economic capsule - march 2013

< Research & Development Unit > March 2013

E C O N O M I C C A P S U L E

FINANCIAL SECTOR NEWS Commercial Bank Bags Best Bank Award

for the 15th Time

Commercial Bank Ranked Sri Lanka’s ‘Most Desired’ Employer

Customer Service Points Openings

ECONOMIC & BUSINESS NEWS Sri Lanka’s Economy Grows by 6.4% in 2012

Sri Lanka Faces Growth and External Pressures: Moody’s

External Sector Performance - January 2013

Inflation Eases in March 2013

Credit to Private Sector

Sri Lanka Classified 'Less Indebted' by US-ESCAP: Central Bank

Sri Lanka Tourism Arrivals up 13.4% in January

India Eases Restrictions on Sri Lankan Exports

Top Chinese Trade Delegation Visits Sri Lanka

Cyprus: Financial Crisis

Fitch Upgrades Philippines to Investment Grade

ADB Global Outlook

Sri Lanka: Economic Prospects< Research & Development Unit >

C O N T E N T S

FINANCIAL SECTOR NEWS

< Research & Development Unit >


Commercial Bank has set yet another record, winning the ‘Best Bank in Sri Lanka’ title for the 15th consecutive year, in an annual ranking published by Global Finance magazine for the past 20 years.The magazine’s list of the 22 ‘Best Emerging Markets Banks in Asia,’ selected after an in-depth survey, is to be published in its May 2013 issue.

Commercial Bank Bags Best Bank Award for the 15th Time


Commercial Bank has been ranked number one in a survey of ‘Employers of Choice’ in Sri Lanka, published in the March 2013 issue of LMD magazine. The Bank achieved an Employer Choice Index of 105 in the survey conducted by TNS Lanka.

The objective of the survey was to benchmark corporate entities and organisations as preferred employers in Sri Lanka. In its report on the survey, LMD magazine states that “Commercial Bank wins a seal of approval as the most desired employer in Sri Lanka.”

The magazine listed 42 companies in the ranking, which includes two global banks, multinationals, leading Sri Lankan conglomerates and top apparel manufacturers.


Commercial Bank Ranked Sri Lanka’s ‘Most Desired’ Employer


Customer Service Points Openings

Commercial Bank



ECONOMIC & BUSINESS NEWS


Sri Lanka’s Economy Grew by 6.4% in 2012

Sri Lanka’s economy expanded by 6.4% in 2012, slowing from a record 8.2% growth in 2011.

The economy grew 6.3% in 4Q, 2012 over the corresponding period of the previous year, picking up from a three-year low of 4.8% in 3Q, 2012.

Sector 2011 2012ServicesGrowth % 8.6 4.6Share of GDP % 59.5 58.5IndustryGrowth % 10.3 10.3Share of GDP % 29.3 30.4AgricultureGrowth % 1.4 5.8Share of GDP % 11.2 11.1GDP growth % 8.3 6.4


Sri Lanka Faces Growth and External Pressures: Moody’s

Sri Lanka's economy faces slower growth and elevated external pressure in the year ahead.

Although the government will likely continue to make gradual progress in reducing its deficit, the debt burden will remain high.

The absence of a new funding program is credit negative from the perspectives of external payments and growth.

The government will continue to gradually reduce its budget deficit, but the composition of deficit reduction will be key.

Supplier cash arrears, weak structural revenue reform and contingent liabilities in the SOE sector are concerns.

High inflation and rapid credit growth are risks to macroeconomic stability.Cont…


Sri Lanka Faces Growth and External Pressures: Moody’s (cont…)

Moody's External Vulnerability Indicator (EVI) - which gauges if foreign reserves are adequate to cover short-term external debt and long-term debt maturing over the next year in the event of sudden stop in external credit extension - is expected to remain high at 124% in 2013, from 132% in 2012.

This level is appreciably above the 100% threshold of reserve coverage for external creditors.

This is partly because higher commercial bank issuances, which are classified as banking sector external liabilities have contributed to outstanding short-term debt.

132% in 2012


External Sector Performance - January 2013

Category

Jan 12USD mn

Jan 13USD mn

Growth (%)

January

Exports 888.2 726.7 -18.2 Agricultural Products 181.5 167.0 -7.9 Tea 103.9 101.0 -2.8 Industrial Products 703.0 557.7 -20.7 Textiles and garments 366.6 333.9 -8.9 Rubber products 78.2 62.8 -19.8 Food, beverages and tobacco 20.8 12.4 -40.3 Mineral Products 2.6 1.0 -60.4Imports 1,915.0 1,507.2 -21.3 Consumer Goods 287.7 246.8 -14.2 Intermediate Goods 1,096.5 819.6 -25.3 Fuel 515.1 269.7 -47.6 Textiles and textile articles 203.0 203.2 0.1 Investment Goods 523.3 440.2 -15.9Balance of Trade -1,026.8 -780.4 -24.0Workers’ Remittances 472.8 524.0 10.8Portfolio Investments (Net) 4.1 -10.4 - Earnings from Tourism 88.9 107.2 20.5Inflows to the Government 325.7 801.8 146.2

The trade deficit continued to narrow and recorded a 24 % (yoy) decline in January 2013.

Expenditure on imports declined by 21.3 %, (yoy), to USD 1,507.

Earnings from exports declined by 18.2 % to USD 727 mn in January, as earnings from all major categories of exports declined, on a year-on-year basis. The decline was mainly driven by industrial exports which declined by 20.7 %.

Gross official reserves amounted to USD 6,855 mn and in terms of months of imports, GOR were equivalent to 4.4 months of imports by end January 2013.


Inflation Eases in March 2013

Month

CCPI (%) *CCPI Core (%)

Year on Year (Y-o-

Y)

Annual Avg. (A.A)

Year on Year

(Y-o-Y)

Annual Avg. (A.A)

Feb 9.8 8.6 7.4 6.3

Mar 7.5 8.8 6.8 6.4

*The price movement excluding Fresh Food, Energy, Transport, Rice and Coconut in the CCPI basket.

According to CBSL, headline inflation in March eased considerably from a month earlier largely due to a statistical phenomenon called the *base effect.

The *Base effect relates to inflation in the corresponding period of the previous year, if the inflation rate was too low in the corresponding period of the previous year, even a smaller rise in the Price Index will arithmetically give a high rate of inflation now. On the other hand, if the price index had risen at a high rate in the corresponding period of the previous year and recorded high inflation rate, a similar absolute increase in the Price index now will show a lower inflation rate now.


Credit to Private Sector

Credit to private sector in January on yoy basis had grown by only 15.5%.From 17.6% in December and by under half of 37% rise witnessed a year earlier.

Cumulative credit to private sector as at January 2013, amounted to Rs. 2.368 trillion.Up by Rs. 10 bn from end December 2012 figure of Rs. 2.358 trillion. A year ago the figure was Rs. 2.050 trillion.

Compared to the increase of credit of Rs. 352 bn extended to the private sector by commercial banks in 2012, the Central Bank expects credit to the private sector to increase by around Rs. 435 billion (18.5% yoy) in 2013.

Some pinned the low pace of growth to weaker appetite for borrowing from the private sector in view of the poor economic fortunes whilst others linked it to interest rate still being relatively higher.

Official sources noted that the growth indicates that the relaxation of monetary policy in December 2012 is yet to be reflected in bank lending.


Sri Lanka Classified 'Less Indebted' by US-ESCAP: Central Bank

Sri Lanka has qualified under the “less indebted” category in five out of six external debt indicators in accordance with the parameters defined in the manual on Effective Debt Management of the UN-ESCAP, to assess the external debt vulnerability of a country.

As indicated below, the only indicator in which Sri Lanka is placed in the “moderately indebted” category (>30% and <50%) is “the Disbursed external debt outstanding to Gross national income” category, where Sri Lanka’s indicator value is 37%, which is marginally above the threshold level specified for the ‘Less indebted category’.

Assessment of External Debt Vulnerability of Sri Lanka - 2012(As per the parameters defined in the manual on Effective Debt Management of the UN-ESCAP

Indicator

UN-ESCAP) Definition LevelsSL

2012LessIndebted

ModeratelyIndebted

HighlyIndebted

Disbursed External Debt Outstanding/Gross National Income <30% >30% and <50% >50% 37.0%Disbursed External Debt Outstanding /Exports of Goods and Non-Factor Services <165% >165% and <275% >275% 112.6%Total External Debt Service Payments/Exports of Goods and Non-Factor Services <18% >18% and <30% >30% 10.7%External Interest Payments/Exports of Goods and Non-Facto Services <12% >12% and <20% >20% 3.7%Net Present Value of External Debt/Gross National Income <48% >48% and <80% >80% 40.0%Net Present Value of External Debt/Exports of Goods and Non-Factor Service <132% >132% and <220% >220% 130.0%


Sri Lanka Tourism Arrivals up 13.4% in January

According to 2012-2013 FutureBrand Country Index, following are the rankings given for Tourism

Sri Lanka's tourism arrivals rose 13.4 % to 97,411 in January 2013 from a year earlier, with double digit growth from Western Europe and China.

Overall

Subcategories Under Tourism

Value for Money Attractions

Resort & Lodging Options

Food Shopping Beaches

1 Italy Thailand Japan Mauritius Italy United States Australia

2 Japan Malaysia United States Switzerland France France Bahamas

3 France Germany Italy Maldives Japan Italy Maldives

64 Sri Lanka 65 61 62 68 76 42

Source: Echelon March 2013


India Eases Restrictions on Sri Lankan Exports

India has announced that it would raise the quota on apparel exports from Sri Lanka under duty free concessions from five million pieces to eight million.

Textile exports to India would be slapped a lower 5 % duty from the earlier 11 %.

India also doubled the validity period for sanitary import permits for processed meat products from 6 months to one year.

As bilateral trade volumes between Sri Lanka and China topped USD 2.67 bn in 2012, a high level Chinese trade delegation led by the Vice Governor of Yunnan Province, Ding Shaoxiang visited Sri Lanka to boost the growing Sri Lanka-China bilateral trade.

Top Chinese Trade Delegation Visits Sri Lanka


Cyprus: Financial Crisis The Republic of Cyprus joined the European Union in 2004 and joined the eurozone (i.e. adopted the Euro as its official

currency) in January 2008. Not surprisingly, this has turned out to be a less than ideal choice (though one required by members of the European Union once they meet certain criteria) due to the financial crisis that started adversely affecting both the financial stability of the region and the Euro itself around that time.

For a while, Cyprus was riding out the crisis quite well- it suffered less severe adverse effects than the rest of the eurozone up until 2012 and had been growing faster than surrounding countries during that time.

What went wrong?

Unfortunately, Cyprus shares not only strong cultural ties to Greece but strong financial ties as well. Specifically, Cypress is a large holder of Greek government and corporate bonds, so the sharp decline in the value of those assets had a particularly severe negative impact on Cypriot banks. In fact, the fact that the value of Greek debt was written down as part of the bailout deal for Greece actually meant that Cyprus was essentially pushed towards needing a bailout itself.

‘Cyprus Popular Bank’ and the ‘Bank of Cyprus’, the two main financial institutions in the country, couldn't withstand their losses and requested assistance from the Cypriot government. The country's government, in turn, chose to nationalize Cyprus Popular Bank.

Unfortunately, this didn't solve the problem, since the Cypriot government couldn't really afford the bailouts that it had enacted. Financial markets also made it difficult for the Cypriot government to finance the bailouts, since the interest rate on Cypriot debt increased due to the country's tenuous position.

Cont…


Cyprus: Financial Crisis (cont…)

Bailout from EU & IMF

Therefore, the Cypriot government moved the problem up the financial food chain by asking the European Central Bank, the European Commission, and the International Monetary Fund for help.

Unlike a lot of previous bailouts, the original Cypress bailout plan involved having depositors in Cypriot banks fund the bailout. Not surprisingly, this was a quite controversial provision, and there was a lot of debate regarding how to allocate this "bailout tax" to accounts.

In fact, it was brought into question whether such a plan would even be feasible, since Cypriot bank deposits are insured and thus implicitly guaranteed that they will not be subject to loss of value. Such a plan would have, however, had the benefit of getting 10 billion euros in bailout funds from the International Monetary Fund and the European Central Bank.

The government tried to move this plan forward, but a vote was delayed and depositors started a run on the banks in order to avoid a potential bailout tax.

Taxing Cypriot bank accounts initially appeared preferable to raising regular taxes in order to fund the bailout because a significant fraction of depositors in Cypriot banks, especially high-value depositors, are not residents of Cypress. (In other words, Cyprus was happy to have foreigners partially fund its bailout, even if it made the country a less attractive financial center in the future.)

Cont…


Cyprus: Financial Crisis (cont…)

Russia’s offer To make matters more interesting, Russia offered Cyprus a loan with very generous terms in order to get its financial situation resolved (this is potentially not unrelated to the fact that a lot of the high-value depositors in Cyrus are in fact Russian.) This loan was not as attractive as it seemed on the surface, however, since it appears that the loan was offered in return for the Cypriot government looking the other way regarding various tax evasion and arms dealing practices. In any case, the Cypriot government was left without an attractive solution to its problem, though possible options are an austerity program similar to what has been enacted in Greece, a new version of the bank deposit tax, or Cyprus' exit from the eurozone (so that it can use its own currency that it not pegged to the Euro to cover its debts).

Capital controls Because the latter two of these options adversely affect the value of bank deposits, the Cypriot government has put capital controls in place that restrict the ability for depositors to withdraw their funds. As a result, some residents of Cyprus are even turning to virtual currency Bitcoin (Bitcoin is a digital currency, a protocol, and a software that enables instant peer to peer transactions, worldwide payments, low or zero processing fees etc.) to conduct business transactions.It appears that depositors in Cypriot banks could lose up to 60 % of their value on deposits over 100,000 Euro, with 37.5 % of holdings over 100,000 Euro becoming shares and 22.5 % earning no interest and being subject to further write-offs. There is additional concern that such a plan will have negative repercussions for other countries, where depositors are concerned that such a bailout implementation could become the norm.

Source: Jodi Beggs, About.com Guide


Fitch Upgrades Philippines to Investment Grade Fitch Ratings upgraded the Philippines' Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'BBB-' from 'BB+'. The Long-Term Local-Currency IDR has been upgraded to 'BBB' from 'BBB-'. The Outlooks on both ratings are Stable. The agency has also upgraded the Country Ceiling to 'BBB' from 'BBB-' .

Many emerging economies rely on foreign creditors to bridge the gap between their exports and imports. The Philippines is a bit different. It relies on overseas employers.

Over 10m Filipinos, equivalent to about a quarter of the country’s labour force, live or work abroad, permanently or temporarily, legally or illegally, in over 200 countries. Their remittances are equivalent to 8.5% of GDP, helping the country to plug its trade deficit and amass over $80 billion of currency reserves.

As a result, the Philippines has become a net creditor to the rest of the world (see chart), not just a net supplier of labour.

These impregnable external finances are one reason why Fitch, a ratings agency, awarded the Philippines its first ever investment-grade credit rating on March 28th.

Source: The Economist


Fitch Upgrades Philippines to Investment Grade (cont…)

The upgrade of Philippines' sovereign ratings reflects the following factors: FitchThe Philippines' sovereign external balance sheet is considered strong relative to 'A' range peers, let alone 'BB' and 'BBB' category medians. The Philippine economy has been resilient, expanding 6.6% in 2012 amid a weak global economic backdrop. Improvements in fiscal management begun under President Arroyo have made general government debt dynamics more resilient to shocks. Favourable macroeconomic outturns have been supported in Fitch's view by a strong policy-making framework. Governance standards, as measured in international indices such as the World Bank's framework, remain weaker than 'BBB' range norms but are not inconsistent with a 'BBB-' rating as a number of sovereigns in this rating category fare worse than the Philippines. Governance reform has been a centrepiece of the Aquino administration's policy efforts. Entrenching these reforms by 2016 is a policy priority of the government. The Philippines' average income is low (USD2,600 versus 'BBB' range median of USD10,300 in 2012), although this measure does not account directly for the significant support to living standards from remittance inflows. The country's level of human development (as measured in the United Nations Development Programme's index) is less of an outlier against 'BBB' range peers.The Philippines had a low fiscal revenue take of 18.3% of GDP in 2012, compared with a 'BBB' range median of 32.3%. This limits the fiscal scope to achieve the government's ambition of raising public investment. The recent introduction of a "sin tax", against stiff political opposition, will likely lead to some increment in revenues and underlines the administration's commitment to strengthening the revenue base.

Source: Fitch Ratings


Analysis & Forecast


Analysis & Forecast

ADB’s, Asian Development Outlook 2013 (ADO 2013), forecasts gross domestic product (GDP) growth in developing Asia of 6.6% in 2013 and 6.7% in 2014. In 2012, the region grew 6.1%.

ADB Global Outlook

Source: ADO 2013


Economic Growth Private consumption expenditure, which accounts for about 70% of GDP, will remain the main engine of economic expansion, fuelled by

rising incomes and remittances from Sri Lankans abroad.

Investments are expected to expand further in 2013, with higher growth in construction buoyed by large infrastructure projects.

Slow recovery in the euro area, Sri Lanka’s largest export market, would continue to constrain growth potential somewhat.

Exports will have to wait at least another year for a stronger recovery because weak external demand will continue in 2013.

From the supply side, expansion is expected in services, led by the hotels and other tourism-related activities, along with growth in external and domestic trade.

Agriculture is expected to improve with normal weather.

Economic growth will be subject to constraint from the balance of payments. Larger imports associated with high economic growth will worsen the trade deficit and—unless financed by exports, workers’ remittance, and capital inflow—depreciate the currency.

Because of the need to address inflation, the monetary policy stance set at the end of 2012 is not expected to be relaxed, which will restrain economic growth.

1

As such, GDP growth is expected to edge up to 6.8% in 2013 and then advance by 7.2% In 2014 on better external conditions.

Analysis & Forecast Sri Lanka: Economic Prospects

Cont…


Analysis & Forecast Sri Lanka: Economic Prospects (cont…)

Inflation Average inflation in 2013 is expected to be 7.5%, little improved from a year earlier, despite the base effect from the energy

price adjustments in 2012 disappearing in the second quarter 2013, expected declines in global commodity and oil prices, and expected exchange rate stabilization at current levels.

Gas prices were adjusted upward by 2% and diesel by 5% in the last week of February 2013. Further price increases are required to address the current operating losses of the Ceylon Electricity Board (CEB), and to pay down debts to banks that funded previous years’ losses. The estimated loss was about Rs89 billion (equal to 1.2% of GDP) for Ceylon Petroleum and Rs65 billion (0.9%) for the CEB. An increase in the national minimum wage is a risk that could top up inflationary pressures.

Monetary policy will therefore need to remain tight to limit second-round effects and anchor inflation expectations in 2013.

External Sector External demand is expected to recover gradually in 2013. Merchandise exports are projected to grow at a slow 4% in

2013 and 5% in 2014. Meanwhile, worker’s remittances will continue to expand rapidly. Services exports are expected to be boosted by growing tourism, the further development of business process outsourcing, and higher income from trade and shipping services partly derived from the opening of new port facilities.

Revenues from these items will allow imports to expand by 6% in 2013 and 10% in 2014 without widening the current account deficit as a share of GDP. Normal weather would increase the share of hydropower generation and contain the oil bill. The current account deficit is thus expected to be 5.0% of GDP in 2013 and 4.5% in 2014, both improvements on the estimated 5.8% in 2012. It is assumed that the current account deficit will continue to be financed by capital inflows.

Source: ADO 2013

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

economic capsule - march 2013

Travel