Financial Times

Economy: heading for a bubble?
The turbo-charged performance of the stock market and the euphoria over the numbers that reflect a remarkable revival of the economy and the corporate sector tend to hide the ugly reality that the majority of the people in the country are not enjoying the fruits of the market economy.

The prosperity that has been generated by the stock market and corporate performance has been confined to a restricted few. There is a further danger that the buying frenzy that is driving the unprecedented bull run on the Colombo stock market and the spill over of investor exuberance into other sectors of the economy such as land and property could create a bubble that, when it eventually collapses, could cause much damage to the economy and investor confidence.

Already, within the space of two weeks we have had warnings from two professionals that the rapid pace of economic growth, and in particular, the sharp rise in stock prices, could be unsustainable. None other than Ho Kwon Ping, Chairman of the Banyan Tree Group, has warned of an economic bubble. While saying that the foreign investor interest in the tourism industry confirms that the peace dividend is "real and substantial" and that it will provide a tangible increase in jobs and exports, and the impetus for sustainable economic development, Ho warned that the gains can also be squandered.

The euphoria channelled into short-term speculation in equities and properties could create a bubble which will eventually damage the prospects for long term growth, he warned. There is already a danger of this happening, he pointed out, noting that land and building prices have shot up several fold and the surging stock market has made Colombo one of the world's best performing bourses.

Speaking at a recent seminar conducted by the Sri Lanka Economic Association, Amal Sanderatne, CEO of Frontier Research, has drawn attention to the greed and unethical practices that, at least partly, is driving stock prices to astronomical heights. He has warned that there were underlying problems such as insider dealing and front running that could trigger an eventual collapse of the booming market.

Poor quality advice has led to speculative investments in the stock market that could leave investors, especially the small investors, with their fingers burned. His remarks indicate that there are serious violations of market rules that regulators need to be watchful of. In a situation where the market regulator, the Securities and Exchange Commission, itself has serious credibility problems, given the fiasco over the insider dealing investigation involving its former chairman Michael Mack, investors would do well to be cautious and not be carried away by glowing reviews of listed firms, ballooning corporate results and soaring market indices.

The stock market boom and the enthusiasm over healthy economic and corporate fundamentals that suggest our economy is poised for take off, must be seen in the context of rampant crime and corruption, the growing trade deficit, and the stalled peace process.

We have previously drawn attention to the increasing disparity in incomes between the ruling elite and upper class and the vast majority of the working class and rural society. This yawning gap in prosperity and the expectations generated by a consumerist culture could, we warned, spell trouble if the tangible benefits of a market economy, such as a decent wage and the ability to lead a comfortable middle-class lifestyle, do not trickle down to the majority of the people.

The people are growing impatient, especially when they see the conspicuous consumption engaged in by a wealthy elite. The danger is that this frustration can be exploited by political forces opposed to the concept of a free market economy.

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