economic capsule - january 2013
TRANSCRIPT
ECONOMIC CAPSULE January 2013
< Research & Development Unit >
FINANCIAL SECTOR NEWS
IFC AMC Invests USD 75 mn in Commercial Bank to Support Small Businesses in Sri Lanka
New Leasing Offers on Isuzu Vehicles from Commercial Bank and Sathosa Motors
Commercial Bank Commissions Drive-through ATM at Reid Avenue
Banking Sector Performance 2012
CRIB, IFC to Improve Credit Access for Small Biz
< Research & Development Unit >
ECONOMIC & BUSINESS NEWS
Sri Lanka to Grow by 6.8 % in 2013: World Bank
Sri Lanka on Fast Track to Cut Flood Risk, Modernize Capital
External Sector Performance, December 2012
Inflation, January 2013
Worldwide Cost of Living 2013
SNIPPETS
Analysis & Forecast
Sri Lanka: Medium Term Macroeconomic Framework
Economic Challenges Faced by Sri Lanka
Latest IMF GDP Projections
The World Economy is Improving
CONTENTS
FINANCIAL SECTOR NEWS
IFC AMC Invests USD 75 mn in Commercial Bank to Support Small Businesses in Sri Lanka
IFC, a member of the World Bank Group, is investing USD 75 mn (approximately Rs 9.6 bn) in Commercial Bank of Ceylon, through a fund managed by its Asset Management Company (AMC), to expand Commercial Bank’s operations and increase access to finance for small and medium enterprises (SMEs).
This investment with Commercial Bank is IFC’s largest investment in Sri Lanka’s financial markets to date, and is expected to increase access to finance for up to 16,000 small businesses and generate about 170,000 direct and indirect jobs by 2017 through lending to small and medium enterprises.
It is also IFC Asset Management Company’s first funding in South Asia, and the largest subordinated debt issued for any bank in Sri Lanka.
This investment through the AMC-managed IFC Capitalization Fund will qualify as capital to help Commercial Bank expand its operations, allowing for small businesses across the country to gain better access to credit.
New Leasing Offers on Isuzu Vehicles from Commercial Bank and Sathosa Motors
Commercial Bank once again partnered with Sathosa Motors PLC to offer attractive terms and benefits on leases covering the latter’s complete range of Isuzu lorries and buses.
The promotion offers a minimum discount of Rs 50,000 on Isuzu lorries and Rs 150,000 on Isuzu buses purchased through this joint promotion, while Sathosa Motors also throws in six labour free services to the package.
Commercial Bank Commissions Drive-through ATM at Reid Avenue
Commercial Bank commissioned its first drive-through Automated Teller Machine in Sri Lanka, bringing a new dimension in convenience to busy customers.
The drive-through ATM, is located at the Bank’s Reid Avenue branch, Thunmulla.
Banking Sector Performance 2012
2008 2011 2012p
Bank Branches 1,782 2,130 2,193
Other Banking Outlets 3,646 4,054 4,103
ATMs 1,676 2,237 2,331
Source: CBSL Road Map 2013
CRIB, IFC to Improve Credit Access for Small Biz
IFC, a member of the World Bank Group, is working with Sri Lanka’s Credit Information Bureau (CRIB) to make it easier for up to 37,000 micro and small businesses to access loans and other forms of financing using movable assets as collateral.
IFC will provide advice and assistance to CRIB to support the legal framework which will enhance financing for firms against movable assets such as inventory and equipment.
Expanding the collateral registry to include non-fixed assets, all of which are more readily available to small businesses, makes it easier for them to obtain financing even without traditional mortgages like land or property.
ECONOMIC & BUSINESS NEWS
Sri Lanka to Grow by 6.8 % in 2013: World Bank
Sri Lanka's economic growth will pick up to 6.8 % in 2013 helped by renewed external demand, better agriculture output, the World Bank stated in a report on global economic prospects.
Sri Lanka's economic growth is expected to accelerate to 7.2 % by 2015, which was more in line with underlying economic fundamentals, compared to 8.0 % levels seen in 2010 and 2011 with post-war reconstruction.
Source: World Bank
Sri Lanka on Fast Track to Cut Flood Risk, Modernize Capital Sri Lanka has begun a fast track execution of a USD 220 mn World Bank funded plan to cut floods, boost drainage as well as create waterfront entertainment areas in a bid to modernize the capital Colombo.
The Colombo metropolitan region produces almost 60 % of gross domestic product and 80 % of industrial output, Rosanna Nitti, senior urban specialist at Sri Lanka's World Bank office stated. "Sri Lanka needs to tap the competitive advantages of the Colombo metropolitan region to spearhead and accelerate growth."
The project which officially kicked off on July 2012 ties in with Sri Lanka governments other plans to modernize the city including the outer circular project funded by other donors. Colombo was severely flooded in 2010 with activities in most areas coming to a standstill but even short spurts of intense rainfall can flood roadways as the cities ageing storm water drains overflow.
External Sector Performance, December 2012
CategoryJan. – Dec.
2011US$ mn
Jan. – Dec. 2012
US$ mn
Change (%)
Exports 10,558.8 9,773.5 -7.4
Agricultural Products 2,527.8 2,331.5 -7.8
Tea 1,490.9 1,411.9 -5.3
Industrial Products 7,991.7 7,371.2 -7.8
Textiles and garments 4,191.2 3,991.1 -4.8
Mineral Products 32.9 61.3 86.4
Imports 20,268.8 19,086.5 -5.8
Consumer Goods 3,653.6 2,995.2 -18.0
Intermediate Goods 12,275.3 11,571.5 -5.7
Fuel 4,794.9 5,038.5 5.1
Textiles and textile articles 2,320.7 2,266.4 -2.3
Investment Goods 4,286.1 4,492.2 4.8
Balance of Trade -9,710.0 -9,313.0 -4.1
Source: CBSL
Inflation, January 2013
Period CCPI (%) CCPI Core* (%)
Y-o-Y A.A. Y-o-Y A.A.
Dec 12 9.2 7.6 7.6 5.8
Jan 13 9.8 8.1 7.3 6.1
According to CBSL, Inflation is projected to moderate from March 2013 and reach mid-single digit levels thereafter.
This was mainly due to price increases in several varieties of food items on account of crop damages and supply disruptions due to adverse weather conditions that prevailed in the island. (CBSL)
Source: CBSL
Tokyo has reclaimed its place as the world's most expensive city, according to the latest cost of living index from the Economist Intelligence Unit. The Japanese city has ranked first 14 times in the last 20 years; only Zurich (which was first last year thanks to its strong currency), Paris and Oslo have also placed first in this period.
The index is a weighted average of the prices of 160 products and services, with New York's figure set to 100 to provide a base for comparisons.
Worldwide Cost of Living
Source: Economist Intelligence Unit , The Economist
SNIPPETS—SNIPPETS—SNIPPETS—SNIPPETS—SNIPPETS—SNIPPETSUSD 290mn Soft Loan from KoreaSri Lanka is to get up to USD 290 mn from Korea for renewable energy and infrastructure under a framework agreement , the Korean embassy stated.
Under the arrangement, the two Governments are expected to work closely to develop a range of projects including construction of administrative complexes, renewable energy plants and infrastructure development.
SL to Develop Trincomalee Port City with ADB FinanceThe Asian Development Bank (ADB) has agreed to extend USD 85 mn to provide a new look for Trincomalee via an Integrated Urban Development Project.The overall objective of the project is to improve planning and for the delivery of priority infrastructure and local services in the Trincomalee Urban Development area.
Canal DevelopmentSri Lanka will also rehabilitate a colonial era canal north of the capital Colombo for tourism promotion and to improve the livelihoods of people living in the area. A 14 kilometer stretch of Hamilton Canal running from Negombo to the Kelani River estuary will be rehabilitated under the project.
BOI Appoints New Chairman
Sri Lanka's Board of Investment appointed Dr. Lakshman Jayaweera, a Sydney based chemical engineer and entrepreneur, as its chairman and director general.
Capital Investment, Links to Global Economy Key: IFC CEO
Sri Lanka needs to promote capital availability to encourage investment and find ways to link with the global economy to achieve sustainable growth, stated the IFC Executive Vice President and CEO Jin-Yong Cai. Private sector is challenged by lack of long term finance and infrastructure constraints. He especially highlighted the need to concentrate on SMEs.
“One major constraint in our view is the infrastructure, particularly if you want to grow the economy at eight per cent on consecutive years. We need power, transportation, water and waste treatment. These are critical for what I term ‘support infrastructure’. We still have room to go and IFC would like to be involved in that process.”
US Trade Mission in Sri Lanka
A multi-sector US Trade Mission – the first since the end of the conflict visited Sri Lanka to explore business and investment opportunities.
The Trade Mission includes companies in the education sector, design consulting services and engineering, food industries, healthcare, airline support, and infrastructure development.
Cont…
SNIPPETS—SNIPPETS—SNIPPETS—SNIPPETS—SNIPPETS—SNIPPETS
U.S. Government Slams S&P with USD 5 bn Fraud Lawsuit
The US government is seeking USD 5 bn in its civil lawsuit against Standard & Poor's, accusing the ratings service of defrauding investors, in one of the most ambitious cases yet from the Justice Department over conduct tied to the financial crisis.The United States stated S&P inflated ratings and understated risks associated with mortgage securities, driven by a desire to gain more business from the investment banks that issued those securities. S&P committed fraud by falsely claiming its ratings were objective, the lawsuit stated.The Justice Department and multiple states are also discussing suing Moody's Corp for defrauding investors, according to people familiar with the matter, but any such move will likely wait until a similar lawsuit against rival Standard and Poor's is tested in the courts.
LOLC Micro Credit Secures Largest Microfinance Syndicated Loan of USD 55.5 mnLOLC Micro Credit Ltd. (LOMC) secured a syndicated loan of USD 55.5 mn facilitated by a reputed consortium of Development Financial Institutions (DFIs) from around the world.
Analysis & Forecast
Indicator Unit 2012 (Est)
Projections2013 2014 2015
Real Sector Real GDP Growth % 6.5 7.5 8.0 8.3
GDP Deflator % 8.5 7.0 6.0 5.0
Total Investment % of GDP 30.3 31.0 32.0 32.5External Sector Trade Balance % of GDP -15.1 -14.4 -13.3 -12.7
Current Account Bal % of GDP -5.5 -4.7 -3.3 -2.0
Overall Balance USDmn 100 510 795 1,925Fiscal Sector
Current Account Bal % of GDP -0.8 -0.1 0.8 1.4
Overall Budget Deficit % of GDP -6.2 -5.8 -5.2 -4.7
Government Debt % of GDP 81 78 75 71Monetary Sector Broad Money Growth (M2B) % 16.2 15.0 15.0 14.0
The projections for 2013 are based on the following assumptions Global economy expected to grow by around 3.3%. Commodity prices expected to remain reasonably stable. Advanced economies expected to maintain accommodative policies. Domestic weather conditions expected to be favourable.
Source: Central Bank of Sri Lanka – Road Map 2013
Analysis & Forecast Sri Lanka: Medium Term Macroeconomic Framework
The problem of twin deficits (budget and trade/current account) and implementing structural reforms that will help to strengthen the framework to address those problems.
The budget deficit has been the main source of instability in the system over the last thirty five years. As a result, Sri Lanka has been a high inflation, high nominal interest rate and over-valued currency economy.
Chronic imbalances require more and more external borrowing… The current account of the budget has been in deficit every single year since 1988 i.e.
the government has borrowed to meet recurrent expenditure every year for close to 25 years.
This "living beyond one's means" for so long has been possible because of the grants and very concessional loans (around 5% of GDP) received as budgetary financing.
With graduation to lower-middle-income country status, a new paradigm has come into play. Addressing the challenges posed by this has been postponed by first sovereign borrowing in international capital markets and now foreign borrowing by banks and corporate.
However, it cannot be done for much longer and the authorities will have to get to grips with the fiscal deficit at some point soon. Source: World Bank
Dual deficits pose challenges in several developing countries
Analysis & Forecast Economic Challenges Faced by Sri Lanka
Cont
The difficult policy challenge for a developing country facing external shocks is:How to maintain macroeconomic stability,
without cutting investments in physical (infrastructure) and human capital (education) that are essential for long term growth and,
without imposing the burden of adjustment on the poor
Exchange Rate Stability: The Fatal Illusion When the pressure on the current account of the balance of
payments and exchange rate arise from deep rooted structural imbalances, attempting to stabilize the nominal exchange rate is a sure path to a crisis:
The commitment – implicitly or explicitly - to any kind of nominal exchange rate target is particularly dangerous in the context of a liberal capital account as the private sector is likely to under-hedge the exchange rate risk involved in foreign currency borrowings. This increases the chances of a serious banking crises.
Chronic current account deficits, if financed by foreign debt - whether private or government - can only end up in sustained downward pressure on the exchange rate although there will be ups and downs along that downward path.
Over time, these restrictions induce resources (labour, land, capital) away from other productive sectors, including exports, increasing their costs, so that the initial reduction in imports is matched by a reduction in exports, so that there is no net effect on the current account.
Analysis & Forecast Economic Challenges Faced by Sri Lanka (cont…)
International experience shows that access to foreign funds dries up quickest for countries with chronic current account and fiscal deficits and high dependence on short term commercial borrowings.
This does not mean the answer is in going back to the failed policies of the past, putting up shutters through trade restrictions and other barriers, and de-linking the domestic economy from the global economy.
Cont
This is the international experience of numerous countries over many decades: import restrictions end up being a tax on exports. They are not a long term answer – only a fetter on long term growth.
Analysis & Forecast Economic Challenges Faced by Sri Lanka (cont…)
Structural measures related to SOE reform. Addressing low productivity, particularly in agriculture and the public service; factor and product market reforms; improving the investment climate,
particularly through consistent, predictable and transparent policies; strengthening education, training and skills development; R&D; innovation etc that are well known.
Source: Prof. Sisira Jayasuriya & Dr. Indrajit Coomaraswamy
Analysis & Forecast International
Analysis & Forecast International
The World Economy is Improving. But not as much as some Investors seem to think…
There are three reasons to feel more hopeful about the world economy. First, several disasters have been avoided.
Europe’s politicians have shown themselves determined to save the single currency. America’s politicians avoided falling off the “fiscal cliff”. And now that Republicans in the House of Representatives have offered to extend the debt ceiling for three months, there is hope that America’s fiscal battles will be waged by negotiation rather than blackmail. All this has boosted financial markets—and should encourage firms and consumers to invest and spend more.
A second reason for cheer comes from central banks’ activism. In September the European Central Bank promised unlimited bond-buying to keep the euro together. Then the Federal Reserve
pledged to hold interest rates down until America’s unemployment rate falls below 6.5%, along with open-ended monthly bond purchases. The Bank of Japan, under pressure from a new government, appeared to join the club of the bold. It doubled its inflation target, to 2%, promising to buy assets on an open-ended basis from 2014. With central banks pledging to buy more bonds for longer, which keeps their yields low, it is no surprise that investors are piling into riskier assets. Indeed, that’s partly the point: higher share prices make investors more likely to boost consumption.
Evidence that growth may be accelerating, at least in some places, provides the third reason for optimism. Much of the good news stems from China, where GDP growth jumped in the last three months of 2012, to 7.9% from 7.4% in the
previous quarter. The latest figures, from retail sales (up 15.2% year-on-year in December) to industrial production (up 10.3%), have all been better than expected. The ebullient also point to America, where the housing-market recovery is gathering strength.
Analysis & Forecast InternationalThe World Economy is Improving. But not as much as some Investors seem to think… (cont…)Curb your enthusiasm…
These are all good reasons for feeling better about the world economy’s prospects. But they need to be put into context.
Politicians may have avoided catastrophes, but their policies are still flawed.
America’s cliff-avoiding tax deal, for instance, implies an immediate fiscal squeeze of 1-1.5% of GDP without any resolution of the country’s long-term deficit. That tightening—much of which comes from a rise in payroll taxes on all workers—hasn’t yet shown up in the data. But it soon may, and in an economy that has been growing at only 2% a year, the hit will be noticeable, perhaps more powerful than the boost from a healthier housing market.
The prospect of central bank activism is not all it is cracked up to be. The fine print of the Bank of Japan’s promises was much less bold than the headlines. The European Central Bank’s pledge to hold the single currency together does not extend to a willingness to loosen monetary policy further. And even at the Fed, worries about the unintended costs of unlimited bond-buying may grow.
The biggest reason for caution, though, lies in the gap between financial-market optimism and economic reality.
That gap is widest in Europe. The single currency may not be about to fracture, but its economies are still in deep trouble: the IMF expects the euro-zone economy to shrink by 0.2% this year. Those on the periphery are stuck in recessions. Even those in the core are looking weaker. With more fiscal austerity ahead and credit tight, it is hard to see how Europe returns to growth. The reforms needed to make the euro work are far from complete. America looks set to administer itself another dose of short-term austerity without addressing its long-term fiscal problems. Japan’s economy needs deep changes. The latest bout of optimism in the markets is welcome, but governments should not let it infect them with a dangerous complacency. Source: The Economist
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.
Research & Development Unit
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