Economy

AGBOPURA, Sri Lanka (Reuters) – W.M. Seneviratne sat watching a mechanised harvester slice through the jade green fields around him in eastern Sri Lanka’s Agbopura village one recent morning, aware that this year’s harvest would be only a fraction of what he was used to.”I cannot recall any time in the past when we had to struggle so much to get a decent harvest,” said Seneviratne, a lean 65-year-old with a shock of silver hair, who has been farming since he was a child.”Last year, we got 60 bags from these two acres. But this time it was just 10,” he added.The dramatic fall in yields follows a decision last April by President Gotabaya Rajapaksa to ban all chemical fertilisers in Sri Lanka – a move that risks undermining support among rural voters who are key to his family’s grip on Sri Lankan politics.Although the ban was rolled back after widespread protests, only a trickle of chemical fertilisers made it to farms, which will likely lead to an annual drop of at least 30% in paddy yields nationwide, according to agricultural experts.The shortfall comes at a bad time for the island nation of 22 million people. Sri Lanka is in the throes of its worst economic crisis in a decade, foreign exchange reserves are at a record low and inflation is soaring, especially for food.Fuel shortages have led to rolling power cuts across the country.The impact of the poor paddy crop could push up the retail price of rice by around 30%, said Buddhi Marambe, an agriculture professor at the University of Peradeniya, who blamed the decision to ban chemical fertilisers.”That’s where the problem is,” he told Reuters. “Yields will likely be lower next harvest season as well. So, costs will keep increasing even 4-5 months from now.”To ease the hit on consumers, Rajapaksa’s administration is importing rice using credit lines from friendly neighbours.And to help farmers, it has raised the minimum government purchase price and announced a 40 billion Sri Lankan Rupee ($200 million) compensation package.Sri Lanka’s agriculture and finance ministries did not respond to questions from Reuters.Agriculture Minister Mahindananda Aluthgamage told reporters on Tuesday that the harvest would be lower this year.”We will start paying compensation to 1.1 million farmers from next week … none of the farmers will suffer financially,” he said. “We will never let that happen.”‘VISTAS OF PROSPERITY’In a campaign manifesto for the presidential election in 2019 titled “Vistas of Prosperity and Splendour”, which became a policy framework after a landslide victory, Rajapaksa proposed providing Sri Lankans with food without harmful chemicals.He pushed the reform through in a single season rather than over several years, adding to confusion across Sri Lanka’s farms including around Agbopura, a quaint hamlet some 220 km northeast of the country’s main city of Colombo.”Farmers around here really tried everything possible to grow their paddy. They applied coconut fertiliser, liquid fertiliser, compost… basically, anything they could get their hands on,” said Chanuka Leshaan Karunaratne, a major paddy trader in Agbopura.Yields among the area’s 500 farmers appear to have dropped by half, Karunaratne said, sitting at his warehouse on the main road that runs through Agbopura.Indika Paranavithana, head of the local farmers’ association, estimated a similar fall in output and said many distressed households had used up their reserve stocks.”This paddy reserve is their savings,” he said. “For the rest of the year, if someone gets sick or there is a funeral, they sell a sack of paddy to cover costs.”On Monday, the government approved a minimum of 50,000 rupees per hectare as compensation, part of the 40 billion rupee package announced in January. That could make it harder to achieve its 8.8% budget deficit target for 2022, and further stoke inflation. Some farmers say the amounts are not enough, and the government has become deeply unpopular, according to a new survey by Colombo think-tank Verité Research.In its first “Mood of the Nation” poll, which surveyed over 1,000 Sri Lankans in January, Verité found that 10% approved the government’s work and more than 80% had lost confidence in the country’s economy.Sri Lanka’s 1.5 million paddy farmers are a core vote base for the nationalist Rajapaksa family, who have supported them with fertiliser subsidies and higher crop prices.The farm sector contributes 7% to the country’s GDP but employs about 27% of the workforce, mostly in rural areas. Sri Lanka’s reserves fell to $2.36 billion in January, leaving the government short of dollars for chemical fertiliser imports for the cultivation season starting in April.The military is getting involved. Thousands of troops have been tasked with producing 2.5 million tonnes of organic fertilisers by April, according to an official who declined to be named.GOLD NECKLACESWeeks before the harvesters arrived at Agbopura, Seneviratne noticed the plants were short and reedy.”These crops need urea. Compost is just not good enough and we didn’t even get any of the organic fertiliser that was distributed by the government,” he said.Despite 150,000 rupees in debt, a decent harvest would allow him to get back two of his wife’s gold chains that were pawned last year to meet household costs.The night before his crop was harvested, Seneviratne camped in the fields to scare away a group of elephants that arrive each winter.But paddy from his two areas only filled 10 bags. His earnings dropped to around 15,000 rupees from 85,000 rupees a year earlier. “After I paid off the harvester, there was only 200 rupees left,” he said.Like many other farmers in Agbopura, Seneviratne said he did not know when and how government compensation would reach him.”If I had known the yield would be this low, I would have left the crop to be eaten by wild animals,” he said. “I don’t know how we will get the pawned gold back.”($1 = 199.2000 Sri Lankan rupees) More

MOSCOW (Reuters) – Russia’s central bank on Thursday said it was increasing the capital of affiliated reinsurance firm AO RNPK, which specialises in providing protection against international sanctions, to 300 billion roubles ($3.08 billion) from 71 billion roubles.($1 = 97.4990 roubles) More

BERLIN/LONDON (Reuters) – Home prices in Germany’s booming property market look set to rise sharply again in 2022 and, while the pace will ease in coming years, the increases will still outstrip general inflation, a Reuters poll found.As in much of the world, many Germans spent most of the coronavirus pandemic working from home and those who could afford to move sought out larger, more expensive properties – fuelling home price rises.Years of ultra-low borrowing costs have also made it cheaper for people to upsize or for first-time buyers to get onto the property ladder.Historically, the German housing market was dominated by renters but the desire for a safe-haven investment, along with speculators, has grown in recent years, adding to the property market boom.European Central Bank board member Isabel Schnabel said in February the bank must consider surging house prices when assessing inflation.Much of the polling was conducted before Russia’s invasion of Ukraine, which could delay – or limit – any ECB considerations of tighter monetary policy. That in turn may support the housing market in the short term.Home prices rose around 10% last year and were forecast to rise 6.3% this year, according to the Feb. 10-March 2 Reuters poll of 16 property market experts. That pace was expected to slow to 4.5% next year and then to 2.8% in 2024.INFLATIONYet consumer price inflation was pegged at 3.0%, 1.8% and 1.9%, respectively, in a January Reuters poll and the latest house price forecasts were an upgrade from the respective 6.0%, 4.0% and 2.0% given in November. [ECILT/EU]”House prices will continue to rise, albeit at a somewhat slower pace than in the previous years,” said Carsten Brzeski, global head of macro at ING.”Both the mismatch between supply and demand, currently fuelled by a stagnating supply, as well as high material and construction costs and the fight against climate change, for which energy-efficient housing plays a major role, will continue to drive house prices up in the coming years.”Germany should curb a boom in house prices by setting caps on mortgages and forcing banks to build up more capital, the European Union’s financial stability watchdog said last month.”The house price to income ratio is even higher than during the housing boom of the ’90s, particularly in big cities,” said Marco Wagner, senior economist at Commerzbank (DE:CBKG).Asked to rate the affordability of German house prices on a scale of 1 to 10 where 1 was extremely cheap and 10 extremely expensive, analysts rated them 8. That matched the previous estimate and one of the highest medians given compared to other Reuters polls for major housing markets.Respondents to an additional question said the ECB would have to lift its refinancing rate to 1.50% this year to significantly slow activity. It currently sits at zero and only 13 of 43 economists in a separate Reuters poll on ECB policy saw it rising at all this year.”To significantly slow down activity, a sharp rise in interest rates is required, which is not to be expected to this extent,” said Pekka Sagner, economist for housing policy and property economics at the German Economic Institute.(For other stories from the Reuters quarterly housing market polls:) More

The writer is chief global equity strategist and head of macro research in Europe for Goldman SachsThe Russian invasion of Ukraine has a significant humanitarian cost above all. There are, also, economic impacts and spillovers into financial markets. Increased uncertainty has, in particular, significantly raised the risk of European assets. Together, this has worsened the growth and inflation mix. Largely as a result of higher energy prices, inflation expectations have been pushed up, while the growth outlook has been lowered.All of this comes at a difficult time for investors and for policymakers: supply side bottlenecks and recovering demand from the Covid-led downturn had already pushed up inflation to levels not seen for many years.Markets have had to absorb a major change in expectations about policy. As recently as last summer, for example, investors were expecting no interest rate rises by the Federal Reserve this year; now the market is pricing in close to seven consecutive increases and we expect a further four rises next year.Multi-decade high inflation and low unemployment have been seen in the US and UK. This has already spurred the Bank of England to raise interest rates twice to 0.5 per cent, the first hike in back-to-back meetings since 2004. Even the eurozone, which has long struggled with deflationary pressures, is seeing upward pressure on prices, and this will be exacerbated by the conflict’s impact on energy prices.The direct effects of the crisis on trade are likely to be small given that Russia and Ukraine account for about 2 per cent of global gross domestic product and trade. The euro area exports about 1 per cent of GDP to Russia and Ukraine. Germany is slightly more exposed than Italy or France. The cross-border banking exposure to Russia is also small — the largest among western European countries is Austria with about 1.4 per cent of GDP in cross-border banking exposure to Russia/Ukraine/Belarus. The UK has the next highest exposure at about 0.6 per cent.The implications for the commodity markets are much greater, as Russia produces 11 per cent of global oil and 17 per cent of global gas. Our economists estimate that a 20 per cent rise in the price of oil would boost global headline US inflation by nearly 0.25 percentage points, and it could be more, potentially with higher food prices. Europe is the most impacted region and will probably face higher gas prices given the halt to Nord Stream 2. Commodity price risk remains skewed to the upside, with further escalation likely to send European natural gas, wheat, corn and oil prices higher from already elevated levels. At the same time, a new focus on increasing defence spending and higher investments in alternative energy sources will increase government debt levels, already elevated as a result of the pandemic.From a financial market perspective, the main impact is through greater uncertainty and the potential effects of higher inflation and slower growth. However, assets such as equities had already experienced a correction since the start of the year as concerns about higher interest rates reduced their valuations. The European stock markets were the most heavily hit on the news of the invasion and are factoring in a slowdown in growth. Using our macro factor estimates for growth pricing across European assets, the market has priced in about 0.5 percentage points of a growth downgrade, towards the lower end of the range of our estimates under escalation scenarios.In the short term the risks are high and market volatility is likely to stay elevated. But it should be emphasised that valuations are not very stretched and we continue to see longer term value in Europe shares. The falls have pushed their price/earnings ratio to about 13 times, below the long-term average.In the UK, the FTSE 100 index trades at a price-earnings multiple of less than 12 and a dividend yield of nearly 4 per cent. While there are downside economic risks, nearly 20 per cent of UK index revenues are from the oil sector — which will benefit from higher prices. The modest valuations are despite low real interest rates, a further reopening recovery and an expected sharp rise in fiscal spending this year. Earnings will be boosted by the increased spend on renewable energy and on defence.For longer term investors, the reasonable valuation, particularly across European and UK equities, should provide support. We would expect moderate returns over a 12-month horizon. More

The Confederation of British Industry said business and professional services firms were more likely to raise prices than at any time since the survey began in 1998. Consumer services companies’ pricing plans were the highest since 2007.”Rising inflation and cost pressures are hitting firms’ profitability and their bottom line. The spectre of further price increases is being felt across the board,” said Charlotte Dendy, the CBI’s head of economic surveys.The BoE has raised interest rates twice since December in a bid to stop an energy-led surge in inflation to a 30-year high from shifting businesses’ pricing behaviour upwards in the long term.Financial markets expect the central bank to raise rates again this month and for interest rates to reach 1.5% by August, up from 0.5% now.The quarterly CBI survey, conducted from Jan. 28 to Feb. 15, showed sales growth slowed over the previous three months, when many companies were hit by the Omicron wave of coronavirus.However, hiring and investment intentions remain strong and the businesses forecast a pick-up in business volumes over the coming quarter. More

Russia’s financial markets have been thrown into turmoil by its assault on Ukraine, the biggest on a European state since World War Two, and stiff Western sanctions.The invasion has triggered a flurry of credit rating moves and dire warnings about the impact on Russia’s economy. Last week, S&P lowered Russia’s rating to junk status and Moody’s (NYSE:MCO) put the country on review for a downgrade to junk. The Institute of International Finance predicts a double digit contraction in economic growth this year.Fitch downgraded Russia to “B” from “BBB” and placed the country’s ratings on “rating watch negative”.”The severity of international sanctions in response to Russia’s military invasion of Ukraine has heightened macro-financial stability risks, represents a huge shock to Russia’s credit fundamentals and could undermine its willingness to service government debt,” Fitch said in a report https://www.fitchratings.com/research/sovereigns/fitch-downgrades-russia-to-b-on-rating-watch-negative-02-03-2022. Fitch said that U.S. and EU sanctions prohibiting any transactions with the Central Bank of Russia would have a “much larger impact on Russia’s credit fundamentals than any previous sanctions”, rendering much of Russia’s international reserves unusable for FX intervention.”The sanctions could also weigh on Russia’s willingness to repay debt,” Fitch warned. “President Putin’s response to put nuclear forces on high alert appears to diminish the prospect of him changing course on Ukraine to the degree required to reverse rapidly tightening sanctions.”Fitch said it expects further ratcheting up of sanctions on Russian banks. The sanctions imposed by Western countries will also markedly weaken Russia’s GDP growth potential relative to the ratings agency’s previous assessment of 1.6%, Fitch said.Sanctions imposed on Russia have significantly increased the chance of the country defaulting on its dollar and other international market government debt, analysts at JPMorgan (NYSE:JPM) and elsewhere said on Wednesday.Russia has responded to the sanctions with a range of measures to shore up its economic defenses and retaliate against Western restrictions. It hiked its main lending rate to 20%, banned Russian brokers from selling securities held by foreigners, ordered exporting companies to buttress the rouble and said it would stop foreign investors selling assets.The government also plans to tap its National Wealth Fund (NWF), a rainy day cushion, to help counter sanctions. More

NEW YORK (Reuters) – Federal Reserve chair Jerome Powell said he is inclined to support a 25 basis point rate increase at the March policy meeting but said the central bank is prepared to move more aggressively later if inflation does not abate as expected. “I’m inclined to propose and support a 25 basis point rate hike,” Powell testified before Congress on Wednesday about the Fed’s upcoming March meeting. He added that the central bank is “prepared to move more aggressively by raising the federal funds rate by more than 25 basis points” at one or more meetings if inflation does not come down later this year as expected. More

WASHINGTON (Reuters) -Federal Reserve Chair Jerome Powell, balancing high U.S. inflation against the complex new risks of a European land war, said Wednesday the central bank would begin “carefully” raising interest rates at its upcoming March meeting but be ready to move more aggressively if inflation does not cool as quickly as expected.Powell called the Russian invasion of Ukraine “a game changer” that could have unpredictable consequences.”There are events yet to come and we don’t know what the real effect on the U.S. economy will be,” Powell told the House Financial Services Committee during a monetary policy hearing overshadowed by the conflict in Europe.But he said for now the Fed was proceeding largely as planned to raise the target overnight federal funds rate and reduce the size of its balance sheet in order to tame inflation that is currently the highest it has been since the 1980s.Powell said he will back a quarter point rate increase when the Fed meets March 15-16, effectively putting to rest debate over starting a post-pandemic round of rate hikes with a larger than usual half-point increase.But the Fed chief said he was ready if needed to use larger or more frequent rate moves if inflation does not slow, and may over time need to push rates to restrictive levels above 2.5% – slowing economic growth rather than simply stimulating it less robustly.It is a subtle distinction but a marker of Powell’s focus on inflation as the key fight before the Fed right now, a top of mind concern that could undermine the central bank’s credibility if it gets worse, erodes household spending power and begins distorting the investment and spending decisions of businesses and families.The job market, Powell noted in prepared testimony, was “extremely tight,” and Fed officials have declared their maximum employment goal effectively met. The pandemic’s impact on the economy appeared to be easing and “demand is strong,” Powell said. However inflation is currently triple the Fed’s 2% target, and has become a prime political concern for the Biden administration and members of Congress who came to Wednesday’s hearing armed with anecdotes of constituents paying more for staple goods or for business supplies.What Powell described as a collision between strong consumer demand and pandemic constraints on global product supply was “not as transitory as we had hoped…Other mainstream economists and central banks around the world made the same mistake. That doesn’t excuse it, but we thought these things would be resolved long ago.”FRAMED BY UKRAINE CONFLICTBut even with the immediate focus on inflation, Powell’s testimony was framed by the conflict in Ukraine, and what it might mean for the United States and world economies in the weeks or even years ahead.Powell said that Fed staff had begun analyzing different scenarios but that too much remained unknown about an event whose full implications may “be with us for a very long time.” “The near-term effects on the U.S. economy of the invasion of Ukraine, the ongoing war, the sanctions, and of events to come, remain highly uncertain,” Powell said. “Making appropriate monetary policy in this environment requires a recognition that the economy evolves in unexpected ways. We will need to be nimble in responding to incoming data and the evolving outlook.””We will proceed carefully as we learn more about the implications of the Ukraine war on the economy,” Powell said. “We have an expectation that inflation will peak and begin to come down this year. To the extent inflation comes in higher or is more persistently high … we would be prepared to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings.”The Fed slashed rates to the current near zero level in 2020 to blunt the impact of the coronavirus pandemic. There is now broad agreement that the current level of borrowing costs is out of phase with an economy that has rebounded faster than expected from the health crisis.Lawmakers peppered Powell with questions about the fallout from rising oil prices following Russia’s action, the threat of cyberattacks and broader risks to the financial system, and even the impact on the market for fertilizer.”Everything we can do … we are doing it,” to protect against a cyberattack, Powell said. “The larger financial institutions are doing it. It’s hard to say what’s possible, but we are on high alert and will continue to be.” Regarding financial markets, Powell said that so far they have been “functioning well. There is a great deal of liquidity out there,” and existing Fed programs were helping.Powell will appear before the Senate Banking Committee on Thursday. The Fed chief is required to testify to those House and Senate committees twice a year as part of the central bank’s semiannual reviews of monetary policy. Major U.S. stock indexes were trading sharply higher, extending their gains during Powell’s testimony, and yields on Treasuries rose. The U.S. dollar was little changed against a basket of major trading partner currencies. Traders in interest rate futures began pricing in six quarter-point rate hikes this year versus five as of Tuesday.Powell, “preferred to keep the Fed’s options open … there was little pushback on current market rate expectations, which have plummeted since Russia’s invasion,” said Paul Ashworth, chief U.S. economist at Capital Economics. More