Chief Economist & Political Strategist, CrossASEAN Research

Prasenjit K. Basu

PK Basu has 34 years experience covering Asia's economies and markets (equities, fixed income and currencies), including 20 years covering the global economy. He was Chief Economist (SE Asia & India) at Credit Suisse First Boston for 5 years, and Chief Asia (x-Jpn) Economist at Daiwa Securities for a similar period. Among other roles, he was global head of research at Maybank Kim Eng, Malaysia equity research head and chief ASEAN economist at Macquarie, Chief Economist at ICICI Securities, ASEAN economist at UBS and the first chief economist at Khazanah Nasional (where he was co-head of research, and led all agri-business initiatives). PK Basu started his career in the Asia Service of WEFA (Wharton Econometrics) in Philadelphia in 1990, rising to be Director of their Asia Service in June 1994. 
PK's book, "Asia Reborn: A continent rises from the ravages of Colonialism and War to a New Dynamism" won the Tata Literature First Book Award (non-fiction) for 2018. It is the first single chronicle of the modern economic and political history of the whole of Asia (from Iraq and Turkey to Korea and Japan, and everything in between), told from an Asian perspective.

Chief Economist & Political Strategist

Sri Lanka's Sovereign Default: Painful Structural Reform Needed

Sri Lanka Defaults on Debt: South Korea Is the Biggest Investor & Domino Effect on Other Countries?

Sri Lanka: Election Could Jeopardise Hard-Earned Economic Gains, but Hopefully Won't

Sri Lanka: Struggling to Avert Being The "Next Argentina" Amid Unsustainable Debt

Staying with the IMF Program Entails Sluggish Growth, and the Uncertain Promise of Future Gains

Constitutional Coup Could Pave the Way to Faster Economic Growth Despite External Debt Challenge

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Macroeconomics

Sri Lanka's public debt was 100% of GDP in 2020, and its primary fiscal deficit is officially estimated to be 4% of GDP this year, implying that the government has chosen to stay on an unsustainable fiscal path. External debt is even more precarious, with foreign reserves (US$4.8bn in January 2021) far below short-term external debt, and a deteriorating basic balance (with large portfolio outflows in recent quarters, and negligible FDI inflow). Without an IMF program, the RBI declined to roll-over a currency swap in February 2021, although China provided an additional RMB10 billion swap on 23 March 2021. China's support is a poisoned chalice (with an "unequal treaty" already handing one port, Hambantota, to China's control), but even with that Sri Lanka will struggle to make the US$4 billion of external debt repayments this year, and larger ones in the next 4 years. We recommend staying well clear of Sri Lanka bonds due in 2022 and beyond. Sovereign defaults are rare in Asia, and Sri Lanka prides itself on never having defaulted on its external debts. But with foreign reserves down to US$4.8 billion in January 2021 (of which US$1.37 billion comprised currency swaps with other central banks), while short term external debt was estimated at US$9 billion, Sri Lanka's external liquidity situation was extremely precarious. On 23 March 2021, Sri Lanka signed a RMB10 billion (over US$1.5 billion) swap facility with China, which should enable repayment of the US$1 billion sovereign bond that matures on 27 July 2021. But the Reserve Bank of India (RBI) had declined to roll-over a US$400 million swap in February 2021, and the Rajapaksa government has ruled out turning to the IMF, leaving it with very few other options. External debt repayments for each of the next 5 years are US$4-5 billion annually, and total external debt is 285% of Sri Lanka's annual exports of goods &amp; services (far above the average of 110% for all developing economies). The external debt service ratio has been above 30% for the past two years, well above the 25% level that is considered risky. Public debt reached 100% of GDP in 2020 (up from 79.9% in 2017 and 86.3% in 2019), and the primary fiscal deficit is officially expected to be 2.5% of GDP in 2020 and 4% of GDP in 2021. So the public debt will stay on an unsustainable path, rising (by Fitch's estimate) to 116% of GDP in 2022. In 2020, the domestic public debt was financed primarily through a huge 62.7% YoY increase in net credit to government (81% of it from commercial banks), which caused M2 money supply to expand 23.4% YoY in 2020, the fastest expansion in more than 25 years. Rapid monetary expansion didn't cause inflation to rise much in 2020 (with recession causing a large output gap that would have depressed price levels). Money supply will perforce decelerate in 2021 as the economy returns to normalcy, and net credit to government must decelerate sharply too. Massive government borrowings will cause domestic bond yields to rise, making public debt even more unsustainable. The Rajapaksa government has spoken of two approaches to meeting its external obligations -- using non-debt capital flows to finance the current account deficit (which is relatively small at 2% of GDP), and the "Malaysia template" (1998) of capital controls (supplemented by import controls). The Malaysia template is irrelevant, because Malaysia had a much more diversified export base (huge electronics exports, not just commodities like palm-oil, rubber, crude oil which responded very strongly to the depreciated ringgit), much larger ongoing FDI inflows (4% of GDP, while Sri Lanka rarely receives more than 1% of GDP worth of FDI), and used the capital controls to rapidly resolve its banks' bad-loan problem; Malaysia did not have public or external debt challenges remotely as large as Sri Lanka does. FDI as a source of funding for Sri Lanka's current account deficit has diminished rapidly (to just US$743 million, 0.8% of GDP, in 2019, and US$434 million, or 0.5% of GDP in 2020), and foreign portfolio outflows have grown steadily in each of the past 6 quarters (to US$1,149 million in 4Q 2020, a quarter in which FDI inflow was just US$ 89 million). Apart from a tyre-manufacturing proposal from a mid-sized Chinese producer (not among the top-30 in the world or the top-5 in China), no significant FDI is in the pipeline. So foreign reserves are likely to continue declining, and Sri Lanka will face an external payments crisis by October 2021 in the absence of even larger lending by China -- which (like in Hambantota port) will involve covenants that give China ownership of Sri Lankan land and other assets in the event of non-payment.

Sri Lanka's public debt was 100% of GDP in 2020, and its primary fiscal deficit is officially estimated to be 4% of GDP this year, implying that the government has chosen to stay on an unsustainable fiscal path. External debt is even more precarious, with foreign reserves (US$4.8bn in January 2021) far below short-term external debt, and a deteriorating basic balance (with large portfolio outflows in recent quarters, and negligible FDI inflow). Without an IMF program, the RBI declined to roll-over a currency swap in February 2021, although China provided an additional RMB10 billion swap on 23 March 2021. China's support is a poisoned chalice (with an "unequal treaty" already handing one port, Hambantota, to China's control), but even with that Sri Lanka will struggle to make the US$4 billion of external debt repayments this year, and larger ones in the next 4 years. We recommend staying well clear of Sri Lanka bonds due in 2022 and beyond. Sovereign defaults are rare in Asia, and Sri Lanka prides itself on never having defaulted on its external debts. But with foreign reserves down to US$4.8 billion in January 2021 (of which US$1.37 billion comprised currency swaps with other central banks), while short term external debt was estimated at US$9 billion, Sri Lanka's external liquidity situation was extremely precarious. On 23 March 2021, Sri Lanka signed a RMB10 billion (over US$1.5 billion) swap facility with China, which should enable repayment of the US$1 billion sovereign bond that matures on 27 July 2021. But the Reserve Bank of India (RBI) had declined to roll-over a US$400 million swap in February 2021, and the Rajapaksa government has ruled out turning to the IMF, leaving it with very few other options. External debt repayments for each of the next 5 years are US$4-5 billion annually, and total external debt is 285% of Sri Lanka's annual exports of goods &amp; services (far above the average of 110% for all developing economies). The external debt service ratio has been above 30% for the past two years, well above the 25% level that is considered risky. Public debt reached 100% of GDP in 2020 (up from 79.9% in 2017 and 86.3% in 2019), and the primary fiscal deficit is officially expected to be 2.5% of GDP in 2020 and 4% of GDP in 2021. So the public debt will stay on an unsustainable path, rising (by Fitch's estimate) to 116% of GDP in 2022. In 2020, the domestic public debt was financed primarily through a huge 62.7% YoY increase in net credit to government (81% of it from commercial banks), which caused M2 money supply to expand 23.4% YoY in 2020, the fastest expansion in more than 25 years. Rapid monetary expansion didn't cause inflation to rise much in 2020 (with recession causing a large output gap that would have depressed price levels). Money supply will perforce decelerate in 2021 as the economy returns to normalcy, and net credit to government must decelerate sharply too. Massive government borrowings will cause domestic bond yields to rise, making public debt even more unsustainable. The Rajapaksa government has spoken of two approaches to meeting its external obligations -- using non-debt capital flows to finance the current account deficit (which is relatively small at 2% of GDP), and the "Malaysia template" (1998) of capital controls (supplemented by import controls). The Malaysia template is irrelevant, because Malaysia had a much more diversified export base (huge electronics exports, not just commodities like palm-oil, rubber, crude oil which responded very strongly to the depreciated ringgit), much larger ongoing FDI inflows (4% of GDP, while Sri Lanka rarely receives more than 1% of GDP worth of FDI), and used the capital controls to rapidly resolve its banks' bad-loan problem; Malaysia did not have public or external debt challenges remotely as large as Sri Lanka does. FDI as a source of funding for Sri Lanka's current account deficit has diminished rapidly (to just US$743 million, 0.8% of GDP, in 2019, and US$434 million, or 0.5% of GDP in 2020), and foreign portfolio outflows have grown steadily in each of the past 6 quarters (to US$1,149 million in 4Q 2020, a quarter in which FDI inflow was just US$ 89 million). Apart from a tyre-manufacturing proposal from a mid-sized Chinese producer (not among the top-30 in the world or the top-5 in China), no significant FDI is in the pipeline. So foreign reserves are likely to continue declining, and Sri Lanka will face an external payments crisis by October 2021 in the absence of even larger lending by China -- which (like in Hambantota port) will involve covenants that give China ownership of Sri Lankan land and other assets in the event of non-payment. 

Sri Lanka Government International Bond (SRILAN GOVT)

Sri Lanka: Closer to Being Asia's Argentina Despite Swaps from PRC's Poisoned Chalice