economic capsule - july 2014

Economic CapsuleJuly 2014

Research & Development Unit

ECONOMIC & BUSINESS NEWS

Commercial Bank Rated Most Respected Bank in Sri Lanka for 10th Consecutive Year

Double Honours for Commercial Bank at Asia’s Best CSR Practices Awards

Central Bank Enters into an Investment Agreement with Reserve Bank of India

Financial Sector Consolidation Update

FINANCIAL SECTOR NEWS

Sell Singapore, Buy Sri Lanka

Public Debt in Sri Lanka

IMF Views on Sri Lanka

ANALYSIS & FORECAST The 3 T's of Opportunity for Sri Lanka

SRI LANKA: 2020

C O N T E N T S

BANKING NEWS

< Research & Development Unit >

Commercial Bank Rated Most Respected Bank in Sri Lanka for 10th Consecutive Year

The Commercial Bank of Ceylon has been rated as the most respected bank in Sri Lanka for the 10th consecutive year and the second ‘Most Respected’ corporate entity in the country for the fourth consecutive year in the annual LMD rankings.

Additionally, the Bank was ranked No 1 in Sri Lanka for ‘Honesty’ for the second successive year, topping the category that is most important to businesses in the financial services sector.

Commercial Bank is the only bank among the Top 5 Most Respected entities in Sri Lanka, and is ranked among the Top 3 in several other key aspects such as Financial Performance, Quality Consciousness, Management Profile, CSR and Vision. The Bank has been the Most Respected bank in the list since its inception in 2005.

The 2014 and tenth edition of this prestigious list of Sri Lanka’s most respected companies includes the most diversified conglomerates in the country and some of the world’s best-known multinationals.


Double Honours for Commercial Bank at Asia’s Best CSR Practices Awards

The Bank received the award for ‘Support and Improvement in quality of Education’ and a Merit Certificate for ‘Concern for Health’ at the 4th Asia’s Best CSR Practices Awards at Pan Pacific, Singapore, attended by a prestigious gathering of business leaders, Chief Marketing Officers and Human Resource professionals.

Preceded by the World Brand Congress at the same location, the Best CSR Practices Awards are Asia’s highest recognition of corporate organisations that have a significant and positive impact on the lives of people around them.

The Commercial Bank of Ceylon has won double honours for its commitment to the community from the Chief Marketing Officer (CMO) Asia Council, which has presented Sri Lanka’s largest private bank with two prestigious international awards.


Central Bank Enters into an Investment Agreement with Reserve Bank of India

The Central Bank of Sri Lanka and the Reserve Bank of India entered into a Bilateral Agreement on the 24th July 2014 which enables CBSL to further diversify its reserves management activities into Indian rupee denominated assets, while reciprocally, RBI is able to access the Sri Lankan government securities market, up to a maximum value equivalent of USD 500mn, each way.

As a result, the CBSL could now access one of the growing securities markets in the world, realising a considerably higher return for the funds invested.


Financial Sector Consolidation Update

57 NBFIs and 12 banks have submitted plans for mergers/acquisitions and infusion of capital. The CBSL has approved 19 consolidation proposals, in-principle, and the respective

companies were proceeding with the merger/acquisition processes. 19 NBFIs completed the internal processes in order to submit their proposals for the approval

of the Central Bank

On-going consolidation activities

Mergers of DFCC Bank, DFCC Vardhana Bank PLC and the National Development Bank PLC, as well as Merchant Bank of Sri Lanka PLC, MBSL Savings Bank Ltd., and MCSL Financial Services Ltd., continued to progress during the month.

The work relating to the acquisitions of Lisvin Investments Ltd. by Assetline Leasing Company Ltd., and Asian Finance Ltd. by TKS Finance Ltd. also progressed.

Cont…


Financial Sector Consolidation Update (cont…)

Announcements of new transactions

Certain banks and NBFIs made public announcements of agreed consolidation arrangements. These included the Commercial Bank of Ceylon PLC with Indra Finance Ltd.,

and Deshodaya Development Finance Company Ltd. with George Steuart Finance PLC.

Source: CBSL

Economic & Business News


Sell Singapore, Buy Sri Lanka

“Step forward to today and it is Singapore that has the foreign exchange reserves, amazing infrastructure, world renowned education and it is Sri Lanka that is recovering from a period of war. However, as any sensible investor knows, in deploying capital, it is not the past that is important, but the future. As Singapore reaches the ripe old age of 50 next year, it seems likely to be Sri Lanka’s turn to produce the economic growth over the next 50 years that Singapore has produced since independence in 1965Singapore’s reputation for its rule of law and fairness will not be matched by Sri Lanka for many years to come. Many will also be concerned by continuing investigations into the approach taken by the Sri Lankan Government in ending the civil war and by allegations of corruption within the country. However, the question has to be posed. If the past 50 years belonged to Singapore will the next 50 years belong to Sri Lanka? At least today, it seems likely that at least for the next few years, the growth opportunities are more likely to lie in the Indian Ocean than in the South China Sea”

(About the writer: After over 24 years living and working in Asia, I have structured and closed complex transactions across the region and have extensive experience of the volatility of valuation and liquidity that dominates emerging market investment. Following formal investment banking activities with the likes of HSBC, Paine Webber and Citibank, I shifted to more entrepreneurial activities with direct experience in industries from energy to digital media. My focus is to identify key macro trends, overlay the timing at which time liquidity will arrive or depart and then identify the best way of executing this trend.) Cont…

By Fraser Dinnis


Sell Singapore, Buy Sri Lanka (cont…) Sri Lanka occupies a strategic location adjacent to the main East-West sea lane. Literally every oil tanker and container

vessel travelling from Europe and the Middle East to East Asia (and back) has to pass within a few kilometres south of Sri Lanka. The country is planning to take advantage of this strategic location by expanding its Southern Port at Hambantota and at the capital city of Colombo.

The country has built new expressways linking Colombo with the key tourist destinations of the South and on to Hambantota as well as with the international airport. Further expressways are planned linking Colombo with the north and east.

Power generation has been expanded with the building of two coal powered stations (900 MW in total) and a 150MW hydro project.

Over 450 acres of land is being reclaimed from the sea adjacent to downtown Colombo to created ‘Colombo Port City’ in a $15 billion project.

The enormous tourism potential of the country is being supported by new hotels . Amongst international brands opening in Sri Lanka Shangri-La Hotels are building two hotels totalling 800 rooms, Hyatt is opening a 550 room hotel, Marriott is building a 200 room hotel and Crown Casino will open a 450 room integrated resort (another 800 room casino linked resort being built by John Keels). However, this is only a small portion of the expansion of Sri Lanka’s tourism sector which counts local and regional brands as well as a wealth of boutique and villa hotels. Tourist numbers are increasing by over 20% per annum and the national airline has recently joined the One World Alliance. The international airport at Colombo is being upgraded and a new international gateway in the South of the island was recently opened. Cont…


Sell Singapore, Buy Sri Lanka (cont…)

Sri Lanka is the world’s second largest tea exporter and the fourth largest producer of tea . However, a lack of branding has left profits lying in international hands. Moreover, its variety of climates from the tropical coasts to the cooler highlands permits many other agricultural products to be grown.

Sri Lanka enjoys a wealth of natural resources. Minerals include mineral sands deposits of the North and some of the best large flake graphite so critical for the new super nano-material known as graphene to a multitude of gems, most notably sapphires which are reputed to have the best colour and clarity of any found in the world. A Sri Lanka Sapphire was featured in Kate Middleton engagement ring that was previously owned by Princess Diana.

Sri Lanka has identified offshore resources of oil and gas which is now attracting interest from exploration and production companies.

Whilst the low paying garment and textile industries remain strong in Sri Lanka, the higher value software and business processing industries are expanding strongly with export revenues in this area up from $213 million in 2007 to $600 million in 2013 and having a target of $2 billion by 2030.

Whilst the potential of the country is clearly high, it may come as a surprise that so much has been achieved in such a short period of time since the end of the civil war. The answer is the China factor! Whilst Chinese investment may be one of the factors now hurting Singapore, it has certainly propelled Sri Lanka and looks destined to continue to support the island’s expansion.


Public Debt in Sri Lanka

Indicator End 2005

End 2009

End 2013

End June 2014

Public Debt/ GDP (%) 90.6 86.2 78.3 74.3

Domestic Debt (%) 51.6 49.8 44.2 41.4

Foreign Debt (%) 39.0 36.4 34.1 32.9

Average Time to Maturity (ATM) of Public Debt (Years)

ATM of Domestic Debt 1.9 2.3 4.8 6.0

ATM of Foreign Debt n.a. 9.3 9.8 10.4

According to the Central Bank governor, overall debt levels are likely to improve further after data showed Sri Lanka managed to hit the debt-to-GDP goal months ahead of the year-end target. Central Bank data showed the ratio of debt to gross domestic product had fallen to 74.3 %, by end June, 2014, which was the year-end target set by the bank. The indicator stood at 78.3 % at the end of 2013.

The average maturity of domestic debt extended to six years in mid-June from last year's 4.8 years. Foreign debt maturity increased to 10.4 years from 9.8 years in the same period.

Source: CBSL


Public Debt in Sri Lanka (cont…)

The concerns were also echoed by the International Monetary Fund, which stated medium-term sustainability of growth depended on Sri Lanka's "judicious use of foreign borrowing ". These loans are not counted in the overall debt figure.

However, according to the governor, the offshore commercial borrowings by banks is very small as a proportion of the official debt load.

Since the end of a civil war in May 2009, Sri Lanka has increasingly sought funding from expensive commercial loans instead of bilateral channels to pay for massive infrastructure projects.

The governor stated the decision to go for commercial loans was due to conditions attached to bilateral loans and lower availability of concessionary loans as the country progresses to middle-income-nation status.

According to analysts, the government has also been borrowing through state banks and those loans, mainly for state spending, are not reflected in the latest numbers.

In the 17 months to September 2013, state banks have borrowed USD 1.85 bn from international markets at commercial rates. The IMF last week urged caution on such borrowing.

In absolute terms, Sri Lanka's total debt stood at 7.18 trillion rupees (USD 55.2 bn) at the end of March this year, compared with 6.79 trillion rupees by the end of 2013.

Foreign debt accounted for 44.1 % of the total, as of the end of March this year.


IMF Views on Sri Lanka

Sri Lanka’s short-term outlook appears broadly positive, as Sri Lanka is well positioned to benefit from the global economic recovery and particularly stronger growth in advanced economies. Real GDP growth is expected to remain robust at about 7 % in 2014, while inflation is likely to remain in the mid-single digits.

The government has targeted a further reduction of the fiscal deficit to 5.2 % of GDP, which should allow for even more reduction of public debt. With a continued robust export performance, the current account deficit is expected to narrow further and allow for some additional accumulation of international reserves.

Near-term risks appear moderate given the ongoing recovery of advanced economies and a relatively benign outlook for international commodity prices. Adverse climatic events (such as the recent drought) remain a chronic source of vulnerability.

Medium-term risks center on the potential for slower-than-projected growth in the advanced economies, tighter external liquidity conditions and chronic turbulence in international capital markets (negatively affecting rollovers and borrowing costs), and continued weakness in government revenues, which could threaten fiscal and debt consolidation objectives. Cont…


IMF Views on Sri Lanka (cont…) Economic Performance: Sri Lanka’s recent economic performance has been better than expected—particularly given some headwinds from chronic

market turbulence and climatic shocks. While there remain weak spots in economic activity (such as agriculture, which has been negatively affected by recent drought), strong activity in traditional sectors such as garment manufacture, and new sectors such as tourism and services bode well for the near and medium-term outlook. This is complemented by a sustained reduction in headline and core inflation—bringing a new and welcome level of stability which has hopefully fed into a new set of public expectations regarding inflation.

Fiscal Performance: the IMF mission saw the fiscal stance for 2014 as appropriate, but raised concern about the composition of further consolidation. Capacity in expenditure and commitment control has increased, enhancing the government’s ability to curtail spending to meet fiscal objectives. However, given sizeable investment needs, the staff was of the view that spending cuts may have reached their effective limit, and that the burden of adjustment needed to fall more squarely on increasing revenue. Particularly if Sri Lanka is to maintain current growth momentum and foster economic development and diversification, high and sustained levels of public spending on infrastructure and human capital will be essential.

Monetary Policy: The current, supportive stance of monetary policy is appropriate given the decline in inflation and weak private credit growth. However, the overall picture is complex and requires close monitoring. On the one hand, with economic activity apparently on the rise and private credit (outside of pawning activity) beginning to show signs of recovery, the authorities should be ready to adjust rates as needed to ensure price stability—particularly given the long lags involved in monetary transmission. On the other hand, the current low inflation environment and the apparent change in inflation expectations offers an opportunity for a downward shift in the interest rate structure that might benefit the investment environment (and borrowing costs) over the medium term. Given the mix of signals, a cautious approach is warranted and the staff believes policy rates should remain on hold for the near term.

Cont…


IMF Views on Sri Lanka (cont…)

Exchange Rate: Exchange rate policy remains broadly appropriate, but should be monitored in light of developments in the balance of payments and inflation, and the commitment to flexibility maintained.

Financial sector Consolidation: Financial sector consolidation has potential benefits in the form of economies of scale, new products and services, and a greater resilience (via a stronger capital base) to shocks. The benefits of consolidation would likely be more rapid if fewer restrictions were placed on restructuring operations. Continued progress on corporate governance is also key. Close supervision during and after the consolidation process could also help avoid some of the pitfalls encountered by other countries in episodes of financial sector restructuring, such as excessive credit growth. Consolidation may also result in increased concentration and hinder effective competition if larger and state-owned banks continue to grow and dominate the banking sector

Analysis & Forecast


The 3 T's of Opportunity for Sri LankaBy The Boston Consulting GroupSri Lanka Economic Summit 2014

Textile

Total global textile trade (2013) = $ 545 Bn

Sri Lanka exports (2013)= $ 4.7 Bn

Market share = ~1% (Rank #21)

With textile exports growing at 8%, growing share in the next 5 years to 1.5% is worth additional ~ $ 5Bn

Tea

Total global tea trade (2013) = $ 6.2 Bn

Sri Lanka exports (2013) = $ 0.75 Bn Market share = ~12% (Rank #4)

Doubling share in the next 5 years and growing tea exports at 10%+ is worth an additional ~ $ 2 Bn

Tourism

Tourists inflow to Sri Lanka (2013)= 1.3 Mn

Tourists from: India = 209k; China = 54k

Tourist outflows from China +India = ~120Mn

SL share today = ~1.0% (India) & 0.06% (China)

With tourists outflow growing at 10%, increasing share to 1% by 2020 is worth an ad ditional ~$ 2Bn Cont…


Other Opportunities for Sri LankaBy The Boston Consulting GroupSri Lanka Economic Summit 2014

BPO

Total market (2013) = ~ $ 144 Bn

Large value for countries India (2013) – 1.1 Mn people - $ 20 Bn Philippines (2013) – 0.7 Mn people – $ 13 Bn

Sri Lanka has favorable demographics English speaking 90% literacy

0.25Mn people will create an opportunity of ~ $ 5 Bn

Medical Tourism

Total market = 100 Bn (2012) growing @ ~25%

Large value for countries India (2013) 1.5 Mn tourists, $ 3 Bn business Thailand – 2.5 Mn tourists, $ 4.5 Bn business

Can Sri Lanka create a brand for medical tourism?

1 Mn medical tourists will create an opportunity of $2 Bn


SRI LANKA: 2020

Sri Lanka’s per capita income would surpass US$ 4,000 by 2015 while the GDP would reach US$ 100 bn in 2016…

Presented by Ajith Nivard Cabraal Governor Central Bank of Sri LankaSri Lanka Economic Summit 2014


SRI LANKA: 2020 (cont...)

2013 GDP

IndustryMining and QuarryingApparelOther ManufacturingElectricity, Gas and WaterOil and Gas ExplorationMarine and Aquatic ResourcesTechnology and InnovationConstruction

AgricultureAgriculture, Livestock, Forestry & Fishing

IndustryMining and Quarrying, Manufacturing, Electricity, Gas and Water, Construction

ServicesWholesale and Retail Trade, Hotels and Restaurants, Transport & Communication, Banking, Insurance &Real Estate, Ownership of Dwellings, Government Services, Private Services

2020 GDPAgricultureAgricultureFishingForestryLivestock

ServicesWholesale and Retail TradeHotels and RestaurantsTransportBankingCommunication and ITInsuranceReal EstateHealthcareEntertainmentEducation ServicesOwnership of DwellingsGovernment ServicesPrivate Services

Sri Lanka: 2020 macroeconomic framework would reflect several new drivers in the GDP computation tables…



Sri Lanka: 2020 would have a greater bias towards export of services…

Tourism services

IT/BPO services

Aviation services

Maritime services

Knowledge economy services

Macro-economic fundamentals and trends…



The Economic Diversification Programme would need tocontinue, based on the ‘5 Hubs ++’ concept



The financial sector would need to be developed and sustained in order to become deeper and more liquid…

Full Presentation: SRI LANKA: 2020 Towards Surpassing the $7,000 Per Capita... Presented by Ajith Nivard Cabraal Governor, Central Bank of Sri LankaSri Lanka Economic Summit 2014

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.

As Socrates puts it “the unexamined life is not worth living”. The more we examine our lives and re-align ourselves, the more we are likely to become more effective leaders.Dr. Shantha Yahanpath - Director, Agape International and Senior Adviser, FPC Funds Management, Sydney, Australia

economic capsule - july 2014

Economy & Finance