economic capsule - april 2015

Economic CapsuleApril 2015

Research & Development Unit

220th Issue

C O N T E N T S

BANKING SECTOR NEWS

A millionaire in 3 to 6 years? Commercial Bank Shows How

ECONOMIC & BUSINESS NEWS

Sri Lanka Growth Outlook by WB & ADB

Fitch Affirms Sri Lanka’s Rating

CBSL Cuts Policy Rates

Small Car Imports to Sri Lanka from India and China Surge Amid Credit Pick-up

Sri Lanka Bank Credit to State Top Rs 100 bn for Second Month in Feb 2015

Sri Lanka's Central Bank to have USD 1.1bn Currency Swap Extension from India

China to Unveil USD 46 bn Investment in Pakistan

China’s other Major Investments

Chinese Investments & Contracts in Sri Lanka

INTERNATIONAL NEWS

Condominium Industry in Sri Lanka

October, 2014


Banking News

< Research & Development Unit >

A millionaire in 3 to 6 years? Commercial Bank Shows How

A new, aspiration targeted investment plan that enables account holders to build up a minimum balance of Rs 1 million within a specific period without a high initial investment, has been launched by the Commercial Bank of Ceylon.

o The first savings product of its kind in the local banking sector, the ‘Commercial Bank Millionaire’s Account’ guarantees the depositor a balance of Rs 1 million or multiples of Rs 1 million up to Rs 10 million in three, four, five, or six years, depending on how much he or she is willing to deposit each month.

o Available to any Sri Lankan over 18 years of age, the Commercial Bank Millionaire’s Account that generates a balance of Rs 1 million requires a monthly deposit of Rs 25,000 over three years, Rs 18,100 a month for a four year plan, Rs 13,950 per month for a five year plan and just Rs 11,225 a month for a plan maturing in six years.

o Depositors who wish to raise more than Rs 1 million may increase their monthly deposit according to the number of millions they wish to raise, up to a maximum of Rs 10 million. Depositors can also nominate beneficiaries to receive the total amount invested in the event of their demise before maturity.


October, 2014


Economic & Business News


Sri Lanka Growth Outlook by WB & ADB

2014 2015 2016

WB7.4

6.9 6.6

ADB 7.0 7.3

GDP growth

Growth will be affected by;

WB: Slowing construction activity

ADB: Political transition and the revised priorities of the government

o World Bank(WB): In Sri Lanka, growth is expected to decline to 6.9 % in 2015 due to slowing construction activity.

o This trend is partially set off by consumption growth thanks to increased public sector wages and higher disposable income. With competitiveness remaining a challenge, the new government is reassessing the previous investment-led growth model.

o Asian Development Bank (ADB): Growth in 2015 will be affected by the political transition and the revised priorities of the government. Construction will slow after leading growth in the recent years, driven by large government infrastructure projects. Political uncertainty would retard private investment.

o While investment is likely to lose momentum in 2015, consumption is expected to pick up. Price reductions for food and fuel will encourage private consumption, and government consumption will rise with the shift in the budget toward recurrent expenditure.

Source: WB & ADB


Fitch Affirms Sri Lanka at 'BB-'; Outlook Stable

Cont…

Fitch Ratings has affirmed Sri Lanka's Long-Term Foreign and Local Currency Issuer Default Ratings at 'BB-'.

The issue ratings on Sri Lanka's senior unsecured foreign and local currency bonds are also affirmed at 'BB-'.

The Outlooks on the Long-Term IDRs are Stable.

The Country Ceiling is affirmed at 'BB-' and the Short-Term Foreign Currency IDR at 'B'.


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

Key Rating Drivers

Orderly and peaceful political transition. Sri Lanka enjoyed a smooth political transition following presidential elections in January 2015, reinforcing perceptions of a functioning democracy with relatively strong institutions by 'BB' standards.

However, uncertainties remain about the timing and outcome of parliamentary elections, and the implications for effective policymaking in the future.

Favourable GDP growth. Sri Lanka continues to post strong economic growth of 7.5% (five-year average), far exceeding the 'BB' median of 3.9%.

However, with low foreign direct investment, growth is heavily dependent on external borrowing, while the government's "pro-growth" bias has constrained improvements in Sri Lanka's fiscal and current account deficits and weakened policy coherence and credibility. Recent monetary easing and continued strong credit growth lend further support to this view.

Cont…


Key Rating Drivers (cont.)

Weak balance of payments. Falling oil prices should play to Sri Lanka's advantage, helping to contain the current account deficit, as should strong remittances and tourism, while net non-resident inflows into the domestic debt market have remained positive.

Even so, heavy external debt repayments have led to a drawdown of international reserves from USD10bn at end-April 2014 to less than USD7bn at end-March 2015, raising concerns about external liquidity, particularly in the face of expected monetary tightening by the US Federal Reserve.

External Borrowing Strategy. Fitch expects that Sri Lanka will succeed in rebuilding international reserves to USD10bn by the end of 2015 through a combination of renewed borrowing on international capital markets, the exercise of foreign currency swaps with the Indian and Chinese central banks, and onshore borrowing through Sri Lanka Development Bonds.

Nonetheless, there are risks that may derail this strategy, including a potential rise in domestic political uncertainty and an adverse shift in investor sentiment, which led Sri Lanka to abort plans to borrow in international capital markets in 1Q15. Cont…



Key Rating Drivers (cont.)

Public finances remain a credit weakness. Sri Lanka's fiscal metrics are a standout relative to the 'BB' category, notwithstanding a reduction in general government deficits to around 5% in 2014 from 8% of GDP in 2010. Narrower government deficits have contributed to a fall in public debt, despite a weaker Sri Lanka rupee, which drives up the local currency component of external public debt.

Still, gross general government debt remains high at about 75% of GDP at end-2014 and Fitch believes that fiscal consolidation could stall in 2015-16 as expenditure rises and revenues remain lacklustre. An interim 2015 budget contained a number of one-off measures that have hurt business confidence and did little to address the lack of a medium-term fiscal framework.

Sri Lanka's ratings are supported by the following factors:

• A clean external debt servicing record, which stands out among 'BB' peers.

• Levels of basic human development, including education, health and literacy, are relatively high, as indicated by a favourable UNDP Index score.

• Among sovereigns rated by Fitch, Sri Lanka falls in the 61st percentile, which is much higher than the 'BB' median of 41.



CBSL Cuts Policy Rates

o Sri Lanka’s central bank eased policy for the first time in 16 months to boost growth, joining more than 20 peers around the globe that have cut rates this year.

o The standing lending facility rate (SLFR) was cut to 7.5 % from 8 % and standing deposit facility rate (SDFR) to 6 % from 6.5 %.

These are the lowest ever policy rates that have been recorded.

Policy Rate Changes

Source: CBSL

Cont…


CBSL Cuts Policy Rates (cont…)

o Current behaviour of market interest rates is viewed to be inconsistent with the continued low inflation and investments needed to address concerns on economic growth for the year. Inflation is projected to remain at low mid-single digit level in 2015.

o Therefore, there is further leeway to continue relaxation of monetary policy, primarily through a reduction in policy interest rates of the Central Bank to encourage economic activities by enhanced credit flows and investments due to lower cost of funds and behaviour of market interest rates consistent with economic growth outlook.

o If any of subsequent interim effects of further monetary relaxation are found to be of concern over other economic variables, a mix of other monetary policy tools is available to fine-tune such effects towards achievement of current objectives of the monetary policy.

According to CBSL Monetary Policy Statement:

Cont…


CBSL Cuts Policy Rates (cont…)

o Although the government expects interest rates in the market to decline following the policy rate cut, the government’s borrowing requirements will have a strong influence on the movement of interest rates.

o There has been a sharp increase in the T-bill supply in 2015, which has applied upward pressure on T-bill yields.

T-Bill Yields %

Prime Lending Rates (%)

Rs Bn

ItemWeek Ending

31.12.14 22.04. 15 Change

Treasury Bills & Bonds 3,996.0 4,277.7 281.7

SLDBs 391.1 460.9 69.8

Outstanding Stock of Government Securities

Source: CBSL

Source: CBSLSource: CBSL


Small Car Imports to Sri Lanka from India and China Surge Amid Credit Pick-up

Imports of small cars from India and China, which began to rise sharply from December as credit picked up, surged further in March following a tax cut

• Registrations of Maruti/Suzuki cars from India was up nearly 1000 percent from a year earlier to 2,531 units in March 2015 compared to 234 in March 2014, an analysis by JB Securities shows.

• The best-selling Maruti Alto registrations rose to 2,263 unit in March up from 1,160 in January and 1,320 in February.

• Chinese Geely cars, sold in Sri Lanka under the Micro brand rose 463 percent to 479 units in March 2015 from 85 units a year earlier. There were 445 units of the best-selling Geely Panda model in March.

Source: JB Securities

Source: CBSL

Source: JB Securities


Sri Lanka Bank Credit to State Top Rs 100 bn for Second Month in Feb 2015

• Sri Lanka's bank credit to the central government and state enterprises topped Rs 100 bn for the second month in a row in February 2015, while private credit also grew Rs 24.5 bn.

• The Central government borrowed Rs 87.30 bn from the banking system, including Rs 4.9 bn in central bank credit.

• In January government borrowings from the banking system rose to a historic high of Rs 121.6 bn, as foreign reserves were appropriated to repay a USD 500 mn bond. State enterprises borrowed another Rs 12.8 bn in February 2015, down from Rs 22.9 bn rupees in January. Source: CBSL

Cont…


Sri Lanka Bank Credit to State Top Rs 100 bn for Second Month in Feb 2015 (cont..)

• Total loans from the banking system rose above 100 billion rupees from September 2014 largely driven by state credit, though in December private credit rose to 76.50 billion rupees.

• Monthly credit disbursements are now around the levels seen during the last balance of payments crisis.

• Though interest rates rose in March, in April there was a cut in the policy rate despite rising state borrowings and pressure on the balance of payments (Source: economynext)


Sri Lanka's Central Bank to have USD 1.1bn Currency Swap Extension from India

Sri Lanka's Central Bank is to enter into an agreement with India to extend its currency swap facility by USD 1.1 bn.

RBI in their letter dated February 18, 2015 has proposed to make available US$400 million to Sri Lanka under this Framework and the remaining US$1.1 billion as a special/ad-hoc swap facility outside the Framework, but with the same terms and conditions, for 6 months against the request of the Central Bank of Sri Lanka.

This will help Sri Lanka in availing a safety net against the probable volatility of their currency and provide short-term liquidity that would contribute to Sri Lanka’s economic recovery. This will also strengthen India’s bilateral relations and economic ties with Sri Lanka.


October, 2014


International News


China to Unveil USD 46 bn Investments in Pakistan

• China's President Xi Jinping has signed agreements with Pakistan promising investment of USD 46bn.

• The focus of spending is on building a China-Pakistan Economic Corridor (CPEC) - a network of roads, railway and pipelines between the long-time allies.

• They will run some 3,000km (1,800 miles) from Gwadar in Pakistan to China's western Xinjiang region.


China’s other Major InvestmentsChina’s worldwide investments & Contracts

2005-Mid June 2014

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Source: The Heritage FoundationSource: The Heritage Foundation


Chinese Investments & Contracts in Sri LankaTe

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Year InvestorQuantity

MnPartner/Target Sector Subsector

2006 Sinomach $460 Energy Coal

2007 Sinohydro and China Communications Construction $360 Transport Shipping

2007 Huawei $150 Bharti Airtel Technology Telecom

2008 MCC $290 Transport Autos

2009 Sinomach $850 Energy Coal

2009 China Communications Construction $210 Transport Aviation

2010 Genertec $280 Transport Rail

2011 China Communications Construction $810 Transport Shipping

2011 China Merchants Group $280 Aitken Spence Transport Shipping

2011 China Communications Construction $140 Transport Rail

2012 China Merchants Group $150 Aitken Spence Transport Shipping

2012 Power Construction Corp $250 Energy Hydro

2013 Sinomach $230 Agriculture

2013 AVIC $260 Real estate Property

2013 China Communications Construction $1,430 Transport Shipping

2013 China Communications Construction $300 Transport Shipping

2013 China Communications Construction $100 Transport Aviation

2013 China Communications Construction $540 Real estate Construction

2013 Sinomach and Hunan Construction Engineering $430 Transport Autos

2013 China Communications Construction $400 Transport Autos

2014 China Merchants $990 Transport Autos

Chinese Investments & Contracts in Sri Lanka

$ 8.9 BnTotal

2005-Mid June 2014

Source: The Heritage Foundation

Source: The Heritage Foundation

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.

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economic capsule - april 2015

Economy & Finance

gdp growth growth

multiples of rs

maximum of rs

monthly deposit of rs

growth model

minimum balance of rs

consumption growth thanks

government consumption