economic capsule - september 2014

Economic CapsuleSeptember 2014

Research & Development Unit

C O N T E N T SBANKING SECTOR NEWS Commercial Bank Acquires Indra Finance Limited

Commercial Bank Commissions Milestone 600th ATM

CBSL Limits Commercial Banks' Access to its Repurchase Rate

ECONOMIC & BUSINESS NEWS SL’s 2Q 2014 Economic Performance

Central Bank enters into a Swap Agreement with People’s Bank of China

China-SL FTA: Opportunities for Sri Lanka’s Non-Traditional Exports

Colombo Port City Work Commences

Sri Lanka’s Rank for IT/BPM Jumps to 16th in the World

Sri Lanka's First 'Colombo Gold Centre' Opened

Galle Dutch Hospital Shopping Precinct Opened

Price Cuts

ANALYSIS & FORECAST IMF Article IV Views on Sri Lanka

Public Debt in Sri Lanka: Too High?

INTERNATIONAL NEWS

BANKING NEWS

< Research & Development Unit >

Commercial Bank Acquires Indra Finance Limited

In one of the earliest transactions under the Financial Sector Consolidation Road Map mandated by the Central Bank of Sri Lanka, Commercial Bank of Ceylon PLC acquired a 100% stake of Indra Finance Limited, with the Share Sale and Purchase Agreement signed on 1st September 2014 at the Commercial Bank Head Office in Colombo.


Commercial Bank Commissions Milestone 600th ATM

The milestone 600th automated teller machine (ATM) of the Commercial Bank in Sri Lanka was ceremonially commissioned by Minister of Fisheries and Aquatic Resources Development Dr Rajitha Senaratne and Defence Ministry Secretary Mr Gotabhaya Rajapaksa at the new Colombo Gold Centre.


CBSL Limits Commercial Banks' Access to its Repurchase Rate

Sri Lanka's central bank in its 23 September policy decision announced moves to encourage commercial banks to lower their interest rates and increase lending, while keeping its own policy rates on hold (Standing Deposit Facility Rate at 6.5% and the Standing Lending Facility Rate at 8.0%)

In view of increased usage of repo (deposit) facilities, the CBSL will now limit bank access to the Standing Deposit Facility to three times per month at the standard rate of 6.5%. On any additional usage, banks will get a reduced rate of 5%. This measure will be effective as of 23 September. For the remainder of September, banks will be allowed to access the facility twice per participant, followed by three times a month from October onwards.

The purpose of this change in policy is to encourage higher bank lending. The amount that commercial banks deposit at the CBSL’s facilities has been consistently increasing in recent months. Net CBSL absorption of liquidity in repo operations has increased to more than Rs 40bn per day from Rs 15bn per day on a one-month moving average basis in June-early July. The CBSL is evidently keen to limit usage of the deposit facilities in the hope that this will result in higher credit growth; private credit growth remains low at 2.0% y/y at present (versus the CBSL’s target of 16.0% for year-end).

Monetary Policy Decision: Access to Standing Deposit Facility Rationalised

Period Number of Times Rate Applicable

23rd to 30th September 2014 2 6.50%

Exceeding 2 5.00%

During a calendar month from 1st October 2014 3 6.50%

Exceeding 3 5.00%

Source: CBSL, SCB Economic Alert

Economic & Business News


SL’s 2Q 2014 Economic Performance

The Sri Lankan economy during the second quarter of 2014 recorded a GDP growth of 7.8 % compared to the 7.6 % recorded in the first quarter of 2014. The growth in the second quarter was led by robust performance in the Industry sector, while the Agriculture and the Services sectors complemented the overall economic performance. A growth of 7.7 % was recorded in the first half of 2014

Meanwhile the International Monetary Fund (IMF) has warned that Sri Lanka's continuing failure to strengthen its tax administration could force its government to spend less, which would hit economic growth.

IMF expects Sri Lanka's economic growth to remain at a robust 7 % this year and 6.5 % in each year from 2015-2019, well below the estimates by the Sri Lankan authorities.

According to Sri Lanka’s Appropriation Bill for 2015 Sri Lanka aims to have 8.2 % growth in 2015, and gradually increase that to 8.4 % by 2017.

Source: CBSL, Reuters


Central Bank enters into a Swap Agreement with People’s Bank of China

The Central Bank of Sri Lanka (CBSL) and the People’s Bank of China (PBOC) entered into a bilateral Currency Swap Agreement on 16th September 2014 which provides an opportunity to exchange Sri Lanka’s National Currency (LKR) with the Chinese National Currency (CNY) for trade related activities and other purposes agreed upon by both parties.

The Swap agreement facilitates the exchange of a maximum of LKR 225 billion and CNY 10 billion for a tenor of three years.

This Swap agreement is also expected to facilitate the rapidly growing bilateral trade and investments between the two countries, as well as contribute towards the further enhancement of the financial cooperation between the two Central Banks.


Developed CountriesSouth KoreaJapanHong KongTaiwanMalaysiaSingapore

Chinese Imports

China’s Total Imports (USD Bn)2012 2013 Inc.

1,817 1,949 7%

China-SL free trade agreement will not be restricted to trade alone. It will also cover sectors such as finance, investment, shipping & aviation, ports, airports, culture, science and technology.

China’s Major Imports

2013USD Bn

% Inc. over 2012

Plastics & other related articles 72.0 4.0

Rubber & related articles 20.0 -

Jewellery Sector 18.0 39.0

Pharmaceuticals 15.0 16.0

Dairy 5.2 61.0

Soap Products 3.7 8.0

China-SL FTA: Opportunities for Sri Lanka’s Non-Traditional Exports

Colombo Port City Work Commences

The Chinese-financed USD1.4 bn “Colombo Port City” project is Sri Lanka’s largest foreign-funded investment on record.

The Port City will be built by a unit of state-controlled China Communications Construction Co. on 233 hectares (576 acres) of reclaimed land, an area slightly larger than Monaco (second smallest country in the world). The offices, hotels, apartments and shopping centers will draw as much as USD 20 bn in investment over about 15 years, according to ports authority chairman Dr. Priyath Wickrama.

Sri Lanka will own rights to 125 hectares of the reclaimed land and 20 hectares will be held by China Communications, with the remaining 88 hectares leased to the company for 99 years. < Research & Development Unit >


Sri Lanka’s 2014 Rank for IT/BPM Jumps to 16th in the World

A.T. Kearney’s Global Services Location Index (GSLI) Sri Lanka’s global country ranking jumped five places, to become 16th

in the A.T. Kearney’s Global Services Location Index (GSLI).

Consulting giant A.T. Kearney’s Global Services Location Index (GSLI), first established in 2004, analyses and ranks top 51 countries worldwide as the best destinations for providing off-shoring services, including IT services and support, contact centres, and back-office support.

“Sri Lanka moves up five places in this year’s index, as it develops a successful but relatively unknown knowledge services industry. With a highly educated talent base and sophisticated technical skills, Sri Lanka-based firms are providing advanced services to clients such as Google, Nokia, JPMorgan and London Stock Exchange. Offerings extend beyond software development and transaction processing to off-shore legal services, architectural drawings and medical diagnostics,” A.T. Kearney stated.

(2014)

Source: A.T. Kearney


Sri Lanka's First 'Colombo Gold Centre' Opened The Gold Centre project was established at a cost of Rs.237 mn at the

former St.John’s Fish market in Pettah in close proximity to the popular Sea Street jewellery market.

The gleaming modern complex now houses 83 jewellery stalls, space for bank branches, restaurant and public convenience space. Facilities are in place for customers to get their purchases checked for quality from the Gem and Jewellery Authority stall.

Galle Dutch Hospital Shopping Precinct Opened 'Dutch Hospital Shopping Precinct', the new commercial paradise situated

in the historic fortress of the renowned world heritage city of Galle was declared open for public on 20th September.

Located in the renowned Galle Fort, inscribed as a UNESCO World Heritage site, Dutch Hospital is an iconic structure that was originally built by the Portuguese and later developed by the Dutch. Today the Galle Dutch Hospital has been transformed to an attractive shopping mall similar to the one in Colombo Fort.


Price Cuts

Sri Lanka’ electricity tariff was reduced by 25%, and the prices of diesel fuel, petrol and kerosene oil were reduced by Rs. 3.00, Rs.5.00, and Rs. 20.00 respectively from midnight September 16/17.

International News

Jack Ma, executive chairman of Alibaba Group Holding Ltd has become China's richest man with a fortune estimated at $25 bn, underscoring the ascension of tech tycoons over real estate peers in the world's second biggest economy.

Ma knocked Wang Jianlin, head of the Wanda property group, into second place with $24.2 bn, according to 2014 list of China's super-rich published by Hurun Reports Inc. (Reuters)

India’s 100 Richest are all Billionaires For the first time, the 100 richest tycoons in India are all billionaires in 2014, according to Forbes. With a net worth of US $ 23.6 bn, up US $ 2.6 bn from last year, RIL Chief Mukesh Ambani topped the

list for the eighth consecutive year. Ambani was followed by Dilip Shanghvi, who got richer this year by US $ 4.1 bn. Shanghvi is the new

No. 2, after he displaced steel baron Lakshmi Mittal (US $15.8 bn), who slipped to the fifth place. (The Hindu)

< Research & Development Unit > Cont…

Alibaba's Jack Ma Becomes China's Richest Tycoon in 2014

The Richest People in America 2014

< Research & Development Unit > Cont…

The aggregate net worth of the richest 400 Americans was $2.29 trillion, up $270 billion from a year ago. (Forbes)


S&P Upgrades Outlook for India Rating to “Stable” from “Negative”

Standard and Poor's raised the outlook for India's "BBB-minus" rating to "stable" from "negative," saying the country's government mandate and improved political setting offered a conducive environment for reforms.

S&P had cut India's outlook to "negative" in April 2012. India is now rated at the lowest investment grade with a "stable" outlook by all three major global credit agencies.


ADB 2014 Update

Analysis & Forecast

IMF Article IV Views on Sri Lanka

Analysis & ForecastOutlook and Risks Growth is expected to remain robust at 7 % and inflation to remain in the mid-single digits. The external current account should improve marginally, allowing for further accumulation of foreign exchange reserves.

Medium-term risks relate to the potential for tighter external liquidity, the challenge of further fiscal and debt consolidation while maintaining high levels of investment in infrastructure and human capital, maintaining a balanced monetary policy, and staying competitive in a shifting economic landscape.

Key Policy RecommendationsFiscal consolidation and debt reduction need to continue, but the burden of adjustment needs to shift decisively to revenue generation. Debt targets could potentially be recast to achieve deeper reduction over a longer period.

Monetary policy needs to maintain a balance between supporting growth and containing inflation. A continued forward-looking approach is needed given long lags in monetary transmission.

Financial sector consolidation could lead to economies of scale, greater resilience, and more effective supervision, but corporate governance needs to continue to improve, and careful supervision in the post-consolidation period will be key.

Maintaining competitiveness and achieving a more sustainable external position will require a mix of continued innovation, sustained investment in infrastructure and human capital, a predictable business environment, and ideally a heavier emphasis on direct investment and equity portfolio flows than debt.



Public Debt in Sri Lanka: Too High?- IMF Article IV

Sri Lanka’s public debt is one of the highest among the emerging economies. Even though Sri Lanka’s public debt-to-GDP ratio has declined from its peak in early 2000s by about 25 percentage points, it still remains well above the average public debt ratio in the emerging market countries.

In 2013, it was more than twice as high as the average debt ratio in the emerging market countries (EMC) overall and in Asia, and about three times as high as the ratio of emerging market countries in Europe.

Moreover, Sri Lanka’s public debt appears even more worrisome when compared to the government revenues. For a given debt-to-GDP ratio, higher government revenue as a proportion of GDP would indicate also higher capacity to service the government debt.

For this reason, comparing the ratio of government debt to revenues also provides an important insight. Figure II shows that Sri Lanka’s government debt-to-revenues ratio is well above the average ratio for the emerging economies as a group.

Sri Lanka’s debt-to-revenue ratio also exceeds by a large margin the ratio of its Asian peers.

Figu

re I

Figu

re II

Cont…


Public Debt in Sri Lanka: Too High?- IMF Article IV (cont…)

The picture is similar when we replace regional averages with individual countries: Sri Lanka’s debt-to-revenue ratio is the highest among the frontier economies. Finally, given the above-noted recent trend of falling revenues, it is not surprising that, unlike in the other EMCs, Sri Lanka’s debt-to-revenue ratio has continued to increase in recent years.

The authorities’ latest plan is to reduce the debt ratio to 65 % of GDP by 2016, from the 2013 debt ratio of 78.3 % of GDP.

IMF’s broad outline of possible debt reduction strategy.While an ambitious fiscal consolidation plan is desirable when a country is under market

pressure and financing costs are high, this is not presently the case in Sri Lanka. Therefore, a case could be made that its fiscal adjustment strategy should be: (i) gradual (ii) sustained and credible; (iii) revenue-based; and (iv) growth-friendly.

Figu

re II

I

The long-term objective could be to reduce the debt ratio to 50 % of GDP. While Sri Lanka has been able to sustain a significantly higher debt ratio for an extended period of time, without any financing problems and large economic costs, the increased reliance on market financing, and the eventual tightening of global financial conditions points to the desirability of reducing the debt to a more prudent level.

Cont…


Public Debt in Sri Lanka: Too High?- IMF Article IV (cont…)

Sri Lanka has already made significant progress in recent years in reducing the debt ratio by about 20 percentage points. At the same time, it appears that the elevated debt level did not pose a serious threat of debt distress, and did not appear to have had a lasting adverse impact on growth. It also appears that the government was able to finance its large borrowing needs without serious problems, and at costs that were not higher than in a number of countries with lower debt ratios.

This reflects the history of servicing its debt, avoidance of large inflation to reduce the debt, and also favorable borrowing terms, due to concessional financing and captive domestic borrowers.

However, to rely on a continued favorable interest rate-growth differential to keep the debt-to-GDP ratio from increasing would not be prudent. Recently, as the share of concessional budget financing declined, the effective costs of borrowing have already been increasing—a trend that is likely to continue with the increasing reliance on borrowing at market terms.

Therefore, it would appear to be prudent to bring the debt ratio further down, to avoid ballooning servicing costs, crowding out of private investment and increased vulnerability to rollover risks and adverse shocks.

Source: IMF 2014 Article IV Consultation and Second Post Program Monitoring Discussion - Staff Report, IMF Sri Lanka Selected Issues Paper

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.

In life, when faced with failure, sometimes it is appropriate to work harder and put in more effort.

Sometimes it is appropriate to change strategy and try something different.

And sometimes it is appropriate to do both.

economic capsule - september 2014

Economy & Finance