Financial Times

Crisis threatens economic recovery
The constitutional crisis sparked by President Chandrika Kumaratunga's sudden move to assert her powers shattered investor confidence and brought the economy and business activities to a near standstill, triggering a record tumble in stock prices for the first time since the UNP captured power and set the economy on a steady recovery path.

Economists and analysts warned that the crisis, if prolonged, could erode the gains of recent months and jeopardize the strong economic recovery that was under way, on the back of the government's free market reforms and progress in the peace process.

"The actual impact on the economy depends on how long the uncertainty prevails and what the next step is going to be," said Dr Dushni Weerakoon of the Institute of Policy Studies.

"What has taken place brings to the surface the political uncertainty that had been present for the past two years. Confidence had been picking up but that's going to level off for both local and foreign investors with the latest crisis."

Senior IMF Resident Representative Jeremy Carter said he hopes the current uncertainty is resolved quickly so that confidence in the economy, which had improved significantly, is not eroded.

Kumaratunga's move created panic in the stock market, as unnerved investors dumped shares, bringing the indices crashing down and wiping out Rs. 60 billion or almost 20 percent of value in just two days.

But sentiment appeared to recover strongly towards the end of the week as Kumaratunga apparently backtracked by withdrawing the state of emergency in the face of strong international support for Prime Minister Ranil Wickremesinghe and the latter's return to a rapturous welcome. Wickremesinghe also made some conciliatory comments on his return, telling reporters that the PA and the UNP might have to work together to resolve the crisis.

The stock market took investors on a roller-coaster ride with the Colombo bourse, which only three weeks ago had hit record highs, suffering its worst one-day fall in history early in the week and the All Share Price Index climbing 142.3 points on Friday, its highest-ever daily point gain.

The Colombo Stock Exchange said on Friday that the market had recovered much of what it lost during the week with the ASPI closing at 1,298.4 and the Milanka at 2,361.6 points.

Savvy investors, both big and small, managed to turn the stock market crash into an opportunity and cashed in on the highly volatile daily trading by buying when prices fell and selling when the market recovered.

Some big "captains" of industry were reported to have made a killing buying JKH shares when it plunged to Rs 90 and selling at Rs 120 a few hours later. "The small investors panic and sell their shares while the big investors buy at a bargain rate," said Nalin Gunasinghe, an investor interviewed on the floor of the stock exchange.
"The market at present is very volatile, due the lack of confidence. Cohabitation is a must if the country is to move forward."

Naren Godamune, vice president, DFCC Stock Brokers said the political upheaval and the uncertainty created instability. "That resulted in selling some by local investors who went on margin trading facilities. With the market dropping due to panic selling, the selling by margin traders would have created more panic in the market and increased the drop."

Brokers said it was largely retail investors and margin traders who sparked the sell-off with foreigners taking advantage of the drop in prices to pick up fundamentally strong stocks at bargain prices and institutions and funds holding on. Dushyanth Wijayasingha of Asia Securities said the market responded very strongly on Friday to positive developments.

"We think the market has hit the bottom and is on the way up." Bartleet Mallory Stockbrokers reported strong "almost frenzied buying" on Friday. The Joint Business Forum of chambers of commerce and industry, employers organizations and trade associations - known as J-Biz - expressed serious concern and called for a bipartisan approach to resolve the political crisis.

The Forum said it was concerned about the impact on peace and stability, economic recovery, foreign investment, tourist industry, and the export sector.
President Kumaratunga's move appeared to be part of a well-planned strategy about which she gave a hint in mid-October in Singapore where she addressed the World Economic Forum.

Asked at a news conference after the forum about the chances of reconciliation with the prime minister, Kumaratunga said there were "constitutional alternatives". In response to the crisis, Premier Wickremesinghe accused President Kumaratunga of trying to destabilize his government and sabotage the peace effort with her sudden dismissal of three key ministers and declaration of emergency.

But the president countered that her move was prompted by UNP attempts to illegally strip her of her constitutional powers and of caving into LTTE demands that could erode the country's sovereignty and result in a separate Tamil state in the north and east dominated by the Tigers.

Business leaders appealed to both the president and the PM not to seek political advantage from the crisis and to act in the national interest, pointing out that it was almost impossible to solve the ethnic problem without the government and opposition getting to together.

The uncertainty was partly fuelled by politicians themselves with different Cabinet ministers making contradictory statements about the crisis affecting the proposed free trade deal (see separate story) with the United States and tourist arrivals.
Despite the crisis, President Kumaratunga went ahead with a fund-raising dinner reportedly at Rs 3,500 "a plate" at a Colombo hotel attended by some 300 businessmen on Wednesday.

Participants consisted mostly of members of the business community along with a few industry leaders or well-known CEOs. Many had come prepared to listen to a presentation by Kumaratunga providing some clues to what her plans were but there was no speech. Instead, she moved around chatting briefly with businessmen without any serious issues being raised on the current crisis.

There were fears that the crisis might affect the tourist industry, which had been preparing to welcome a record record number of arrivals - almost half-a-million visitors - this year. Tourist arrivals up to September this year were 338,052, up 22 percent from the same period last year.

The government moved quickly to counter misinformation in the foreign media that could deter visitors. Reports that the British government had issued a travel warning to tourists turned out to be incorrect. "The international media has shown several old pictures of the war and tourists are wondering if the country is safe to visit," said Shiromal Cooray, Managing Director, Jetwing Travels.

"Many tourists from India, Singapore, Malaysia and Japan have cancelled their visits. We also have tourists postponing their holidays. As at present we have had about 100 cancellations."

Kumar Mallimarachchi, Managing Director, Associated Hotels Company and Past President Tourist Hotels Association, said he had not heard of large cancellations.
"As long as there is no violence it will not affect tourism. I haven't got any cancellations. We were set to have a good winter with the tourist bookings being high, and I think this will remain so."

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