Economic Capsule

April 2014

Research & Development Unit

ECONOMIC & BUSINESS NEWS

Commercial Bank Ranked Most Valuable Private Sector Brand in Sri Lanka

Commercial Bank Partners EIB Credit Line

Financial Sector Consolidation Update

FINANCIAL SECTOR NEWS

Fitch: Sri Lanka Credit Overview

Fitch Affirms Sri Lanka at ‘BB-’; Outlook Stable

Leading Exporters and Importers in World Trade in Commercial Services

Sri Lanka gets Natural Disaster Credit from World Bank

ANALYSIS & FORECAST Medium Term Macroeconomic Framework

IMF World Economic Outlook

C O N T E N T S

B a n k i n g N e w s

< Research & Development Unit >

Commercial Bank Ranked Most Valuable Private Sector Brand in Sri Lanka

Commercial Bank has been ranked the third most valuable brand in Sri Lanka in the 2014 rankings compiled by Brand Finance Lanka and published in the LMD Brands Annual for the year.

Moving up two places from last year to become the highest ranked private sector brand on this prestigious list amongst all corporate brands in the country, Sri Lanka’s largest private bank has been assigned a brand value of Rs 22.32 billion through an independent analysis by Brand Finance.

The Bank has been rated AAA- by Brand Finance Lanka and recorded the highest growth of 47% over 2013 among the top companies listed in the rankings.

< Research & Development Unit >

Commercial Bank Partners EIB Credit Line

Commercial Bank has entered in to an agreement with the European Investment Bank (EIB) to finance Small and Medium Enterprises (SMEs), Energy Efficiency (EE) and Renewable Energy (RE) projects under the EIB SME Green Energy Credit Line extended to the Government of Sri Lanka.

The minimum project size eligible for SME financing will be Rs 18 mn and Rs 90 mn for projects in the Energy Efficiency and Renewable Energy categories. Up to 50% of the project could be considered for financing under this credit line, and beneficiaries can obtain facilities for a longer repayment period and enjoy an attractive lending rate of 8% p.a.

Construction, renovation or extension of factories or commercial buildings, procurement of machinery, and incremental working capital are the key activities eligible for financing under this credit line.

< Research & Development Unit >

Financial Sector Consolidation Update

According to Central Bank Assistant Governor C.J.P. Siriwardana the consolidation process of the country’s banking and finance sector is on track with considerable progress so far.

Nine audit firms selected by the CB to carry out valuations on the banks and Non-Banking Financial Institutions (NBFI) will finalise and submit their reports on 2 May 2014.

There will be an intervention by the CB if companies fail to find partners. This will take place at the final quarter of the year, but till then CB will not get involved according to Mr. Siriwardana.

The banking sector is comprised of 21 local banks and 12 foreign banks, whereas NBFIs include 49 finance companies and nine leasing companies. Banks and NBFIs account for 64% of the entire financial system assets where banks hold 57% and NBFIs 7%.

He has stated that with 31 March 2014 as the deadline for all banks and NBFIs to submit their proposals regarding prospective mergers and acquisitions, all institutions have complied.

E c o n o m i c & B u s i n e s s N e w s

< Research & Development Unit >

Fitch: Sri Lanka Credit Overview

The rating is supported by relatively strong growth, a comparatively high level of basic human development (as indicated by the UN Human Development Index), and a solid payment record.

Rating factors Status Trend

Public finances Weakness Stable

Macroeconomics Neutral Stable

Structural issues Neutral Stable

External finances Weakness Stable

Key rating drivers:

Upside: sustained improvement in both the public and external finances.

Downside: an intensification in external financing risks, an extended period of overheating, or a significant deterioration in public finances.

Key assumption: political landscape remains broadly stable, and no renewal of the civil conflict.

Source: Fitch

< Research & Development Unit >

Fitch Affirms Sri Lanka at ‘BB-’; Outlook Stable

Key rating drivers:

Real GDP growth is relatively high and less volatile compared with its peers. Fitch expects real GDP growth to stabilise in 2014 at the recorded 7.3% in 2013 and to rise to 7.5% in 2015. A pick-up in tourism will continue to support growth.

Official data do not point to overheating of the economy, as inflation (4.2% in March) and credit growth (4.4% in February) are low. However, average inflation over the past five years has been high (6.2%) and volatile compared with peers (5.0% median for the 'BB' peer group) and the potential for a build-up of future imbalances exists. The authorities' pro-growth bias is illustrated by persistent "twin deficits" and easing monetary policy measures since December 2012, even at high real GDP growth levels.

The public finances are weak relative to peers despite fiscal consolidation. Both the budget balance (-5.9% of GDP in 2013) and government debt burden (78.3% of GDP in 2013) are more than double the 'BB' category medians of -2.7% and 35.9% of GDP, respectively. The 2014 budget signals commitment to medium-term debt reduction to maintain a gradual fiscal consolidation path, although the process is slow and to a large extent built on revenue projections that may turn out too optimistic.

Cont…

< Research & Development Unit >

Fitch Affirms Sri Lanka at ‘BB-’; Outlook Stable (cont…)

Key rating drivers: (cont…)

The current account deficit has fallen from 6.7% of GDP in 2012 to 3.9% in 2013 and is expected by Fitch to narrow further to 3.2% by 2015 due to solid income from tourism and remittances. External liquidity is weak, as illustrated by a low liquidity ratio (84.4%) and lower foreign exchange reserves (3.6 months of current external receipts) compared with 'BB' peer group medians (139.5% and 4.3 months respectively).

Quantitative easing (QE) by the U.S. Federal Reserve has so far not led to severe market pressures for Sri Lanka. The country benefitted less than many other emerging markets from the QE-related search for yield given its relatively closed capital account. The government has been able to secure some US dollar financing through issuance on the bond markets twice in 2014.

The level of basic human development, including education, health and literacy, is relatively high, as indicated by a favourable UN Human Development Index score (Sri Lanka ranks 92 out of 187 countries, better positioned than all other South Asian and most Southeast Asian countries).

Banks' performance is supported by high real GDP growth and monetary easing, but the non-performing loan ratio (NPL ratio) for the banking system was relatively high at 5.6% in 2013, and it may rise further to more than 6% in 2014. However, the banking sector is not very large relative to the economy, with the credit to GDP ratio at only around 40% at end-2013. Rapid credit growth in the past elevated Sri Lanka into the highest '3' category of Fitch's Macro-Prudential Indicator.

Source: Fitch

< Research & Development Unit >

Leading Exporters and Importers in World Trade in Commercial Services

(Excluding *Intra-EU Trade 2012)

*The quantity of goods exchanged between the Member States of the EU (intra-EU trade) and between the Member States and third countries (extra-EU exchanges)

*

Source: WTO, Standard Chartered Research

< Research & Development Unit >

Sri Lanka has been given a USD 102 mn credit line that can be drawn immediately after a natural disaster, as well as another USD 110 mn for measures to cut disaster risk, from the World Bank.

According to the lender Sri Lanka is the first county in South Asia to gain access to its new Catastrophe Deferred Drawdown Option, which can be drawn down fully or partially as soon as a state of emergency is declared after a natural disaster.

Sri Lanka gets Natural Disaster Credit from World Bank

Analysis & Forecast

< Research & Development Unit >

Medium Term Macroeconomic Framework

Indicator Unit 2012 2013Projections

2014 2015 2016 2017

Real Sector

Real GDP Growth % 6.3 7.3 7.8 8.2 8.3 8.4

Per Capita GDP US$ 2,922 3,280 3,718 4,243 4,825 5,485

Total Investment % of GDP 30.6 29.6 31.0 32.0 33.1 34.0

National Savings % of GDP 24.0 25.7 28.4 31.1 33.2 34.2

External Sector

Exports US$ mn 9,774 10,394 11,854 13,671 15,915 18,521

Imports US$ mn 19,190 18,003 20,218 21,630 23,242 25,023

Current Account Balance % of GDP -6.7 -3.9 -2.5 -0.9 0.1 0.2

Overall Balance US$ mn 151 985 1,510 2,185 2,967 3,606 Cont…

< Research & Development Unit >

Medium Term Macroeconomic Framework (cont…)

Indicator Unit 2012 2013

Projections

2014 2015 2016 2017

Fiscal Sector

Total Revenue and Grants % of GDP 14.1 13.3 14.8 15.5 16.6 16.8

Expenditure and Net Lending % of GDP 20.5 19.2 20.0 19.9 20.4 20.6

Current Account Balance % of GDP -1.0 -0.8 1.1 1.6 2.3 2.3

Overall Budget Deficit % of GDP -6.5 -5.9 -5.2 -4.4 -3.8 -3.8

Government Debt % of GDP 79.2 78.3 74.3 70.6 65.0 62.0

Financial Sector

Broad Money Growth (M2b) % 17.6 16.7 14.0 14.0 14.0 14.0

Growth in Credit to the Private Sector % 17.6 7.5 14.0 15.0 15.0 15.0

Source: CBSL Annual Report 2013

< Research & Development Unit >

IMF World Economic Outlook% change 2012 2013

Projections

2014 2015

World Output 3.2 3.0 3.6 3.9

Advanced Economies 1.4 1.3 2.2 2.3

United States 2.8 1.9 2.8 3.0

Euro Area –0.7 –0.5 1.2 1.5

Japan 1.4 1.5 1.4 1.0

United Kingdom 0.3 1.8 2.9 2.5

Emerging and Developing Asia 6.7 6.5 6.7 6.8

China 7.7 7.7 7.5 7.3

India 4.7 4.4 5.4 6.4

World Trade Volume (goods and services) 2.8 3.0 4.3 5.3

Imports

Advanced Economies 1.1 1.4 3.5 4.5

Emerging Market and Developing Economies 5.8 5.6 5.2 6.3

Exports

Advanced Economies 2.1 2.3 4.2 4.8

Emerging Market and Developing Economies 4.2 4.4 5.0 6.2

Consumer Prices

Advanced Economies 2.0 1.4 1.5 1.6

Emerging Market and Developing Economies 6.0 5.8 5.5 5.2 GD

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Source: IMF

The views expressed in Economic Capsule are not necessarily those of the Management of Commercial Bank of Ceylon PLC

The information contained in this presentation has been drawn from sources that we believe to be reliable. However, while we have taken reasonable care to maintain accuracy/completeness of the information, it should be noted that Commercial Bank of Ceylon PLC and/or its employees should not be held responsible, for providing the information or for losses or damages, financial or otherwise, suffered in consequence of using such information for whatever purpose.