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Developments in Sri Lanka underline the risk of destabilising
social and labour unrest throughout Asia-Pacific because of rising
living costs impacting the region.
Countries with similarly weak economic fundamentals and/ or poor
economic policies have reduced resilience to external shocks, such
as the COVID-19 pandemic, the Russia-Ukraine conflict, high oil
prices and inflation and therefore are more likely to experience
sustained and politically de-stabilising social unrest. Pakistan,
Nepal, Bangladesh and Laos, for example, are particularly
vulnerable to similar crises, but to varying extremes.
Sri Lanka's political and economic
instability
Sri Lanka's parliament on 20 July elected acting President and
Prime Minister Ranil Wickremesinghe as the interim president to
lead an all-party interim government. The government has since
March 2022 faced mass public protests driven by the country's
economic collapse. The resultant shortages of essential commodities
- including food, fuel, and medicine - along with extreme inflation
(which IHS Markit expects to exceed 45% over 2022) triggered a near
total erosion of public confidence in the government of former
president Gotabaya Rajapaksa.
Sri Lanka's new interim government will almost certainly seek to
focus short-term efforts towards securing external funding -
principally through the IMF and the other multilateral lenders but
also from close strategic partners, including China and India - as
well as concluding debt rescheduling negotiations. While IHS Markit
assesses that an IMF programme is likely, disbursement of funds and
therefore an improvement in domestic social conditions is unlikely
till 2023. Beyond this, political instability is likely to
continue, with parliamentary elections likely once economics
stabilisation has taken place.
Sri Lanka's economic weakness has been the primary driver of the
country's ongoing crisis. Foreign exchange reserves have decreased
over the past three years, in part due to a decline in revenue
triggered by fiscal policies under Rajapaksa's government and its
resistance to negotiating a bailout with the IMF. Tax revenue fell
to 7.3% of GDP in the third quarter of 2021 versus 12.8% in the
equivalent period of 2019, just before the government introduced a
series of tax cuts.
External factors have also had a compounding effect, with the
COVID-19 pandemic undermining the tourism sector, the third largest
foreign currency earning sector in the country, and the
Russia-Ukraine conflict driving already high food and fuel prices.
With debt servicing payments upcoming, the government was forced to
declare a moratorium on its external debt obligations in April
2022. The government has allowed the rupee to free float, causing a
severe depreciation in the exchange rate, which is projected to
depreciate 82.3% against the US dollar by end-2022, and
exacerbating inflation caused by shortages of imported goods and
global inflationary pressures.
Pakistan, the fragile external position, exacerbated by soaring
global commodity prices, has already led to a rapid depletion of
foreign exchange reserves, sharply rising inflation, and a sudden
change of government in April 2022 with a strong possibility of
snap elections in the next year. Recent deregulation of domestic
fuel and electricity prices as part of IMF bailout conditions
further elevate the risk of social and labour unrest in the next
year.
While Bangladesh and Laos are vulnerable, they have mitigating
factors that set them apart from Sri Lanka, Pakistan and Nepal.
Bangladesh has strong foreign exchange reserves allowing it to
better weather economic pressures and reduces the risk of mass
anti-government unrest. In Laos, rising living costs and fuel
shortages have led to anger against the government on social media
but large-scale anti-government protests are unlikely due to the
Lao People's Revolutionary Party's restrictive security regime.
Other countries in APAC are likely to be more resilient to
government instability as rising inflation and living costs drive
unrest. Protests for example are particularly likely in Indonesia,
India, Thailand and the Philippines although we do not expect
changes in government leaderships as a result. Labour unrest is
also likely to be significant in South Korea, India, and
Bangladesh, driving supply chain risks in their garments and
electronics sectors, as well as to ports and domestic cargo
industries.
Additional research by Andrew Vogel, Economist, S&P Global
Market Intelligence
Posted 28 July 2022 by Hanna Luchnikava-Schorsch, Principal Economist, Asia Pacific, Global Economics, S&P Global Market Intelligence and
Hannah Cotillon, Senior Analyst, Asia-Pacific Country Risk, S&P Global Market Intelligence
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.
