economic capsule - july 2015

Economic CapsuleJuly 2015

Research & Development Unit

223 rd Issue

C O N T E N T S

BANKING SECTOR NEWS

Commercial Bank is Euromoney’s Best Bank in Sri Lanka in 2015

Commercial Bank in World’s Top 1000 Banks for 5th Successive Year

Commercial Bank Bangladesh Receives Highest Rating of AAA for 5th Consecutive Year

Commercial Bank Launches New Paperless Green Banking Facility

ECONOMIC & BUSINESS NEWS Inflation

External Sector Performance – May 2015

Vehicle Registrations Explodes!!

Government Borrowings

INTERNATIONAL NEWS

ADB Trims Growth Forecasts for Asia on Slower US, PRC Economies

IMF Paints Dim Picture for Europe, Suggests more Money Printing may be Needed

ANALYSIS & FORECAST

Moody's: Sri Lanka's credit profile supported by robust growth, constrained by weak government finances

Condominium Industry in Sri Lanka

October, 2014


Banking News

Commercial Bank is Euromoney’s Best Bank in Sri Lanka in 2015

4< Research & Development Unit >

Euromoney, widely considered one of the world’s leading financial magazines, has adjudged Commercial Bank of Ceylon PLC the Best Bank in Sri Lanka in 2015 at the magazine’s Asia Awards for Excellence presented recently in Hong Kong.

The prestigious Euromoney accolade is based on detailed submissions from market participants and extensive year-round research into the banking and capital markets in the region by the magazine’s editors, journalists and research team.

Commercial Bank in World’s Top 1000 Banks for 5th Successive Year


Commercial Bank has once again been ranked among the Top 1000 Banks of the World, in the prestigious rankings published annually by ‘The Banker’ magazine of the UK, becoming the only Sri Lankan bank to achieve this feat five years in a row.

The ranking is based on the Bank’s key performance indicators for FY 2014. Commercial Bank has moved up 39 places in the 2015 rankings.

The Top 1000 Banks of the World are ranked on the basis of Tier I capital, assets, capital assets ratio, pre-tax profits, return on capital, return on assets, BIS (Basel) Capital ratio, NPL to total loans, loans to assets ratio, risk weighted assets (RWA) to total assets (TA) ratio and cost income ratio.

Commercial Bank Bangladesh Receives Highest Rating of AAA for 5th Consecutive Year


The AAA (Triple A) long-term credit rating accorded to the Bangladesh operations of Commercial Bank PLC has been reaffirmed by Credit Rating Information and Services Ltd (CRISL) for the fifth consecutive year.

Triple A is the highest credit rating given to any financial institution in Bangladesh by CRISL.

The rating is based on the financial performance of Commercial Bank up to December 31, 2014 and other qualitative and quantitative information relevant to the rating.

Commercial Bank’s Bangladesh operations, now comprised of 18 service points and 19 ATMs, were upgraded from AA +(Double A Plus) to AAA in July 2011. This rating has remained unchanged since. Commercial Bank is the third largest foreign bank in Bangladesh.

Commercial Bank Launches New Paperless Green Banking Facility


Commercial Bank commissioned the first of a new generation of automated cash deposit terminals that completely eliminate the use of paper, in another example of the Bank’s continuing investment in Green technology and sustainable development.

Dispensing with deposit slips and envelopes, the new machine installed at the Bank’s Rajagiriya branch has a stacker that can accept and count up to 200 notes at a go, enabling customers to make deposits of up to Rs 200,000 at a time into savings or current accounts, 24 hours of the day.

The same machine may also be used to pay dues on Commercial Bank credit cards.


October, 2014


Economic & Business News

Inflation

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Headline Core

May 2015 June 2015 May 2015 June 2015

Year on Year 0.2% 0.1% 2.6% 2.8%

Annual Average 1.9% 1.7% 2.9% 2.8%

Inflation pressure is expected to remain low through 2015.

With no space left on the fiscal front to support growth, the Government may support domestic demand through lower interest rates.

Source: CBSL

External Sector Performance – May 2015


May 14USD Mn

May 15USD Mn

Growth %

Jan-May 14USD Mn

Jan-May 15USD Mn

Growth %

Total exports 883.5 882.5 -0.1 4,464.2 4,471.4 0.2

Textiles and garments 365.1 392.9 7.6 1,966.7 1,981.0 0.7

Tea 140.6 123.6 -12.1 644.4 561.0 -13.0

Total imports 1,353.2 1,585.5 17.2 7,545.6 7,868.0 4.3

Vehicles 49.7 93.0 87.1 246.4 477.9 93.9

Fuel 286.6 264.3 -7.8 2,048.3 1,186.0 -42.1

Textiles and textile articles 176.4 205.2 16.3 884.4 974.1 10.1

Trade Balance -469.7 -702.9 -49.7 -3,081.50 -3,396.60 -10.2

• Sri Lanka's imports in May 2015 rose 17.2 % from a year earlier - an increase led by vehicle imports, amid growing state and private credit in 2015, while exports were flat.• The deficit in the trade account in May 2015 widened substantially by 49.7 % to USD 703 mn in

comparison to USD 470 mn in May 2014. On a cumulative basis, trade deficit during the first five months of 2015 increased by 10.2 % to USD 3,397 mn.

Tea exports, which were severely affected by the lower demand from Russia and the Middle East, declined for the eighth consecutive month in May 2015

Imports of motor vehicles for personal use, increased by 87.1 %, year-on-year.

Source: CBSL

Vehicle Registrations Explode!!

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Vehicle ownership driven by credit

Finance share January to June 2015

• Vehicle registration momentum was extremely strong in June & car registrations hit an all-time record.

• Car registrations hit an all-time record numbering 7,641 units in June (2,256 units 12-months ago)

• Brand new car registrations hit an all-time record accounting for 4,358 units in June (689 units 12-months ago)

• Maruti accounted for 3,470 units of which Altos accounted for 3,148 units up from 2,334 units a month ago.

Source: JB Securities

Government Borrowings

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2014 Jan-May 2015 (Rs. Bn)

Gross Borrowing 1,424.5 626.4

Domestic 1,002.0 567.1

Foreign 422.5 59.3

By way of Treasury Bills, Treasury Bonds, Sri Lanka Development Bonds, Central Bank advances and foreign loans.

Source: Ministry of Finance & Planning – Annual Report 2014, Pre-election Budgetary Position Report July 2015

Government Debt and Debt Service Indicators (Percentage)

Source: Ministry of Finance & Planning – Annual Report 2014


October, 2014


Analysis & Forecast


According to Moody's Investors Service, Sri Lanka's B1 government bond rating is supported by its record of strong growth, but constrained by high government debt ratios.

Moody's: Sri Lanka's credit profile supported by robust growth, constrained by weak government finances

Growth: Since the end of its 27 year long civil war in 2009, Sri Lanka's economy has reaped a peace dividend in the form of GDP growth averaging around 7.5% annually and strong inflows of both foreign direct and portfolio investment.

Credit Profile: However, Sri Lanka's sovereign credit profile faces challenges posed by Sri Lanka's government debt ratios, which, even though they have declined over the last decade, remain higher than the median for similarly rated peers. Cont..


Moody's: Sri Lanka's credit profile supported by robust growth, constrained by weak government finances (cont..)

Consequently, interest payments consume almost a third of government revenues, and limit the fiscal flexibility to increase spending on infrastructure or to introduce fiscal measures to offset a slowdown in growth.

Moreover, as a relatively small economy with a current account deficit, Sri Lanka is exposed to uncertain global growth and financial conditions in coming months, although the risks of this exposure are somewhat mitigated by the balance of payments benefits of lower oil prices.

Lower oil prices have also helped subdue inflation, which was higher and more volatile than peers in past years. Cont..



The rating outlook is stable, incorporating Moody's expectation that the ongoing growth slowdown and political uncertainty around the August parliamentary elections is unlikely to lead to medium term credit deterioration.

The outlook could improve if Sri Lanka's government debt and interest payment ratios were to stabilize at considerably lower than current levels.

On the other hand, a reversal of policy efforts to maintain macro-economic balance, lower fiscal deficits and improve the investment climate would likely lead to downward pressure on the rating outlook.

Cont..



Source: Ministry of Finance & Planning – Annual Report 2014, Pre-election Budgetary Position Report July 2015


October, 2014


International News


The Asian Development Bank (ADB) has cut its 2015 growth forecast for Developing Asia to 6.1% from 6.3%, amidst slower-than-expected economic activity in the United States (US) and the People’s Republic of China (PRC), according to a new report.

Slower growth in the PRC is likely to have a noticeable effect on the rest of Asia given its size and its close links with other countries in the region through regional and global value chains. “While weaker-than-expected external demand, a declining working age population, and rising wages, have contributed to a slower rate of growth in the PRC, reforms aimed at improving labor market flexibility and capital allocation to the most productive firms are needed as they can also help to raise the growth rate.”

Ongoing softness in the major industrialized economies (US, Japan, Euro Area) will see a slowdown in East Asia as a whole

ADB Trims Growth Forecasts for Asia on Slower US, PRC Economies


The International Monetary Fund warned that the euro zone's prospects were modest and that more money printing than planned may be needed.

In its report on the euro zone, the IMF states that the bloc was getting stronger thanks to lower oil prices, a weaker euro and central bank action, but that medium-term prospects were for an average potential growth of just 1 %.

According to the IMF the euro area gross domestic product should accelerate to 1.7 % next year from 1.5 % in 2015, with inflation of 1.1 % from zero.

IMF however warned that "a chronic lack of demand, impaired corporate and bank balance sheets, and weak productivity continue to hold back employment and investment."Potential growth, at an average of only 1 % over the medium term, was well below what is needed to reduce unemployment to acceptable levels in many countries, it said, adding that the euro area was vulnerable.

Reforms were also needed to improve labour markets and productivity. "In the euro area, the important area is structural reforms. This is where the euro area, when compared to OECD countries, for example, is lagging behind.

IMF Paints Dim Picture for Europe, Suggests more Money Printing may be Needed

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 >

- A P J Abdul Kalam

economic capsule - july 2015

Economy & Finance