Daily Update August 16, 2022

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Political Crisis and Organic Food in Sri Lanka

On July 12, Sri Lankan President Gotabaya Rajapaksa fled the country and resigned from office after the South Asian nation’s economy virtually shut down and protesters amassed in the capital of Colombo. The explanations for the political crisis in Sri Lanka are simple: The country was defaulting on its international debt and was unable to pay for basic commodities. The powerful Rajapaksa family has been mired in accusations of corruption for years, and economic hardship provided the spark for a “middle-class revolution.”

So, where does organic food come in? Over the past decade, Sri Lanka has built significant tourism and garment manufacturing industries, but the population is still dependent on agriculture for domestic consumption. In May 2021, former President Rajapaksa and his allies decided to ban chemical fertilizers as a way of tackling some of the nation’s problems. Since chemical fertilizers were mostly imported, banning them could cut Sri Lanka’s balance of payments deficit. The Rajapaksa government also pointed out the health and reputational benefits of moving to a fully organic model.

Unfortunately, the chemical fertilizer ban was implemented with little planning and no transition program. In contrast, a similar program to encourage the adoption of organic farming practices in the U.K. has a phased four-year timeline. Many observers warned that Sri Lanka’s hasty transition would lead to problems.

According to a U.S. Department of Agriculture report issued at the time, "Sri Lanka's leading agricultural economists indicate that the immediate, non-phased-in replacement of chemical fertilizers with organic ones will result in significant drops in crop yields. Rice productivity drops are being calculated to potentially lead to losses of 33%. A similar 35% productivity drop in the tea crop can result in income losses of 84 billion [Sri Lankan rupees]."

The ban on chemical fertilizer didn’t last long. By November 2021, it was rescinded in response to widespread protest. But the damage had been done. Overall food production in Sri Lanka fell by 40% to 50% during the period, according to the United Nation's Food and Agriculture Organization. In the agriculture-dependent country, this decline in food production has caused serious shortages.

The Rajapaksa government tried to blame the falling crop yields on the biofertilizer companies it contracted to replace chemical fertilizers, insisting it would no longer pay for the biofertilizers that were contracted or delivered. The restive Sri Lankan populace was not persuaded. 
The new government, formed under current President Ranil Wickremesinghe, is left with nothing but difficult choices to resolve the food crisis. The International Monetary Fund and other multilateral lenders may be willing to extend credit to the cash-strapped nation, but with the usual strictures such loans require. In the meantime, Sri Lanka will need to import grain to meet its domestic needs but will struggle to pay.

Today is Tuesday, August 16, 2022, and here is today’s essential intelligence.

Written by Nathan Hunt.

Economy

Middle Market CLOs Face Unexpected Headwinds Amid Rising Private Debt Demand

With volatility and uncertainty hampering capital markets, direct lending from private debt providers is increasingly competing with broadly syndicated loans and the high-yield market as an alternative source of funding. In response to volatile market conditions, several broadly syndicated loan borrowers have seen their prices flex wider this year, and deals are taking longer to finalize. By contrast, private debt borrowers typically have more certainty around pricing and timing by working with direct lenders.

—Read the report from S&P Global Ratings

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Capital Markets

Global Venture Capital Funding Rounds Continue Decline In July

The value of global venture capital-backed funding rounds fell 65.6% year over year in July to $21.78 billion, while the number of rounds was down 32.1%, according to S&P Global Market Intelligence data. The amount raised in July is the lowest since April 2020, when $19.69 billion was pulled in, the data shows.

—Read the article from S&P Global Market Intelligence

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Global Trade

Oil Barge Trade To Be Hit Further As Rhine Water Levels Plunge: Traders

Disruptions to supplies of oil products and petrochemical feedstocks through the Rhine River are expected to worsen as water levels have fallen to extreme lows, traders told S&P Global Commodity Insights Aug. 15. Water levels at Kaub, a key chokepoint located between the Lower and Upper Rhine, fell to 30 cm on Aug. 15, the lowest in years, according to data from Federal Waterways and Shipping Administration.

—Read the article from S&P Global Commodity Insights

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ESG

Listen: How Central Banks Help Combat Climate Change: An Interview With NGFS Chair Ravi Menon