures or get creditors to relax budget requirements. - AFP