economic capsule - october 2015

Economic CapsuleOctober 2015

Research & Development Unit

226th Issue

C O N T E N T S

BANKING AND FINANCE Commercial Bank Adjudged ‘Bank of the Year’ 2015 by International Ba

nker Commercial Bank Ranked 2nd in Business Today’s Top 25 PLCs Commercial Bank Launches Green Development Loans CBC Branch Openings

ECONOMY & BUSINESS PM Announces New Policy Reforms Sri Lanka Moves Up in Doing Business 2016 Rankings Sri Lanka Issues USD 1.5 Bn Sovereign Bond Provincial Gross Domestic Product – 2014 External Sector Performance – August 2015 Inflation

INTERNATIONAL NEWS The 2015 Nobel Prize for Economics China's Economic Growth Slows to 6.9%

INDUSTRY UPDATE Sri Lanka Consumer Durables Demand to Remain Healthy in 2016: Fitch

ANALYSIS & FORECAST

Budget Deficit Exceeds 2015 Target in July Reasons for Depreciation of LKR

Condominium Industry in Sri Lanka

October, 2014


Banking & Finance

Commercial Bank Adjudged ‘Bank of the Year’ 2015 by International Banker

4< Research & Development Unit >

The award is the first from International Banker to a bank in Sri Lanka.

The International Banker award recognises the strength of Commercial Bank as reflected in the Bank’s stellar financial performance, its contribution to the country’s Small and Medium Enterprise (SME) sector, the Bank’s contribution to the economy of Sri Lanka and how it has overcome the challenges in the market place.

The Commercial Bank of Ceylon has been adjudged Sri Lanka’s ‘Commercial Bank of the Year 2015’ by the UK-based International Banker.

Commercial Bank Ranked 2nd in Business Today’s Top 25 PLCs


This is the eighth year that Commercial Bank has been ranked among the top five listed companies in the country by Business Today, and the third consecutive year that it has been ranked second in this prestigious list.

Financial criteria considered for the ranking include share turnover, revenue, profit after tax, return on equity, Earnings per Share, market capitalisation and value addition.

The Commercial Bank of Ceylon PLC has been ranked second in Business Today’s ‘Top 25’ public listed corporate entities in Sri Lanka in 2014-15 on the basis of financial performance.

Commercial Bank Launches Green Development Loans


Commercial Bank announced the launch of Green Development Loans, throwing its weight behind efforts by businesses in Sri Lanka to make their operations more eco-friendly.

Loans of up to Rs 25 mn are now available at concessionary interest for small and medium enterprises (SMEs) and entrepreneurs that wish to invest in energy saving, energy efficiency or off-grid renewable energy projects including investments in solar power.

Commercial Bank Green Development Loans will also be available to organisations that need to comply with national environmental standards by improving their waste management systems or by installing waste water treatment plants, air pollution control systems, solid waste recycling/treatment plants or sound pollution control systems.

Repayable in seven years with a grace period of one year, these loans will be offered at concessionary interest rates.

CBC Branch Openings


Commercial Bank opened a Minicom branch in Badulla, in addition to its existing branch in the capital of Sri Lanka’s Uva Province.

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Supermarket Banking Counters at Bandarawatte and Wennappuwa

Commercial Bank opened two supermarket banking counters in Bandarawatte, Kaduwela (Laugfs Supermarket) and Wennappuwa (Arpico Supermarket).

Wennappuwa Opening by Mrs Dharshini Perera, Commercial Bank’s Senior Regional Manager (Colombo North)

Bandarawatte , Kaduwela opening by Mr Ivan Fernando, Bank’s Senior Regional Manager (Greater Colombo)

Badulla Minicom Branch Opening by Commercial Bank’s Deputy General Manager – Personal Banking Mr Chandana Gunasekara.

Cont..

CBC Branch Openings (cont..)


New Branch at Arrivals Terminal of the Bandaranaike International Airport (BIA) Katunayake

The branch, which will operate 24 hours a day, will offer as its principal services the encashment of foreign currency notes and travellers cheques and remittance facilities. It is supported by a Commercial Bank Automated Teller Machine (ATM) at the Arrivals Lounge.

Bank’s Chief Operating Officer/Executive Director Mr S. Renganathan conducts the first transaction at the new branch


October, 2014


Economy & Business

PM Announces New Policy Reforms


Areas of Concern - Medium Term

1. Generation of one million job opportunities.

2. Enhancing income levels.

3. Development of rural economies

4. Ensuring land ownership to rural and estate sectors, the middle class and government employees

5. Creating a wide and a strong middle classCont..

H I G H L I G H T S


Development Goals

Reduce the budget deficit to 3.5% of the GDP by 2020.

Increase the ratio of direct and indirect income tax generation in the medium term from 20%: 80% to 40%: 60%

Removal and reduction of all tax concessions

Removal of the once-and-for-all taxation process

Provide tax free concessions for all earning outside Sri Lanka for Sri Lankans and only ensure taxes are for income earned within the country.

Enhance the allocations made for education and health

Investment forum that will be strictly based on addressing the Government’s priorities. Establishing of a methodology that can successfully evaluate projects while paying adequate attention to state-private partnerships

Ensuring that a regional balance is maintained while addressing development mechanisms Cont..

H I G H L I G H T S (cont..)


Third generation economic reforms that would herald in a new era

Create the background needed to enter the global value system − Encourage our small and large scale farmers and entrepreneurs to participate in the global

economy − Encourage competitive international organisations to invest in Sri Lanka − Bring about the digitisation of the economy

Focus more on foreign direct investment

Highest possible benchmark in the grading of business organisations

Empower 3 mn citizens to become land and house owners

Ownership to those who have lived on state owned - land & rented houses for over a decade

A small land & a house for the estate workers who have been living in line rooms for over 10 years.

Construction of housing schemes for the middle class in urban and semi-urban areas & a low interest based loan scheme to purchase these housing.

Construction of 500,000 new houses that will completely solve the housing needs in rural, semi-urban and urban areas within the next five years. Cont..



State-Owned Enterprises

Establishment of a State Holding Corporation Limited, an organisation that will provide state entrepreneurship, built along the lines of the famous Temasek Company of Singapore, which successfully manages state enterprises.

It will have the capability and the ability to take decisions based on sound financial principles and market economies, as in the private sector.

Public Wealth Trust, EPF/ETF, Employment Council & new Agencies

Public Wealth Trust through which the shares in state enterprises will be passed on to the people.

Sell the shares of state ventures such as hotels and Lanka Hospitals, which do not match the core competencies of state owner enterprises.

A Special Purpose Vehicle for the purpose of attending to infrastructural development initiatives.

Restructuring of - Board of Investment, Export Development Board and the Tourism Authority –within the next 03 years.

Agency for Development, - managing all economic activity Cont..



Public Wealth Trust, EPF/ETF, Employment Council & new Agencies (cont..)

International Trade Agency - handle all aspects of international trade

EPF and ETF will be amalgamated to create a new national pension fund

Employment Council - to ensure a minimum wage for the working population & will be managed by members from the civil society, unions and chambers of commerce.

Introduce a new national pension plan

Central Bank, Central Procurement Secretariat

The tasks of managing exchange processes and managing the ETF will be taken out of the Central Bank’s purview.

Central Procurement Secretariat – established for procurement and awarding of tenders and handling all purchases over and above the specific value assured

Establish a committee that will educate companies and contractors on the methodologies to be followed in applying for state tenders.

Cont..



Rural Economy 2,500 state rural development centres - grouping of many villages under one development centre.

The centres will have access to fully equipped rural economic market units. Large-scale agricultural enterprises in which farmers can be members They will be given concessions and land towards harnessing and developing farmer based

agricultural initiatives. Fully-fledged agro marketing authority that will purchase all agricultural produce. New technology will be used to maximise fishing capabilities

Tea, rubber, paddy Tea & Rubber - enhance production efficiencies and add value to the produce to suit the new and

changing needs of the global market. A Tea Industry Committee to address all sectors of tea Review the issues that stemmed from a surplus in paddy. The process of government purchasing of

paddy will be restructured while reviewing ways of productively utilising the surplus of paddy. Introduce an agricultural insurance scheme Cont..



Land and land ownership

Empower landowners investing in new technology and new farming methods. They will be assisted with land and the necessary capital benefits.

Provide assistance to Sri Lankans who would like to engage in large-scale to small-scale agricultural pursuits

Revitalising underperforming enterprises

Revitalise underperforming enterprises within the Under Utilised Assets Act and bring the necessary revisions.

Investment Bill instead of the Development Methods Bill

Bring trade determining laws that will manage import export mechanisms in place of the import export bill

Bring in new laws that will provide ownership of land to registered investors who meet the required criteria, without being affected by the Land Restriction and Alienation Act.

Tax benefits from 2016 to local entrepreneurs who enter the global markets Cont..



Revitalising underperforming enterprises (cont..)

Appoint a committee that will review the formation of a small and medium scale enterprise development organisation. The committee will make recommendations to Parliament, which will then be made law.

Trade agreements

Entering into trade agreements with India and China.

Through GSP concessions, we will be able to enter the EU markets as well

Garment sector - carefully address the Trans-Pacific Partnership Agreement under which tax free garment export opportunities have been given to countries such as Vietnam. This has enabled them to engage in competitive markets and supply the American, Chinese and Japanese markets at low rates. This may also affect exports from Sri Lanka in the future.

Digitize the economy

Cont..



Balanced Development

Greater metropolis between Negombo and Bentota will experience a high level of economic activity, powered by global and local businesses that will have the opportunity to provide employment and the facilities needed to build and sustain an advanced level of living.

11 business and technology development areas throughout the island. Of these, work will commence on Hambantota, Raigama, Trincomalee and Mahaoya by next year.

Commence work on the information and agricultural technology zone in Kandy next year.

Financial and business areas throughout the country in a planned manner.

Zones within 20 to 200 square miles will be developed in keeping with economic activity and social development.

Create a special financial and a business hub in Colombo

Cont..



Tourism

The tourists who visit Sri Lanka today only spend around $ 40-50 daily. We need to build a strategy that will seek to bring tourists who have the capacity to spend around $ 100-150 daily.

Focus on encouraging the tourists to stay longer in the island.

The upliftment of tourism through zonal development

Developing small tourist inns and encourage provincial businesses to make better use of opportunities, presented by tourism in their localities.

Developing the eastern and the southern provinces and also providing an efficient internal air service.

Encourage air connections that will connect the north and the east efficiently to the rest of the country.

Commence work on tourism zones such as the York Street, Sir Baron Jayatilleke Mawatha and Prince Street in Colombo and the Deduwa Tourism Zone from Bentota to Mirissa.

Galle will be developed as a historic location with tourist attractions and preservation of the historic Galle Fort. Cont..



Tourism (cont..)

Transform the Cultural Triangle sites, the Eastern Province beaches, Nuwara Eliya, Badulla and up country sites as tourist attractions.

The Colombo Port and the Katunayake Airport will be developed.

The Mattala Airport and the Hambantota Port, will be transformed into profit making initiatives with changes and modifications.

Develop the Trincomalee Port and the city.

Plan to rebuild war-affected areas in the north and the east – we have discussed with Japan the possibility of convening an aid summit in this regard in 2016.

Education

Increase the expenditure on education – this is imperative to increase the productivity of our highly literate population.

Introducing knowledge mechanisms that will fulfill employment requirements and encourage participation in national development. Cont..



Education (cont..)

Encourage an education process that will go on for 13 years.

Restrict the number of children in a classroom to 35.

The schools will be provided facilities and access to the digital world that will bring the students together in their quest for knowledge.

ICT development and vocational training

ICT centres for innovation

Laptops for university students on an interest free loan basis while also providing free Wi-Fi zones for all universities.

Techno-based campuses and vocational training institutes alongside the current universities.

Put in place a voucher system that will be tested – it will serve as a springboard for talented students from low-income categories to enter these techno campuses, vocational training institutes and private universities.

Adequate opportunities for vocational training outside Colombo. Cont..



ICT development and vocational training (cont..)

Strict enforcement of standards of English teaching centres. Government will encourage and provide facilities for organisations coming forward to teach English and provide vocational training.

Removal of all taxes imposed on knowledge and talent – as a step in this direction, removal of taxes on all books and the import of sports equipment.

Empowering women

From 2017 onwards, when making budget allocations, it will be based on identifying financial needs on a gender basis, enabling women to have better access to opportunities at all levels.

Cont..



The third generation of economic reforms envisioned here is based on multifaceted economic mechanisms and the increase in trade development.

Many qualified people prefer well-paying jobs that are given based on professional capabilities. It is not viable to maintain a low paying production based economy.

Accordingly, we need to look to sectors like ICT and tourism to generate employment opportunities in the short term.

Increasing and enhancing our trained labour capacity is beneficial for us. Through it, we can also empower those engaged in foreign employment sectors to fulfill qualified and professional job requirements overseas.

Sri Lanka Moves Up in Doing Business 2016 Rankings


Topics DB 2016 Rank DB 2015 Rank Change in Rank

Doing Business 107 113 6

Starting a Business 98 104 6

Dealing with Construction Permits 77 106 29

Getting Electricity 81 101 20

Registering Property 153 151 -2

Getting Credit 97 90 -7

Protecting Minority Investors 49 46 -3

Paying Taxes 158 157 -1

Trading Across Borders 90 90 No change

Enforcing Contracts 161 161 No change

Resolving Insolvency 78 84 6

Sri Lanka was ranked 107 in the World Bank’s “Doing Business 2016″ index, which measures the ease of doing business in 189 different countries.

Source: www.doingbusiness.org

Sri Lanka Ranked 61st in the Prosperity Index


Sri Lanka has risen a notch higher this year and ranked 61st globally in the 2015 Legatum Prosperity Index, which ranks 142 nations according to wealth and wellbeing of their people.

61

Sri Lanka 15’ 14’

Overall Rank 61 62

Economy 65 76

Entrepreneurship & Opportunity 85 85

Governance 58 52

Education 59 66

Health 77 78

Safety & Security 113 120

Personal Freedom 43 43

Social Capital 32 27

Source: Legatum Institute

Sri Lanka Issues USD 1.5 Bn Sovereign Bond


Sri Lanka, successfully raised US$ 1,500mn from an International Sovereign Bond on October 27, 2015. This marks Sri Lanka’s ninth US Dollar benchmark as well as the largest offering in the international bond market since 2007.

Amount USD 1,500 mnPeriod 10 yearsInterest Rate 6.850% (p.a.)Ratings

Fitch - BB-Moody’s - B1S&P - B+

Joint Lead Managers/Bookrunners Citigroup, Deutsche Bank, HSBC and Standard Chartered BankFinal Order USD 3,300 mn (from 290 investor accounts)Oversubscribed by 2.2 timesAllocation of the bonds 55% (USA), 29% (Europe) & 16% (Asia)Allocation of investor type 88% (fund managers), 9% (banks) & 3% (pension/insurance agencies)

Cont..

Previous Bond Issues


Year Amount(USD mn) Period Interest Rate %

2007 500 5 year 8.2502009 500 5 year 7.4002010 1000 10 year 6.2502011 1000 10 year 6.2502012 1000 10 year 5.8752014 Jan 1000 5 year 6.0002014 Apr 500 5 year 5.1252015 May 650 10 Year 6.1252015 Oct 1500 10 year 6.850

Sri Lanka Issues USD 1.5 Bn Sovereign Bond (cont..)

Provincial Gross Domestic Product – 2014


Province Rs. Billion

2013 2014

Western 4,078 4,320

Southern 1,001 1,112

North Western 1,006 1,100

Central 1,005 1,073

Sabaragamuwa 648 689

Eastern 562 597

North Central 481 523

Uva 471 511

Northern 339 367

Sri Lanka 9,592 10,292

Nominal GDP by Provinces

Share of PGDP in the overall GDP % share

• Western province remained the frontrunner providing the highest contribution

Cont..Source: CBSL

Source: CBSL

Provincial Gross Domestic Product – 2014 (cont..)


• Southern province recorded the highest growth rate

• Western province grew the slowest

Source: CBSL

External Sector Performance – August 2015


Aug 15 Change (%) Jan-Aug 15 Change (%)

Total exports 798.9 (19.5) 7,146.5 (3.4)

Textiles and garments 400.1 (6.6) 3,218.7 (1.1)

Tea 91.8 (33.9) 901.2 (16.8)

Total imports 1,523.4 (11.7) 12,558.6 0.0

Fuel 186.5 (60.5) 1,789.3 (48.1)

Trade balance (724.5) (1.0) (5,412.0) 5.0

The BOP is estimated to have recorded an overall deficit of USD 1,795 mn during the first eight months of 2015 in comparison to a surplus of USD 2,150 mn recorded a year earlier. Sri Lanka’s gross official reserves stood at USD 6.5 bn as at end August 2015, equivalent to 4.0 months of imports.

The lower earnings from tea, textiles and garments, transport equipment and rubber products mainly contributed to the overall decline in exports earnings during the month.

On a cumulative basis, export earnings declined by 3.4 %, year-on-year, to USD 7,147 mn during the first eight months of 2015 largely due to weak global demand.

Expenditure on imports in August 2015 declined by 11.7 %, year on year, to USD, 1,523 mn. Despite the considerable expansion in import expenditure on consumer goods and investment goods, a substantial reduction in intermediate goods imports mainly due to a significant decline in fuel imports led to this decline.

Source: CBSL

Inflation


Aug 15 Sep 15 Oct 15

HeadlineP.P. % -0.2 -0.3 1.7

A.A. % 1.0 0.7 0.7

CoreP.P. % 3.9 4.2 4.4

A.A. % 2.8 2.8 2.9

Consumer prices in October rose 1.7 % from a year earlier, ending a three-month streak of falling prices.

Inflation, as measured on a 12-month moving average basis, was steady at a record low of 0.7 % in October, the same pace as in September.

Core annual inflation, which excludes fresh food, energy, transport, rice and coconuts, edged up to a 29-month high of 4.4 % in October from the previous month's 4.2 %. It hit a record low of 0.8 % in February.

Source: DCS


October, 2014


Industry Update

Sri Lanka Consumer Durables Demand to Remain Healthy in 2016: Fitch


The conducive demand environment for Sri Lanka-based consumer durables retailers is likely to continue in the short to medium term despite possible headwinds from depreciation in the Sri Lankan rupee against major currencies and higher import tariffs.

Favourable Demand Environment: The strong demand trend is supported by lower energy tariffs, low interest rates, public-sector salary increases and reductions in the prices of essential food items introduced by the new government in early 2015.

Hire Purchase (HP)-Led Growth Continues: In-house HP programmes offered by top retailers, which contribute to about 40% of sector revenues, will continue to drive top-line growth. Cont..

Sri Lanka Consumer Durables Demand to Remain Healthy in 2016


Mix Shift to ITC: The revenue mix shift towards IT and Communication (ITC) products will continue in 2016.

Margins to Improve: The EBITDAR (earnings before interest, tax, depreciation, amortization and rent or restructuring costs) margin upswing in 2015 that emerged from the lows in 2014 to continue at a gradual pace in 2016, supported by strong operating leverage resulting from top-line growth, expansion in high-margin HP sales and cost efficiency measures.


October, 2014


Analysis & Forecast

Budget Deficit Exceeds 2015 Target in July


Approved Annual Est.

Jan-Jul

2015

Revenue and Grants 1,562,000 721,715

Expenditure 2,061,376 1,245,054

Overall Deficit (499,376) (523,339)

Foreign Financing (Net) 291,376 (12,177)

Domestic Financing (Net) 208,000 535,516

Budgeted for 2015 by the Government

Source: CBSL, Ministry of Finance

IMF projects a fiscal deficit in the range of 5.5 to 6 % of GDP in 2015 higher than budgeted by the SL government and financed mainly by domestic borrowing and according to the World Bank, increased wages, social welfare and interest payments will expand the fiscal deficit to 5.8 % of GDP. Latest Projection 6.5% - 6.9% (Minister of Finance announced on 19th Oct,2015). Cont..

Source: Ministry of Finance

Budget Deficit Exceeds 2015 Target in July (cont..)


The government spends more than 50 % of the tax revenue for the salaries & pensions of government sector workers.

Up to July 2015, 61 % of the tax revenue has been spent on salaries and pensions as the government has increased the salaries and pension payments significantly in 2015.

Rs. Mn 2013 2014 2015 Budget Est. 2015 July

Salaries and wages 393.23 440.98 570.00 319.62Pensions 122.81 126.14 180.00 87.01Total 516.04 567.12 750.00 406.63Revenue 1,005.90 1,050.36 1337.00 663.26As a % of tax Revenue 51.3 54.0 56.10 61.3

Source: CBSL, Ministry of Finance

Reasons for Depreciation of LKR


The 7% YTD (21 Oct) depreciation in the LKR is not primarily due to the pressure from higher imports but due to approximately USD 1 bn outflow from foreign investors who had invested in LKR government securities.

Source: CBSL


October, 2014


International News


The 2015 Nobel Prize for Economics

ANGUS DEATON has been named the winner of this year's Sveriges Riksbank prize in economic sciences in memory of Alfred Nobel.

Mr Deaton is a Britain-born economist (Scotland, to be specific), who earned his PhD in economics at Cambridge University before moving to America; he is now at Princeton University. Mr Deaton is best known for his work on consumption theory, welfare and inequality.

The committee awarded him the honour “for his analysis of consumption, poverty, and welfare”. His work “linking detailed individual choices and aggregate outcomes” was praised for having helped to “transform the fields of microeconomics, macroeconomics, and development economics”.


China's Economic Growth Slows to 6.9%

China's economy grew 6.9% in the third quarter, the weakest rate since the global financial crisis.

The year-on-year growth rate is also below the government's 7% target.

Though slightly above expectations, the data is expected to raise pressure on policymakers to step up monetary policy to stem the slowdown.

China's economy has been hit by extreme stock market volatility over the summer and weak economic data, causing concern on markets around the world.

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 - october 2015

Economy & Finance