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.
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.
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.
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.
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.
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.