economic capsule - september 2015

Economic CapsuleSeptember 2015

Research & Development Unit

225th Issue

C O N T E N T S

BANKING AND FINANCE Commercial Bank to Commence Fully-fledged Banking Operations in the Maldives

Commercial Bank wins International Recognition for its Green Banking Efforts

CBSL Impose Restrictions on LTV Ratio

ECONOMY & BUSINESS Sri Lanka 2Q, 2015 GDP 6.7%

External Sector Performance

Deflation in Sri Lanka

Sri Lanka Launches Producer Price Index

Colombo-Negombo Electric Train System; Township

Orion City to Expand

INTERNATIONAL NEWS

RBI cuts interest rate more than expected

Stronger U.S. second quarter growth backs case for Fed hike

INDUSTRY UPDATE

Sri Lanka to see Oversupply in the Luxury Property Market

Sri Lanka Private-Sector Hospitals Positioned for Sustainable Growth

ANALYSIS & FORECAST

IMF’s Todd Schneider on Sri Lanka

Governor’s Views on a Rate Hike

Sri Lanka squanders oil gains on cheap cars

Condominium Industry in Sri Lanka

October, 2014


Banking & Finance

Commercial Bank to Commence Fully-fledged Banking Operations in the Maldives

4< Research & Development Unit >

Commercial Bank has received approval from both the Maldives Monetary Authority and the Central Bank of Sri Lanka to set up a banking subsidiary in the Maldives.

The Maldives will be the third overseas banking operation of Commercial Bank, after Bangladesh, which the Bank entered in 2003, and Myanmar where the Bank opened a Representative Office in June this year.

Commercial Bank’s new subsidiary is to be named ‘Commercial Bank of Maldives Pvt Limited’ and the Bank will invest in a 55% stake in the entity subject to Exchange Control and other regulatory approvals. A leading Maldivian group of companies will own the remaining stake.

Commercial Bank wins International Recognition for its Green Banking Efforts


The Commercial Bank of Ceylon’s efforts to make its operations more eco-friendly have been acknowledged internationally with the award for ‘Best Sustainability – Green Initiative’ at the 2015 Asian Customer Engagement Forum (ACEF) Awards in Mumbai.

The only award presented by ACEF in the sustainability category, the award recognises the effectiveness of Commercial Bank’s initiatives to migrate customers from traditional banking channels to digital platforms such as mobile and online banking, as well as its investments in and efforts to promote automation to minimise the use of paper.

CBSL Impose Restrictions on LTV Ratio


• CBSL has imposed a maximum Loan to Value (LTV) ratio of 70 % in respect of loans and advances granted for the purpose of purchase or utilisation of motor vehicles by banks and financial institutions supervised by the Central Bank in terms of the relevant legal and supervisory provisions.

• Accordingly, with effect from September 15, 2015, loans and advances granted by licensed banks, finance companies and leasing companies for the purpose of purchase or utilisation of motor vehicles should not exceed 70 % of the value of such vehicles.

Cont..Source: CBSL

CBSL Impose Restrictions on LTV Ratio (cont…)


Positive aspects• The decision is likely to create some financial discipline in the leasing and finance industry since

customers will be compelled to pay an upfront payment of 30% when obtaining a facility.

• Curb the unsustainable level of vehicle importation.

• Reduce the pressure on trade deficit and finally on exchange rate.

• Reduce the system-wide risk to the financial sector

• Preserve asset quality of financial institutions.

Negative aspects•SMEs to be directly affected

•The credit growth of all entities engaged in leasing and hire purchases will be negatively impacted.

•The directive will dampen the business of NBFIs as leasing and hire-purchase is a key driver of their business. Although commercials banks will be hit as well, the impact on them will not be as high as that on NBFIs, as only 8 % of their loan book consists of leasing and hire-purchase.

•A resultant drop in vehicle imports is likely to reduce government revenue.


October, 2014


Economy & Business

Sri Lanka 2Q, 2015 GDP 6.7%


Sri Lanka’s GDP growth as per the new series accelerated to 6.7% y-o-y in 2Q 2015 (vs. downwardly revised 4.4% in 1Q, from previous estimate of 6%)

Sector (%) 1Q 2Q

Agriculture 1.6 5.0

Industry 0.7 2.0

Services 6.2 7.9

GDP Growth 4.4 6.7

Agriculture growth improved reflecting recovery after last year's drought which caused annual output (2014) to fall by 2.2 %

Industry growth rebounded slightly but this is largely due to the 13% negative growth in construction in 1Q (+6.4% y-o-y in 2Q vs. -13% in 1Q and +25% in 4Q, 2014). More importantly, mining remains weak and manufacturing slowed further

Growth in the Services sector improved led by business services, communication, 'trade & transport' and 'public services'

Source: DCS

External Sector Performance


• The increase in the cumulative trade deficit in July was 6 %, down from 15.6 % recorded in June this year, due to a sharp deceleration in imports during July 2015.

• Sri Lanka’s gross official reserves stood at USD 6.8 bn as at end July 2015, equivalent to 4.2 months of imports.

Jul 14USD Mn

Jul15USD Mn

Growth %

Jan-Jul 14USD Mn

Jan-Jul 15USD Mn

Growth %

Total Exports 956.6 932.1 (2.6) 6,406.5 6,347.6 (0.9)

Textiles and garments 414.5 413.1 (0.3) 2,827.4 2,818.5 (0.3)

Tea 147.2 126.5 (14.0) 944.2 809.4 (14.3)

Total Imports 1,845.3 1,533.9 (16.9) 10,830.3 11,035.2 1.9

Vehicles 71.4 147.9 107.1 374.2 744.4 98.9

Fuel 515.8 174.8 (66.1) 2,976.5 1,602.7 (46.2)

Trade Balance -888.7 -601.8 -32.3 -4,423.9 -4,687.6 6.0 Source: CBSL

Deflation in Sri Lanka


Jul 15 Aug 15 Sep 15

HeadlineP.P. % -0.2 -0.2 -0.3

A.A. % 1.3 1.0 0.7

CoreP.P. % 3.5 3.9 4.2

A.A. % 2.8 2.8 2.8Source: DCS

• Sri Lanka's headline inflation recorded -0.3 % in September from a year earlier, after recording -0.2 % in August, and posted a third straight negative figure.

• Core annual inflation, which excludes fresh food, energy, transport, rice and coconuts, edged up to a 26-month high of 4.2 % in September from the previous month's 3.9 %.

• Core-inflation is watched by the Central Bank as a guidance for monetary policy. In the past, rate hikes have been delayed in Sri Lanka citing lower core inflation. Todd Schneider, IMF’s head of mission Sri Lanka too had raised concerns about rising core inflation.

Sri Lanka Launches Producer Price Index


• The Producer’s Price Index (PPI) measures the average change over time in the prices received by domestic producers of goods and services.

• The PPI serves as an indicator of short term inflationary trends and as a deflator of economic series. It is also used in productivity analysis, contract escalation, business analysis and current cost accounting etc.

• PPI for all activities reported for April, May, and June of 2015 are 98.38, 99.95 and 98.82 respectively.

• The overall PPI has decreased by 3.87% in April, 0.29% in May and 1.32% in June as compared to the same months in the previous year.

Source: DCS

Colombo-Negombo Electric Train System; Township


The Airport Express Air and Rail Co. Ltd. (AEARC) of Malaysia will start an electric train system between Negombo and Colombo whilst a mega township is also planned with a combined investment of USD 450 mn.

At Bopitiya a private land of 150 acres has been purchased for a modern township with all the latest facilities. From the 150 acres of residential and commercial land, space will be allocated for the development of a landscape garden for relaxation.

The project will also provide housing options for prospective residents and serve as a hub of play activities and recreational facilities. The main land plots of ‘Eco City’ are planned to be developed within 2015.

Overall development is expected to be completed by 2018. A total of 3,050 apartments are also included in the project.

Orion City to Expand


The Park, which was once a factory, is spread over 16 acres and currently has 550,000 square feet of developed space, where 29 international companies are based.

Expansion of the Park includes two new buildings that will be completed by 2016. These buildings will add 225,000 square feet of office space and 2500 personnel to the current Park.

Cont..

Orion City to Expand (cont…)


The company also plans to build Orion Towers which will offer up to 22 levels of prime office space and will boast an array of complementary and ancillary facilities such as retail and commercial areas, a boutique sky hotel, green eco decks and a sky courtyard which will become a micro city catering to employees every need.

An executive club at the top most floor of the towers will host a fully equipped gymnasium, business centre, lounge areas, meeting venues and private dining facilities.

Leading the development, Tower 1 is bound for completion by end of 2017.


October, 2014


Industry Update


Supply is set to overtake demand at the high end of Sri Lanka’s residential property market, with a series of large-scale projects under way in and around Colombo.

The supply of luxury apartments in the commercial capital could reach 6000 units by 2018-19, up from 783 in 2009 and 2657 this year.

There is a maximum off-take of 500 units a year in Colombo, and there are probably 3500 under construction over the next three years.

Sales could see the demand gap narrow over time as the economy gains momentum.

Demand could also be spurred by wealthy Sri Lankans returning to cities in search of better accommodation.

In the past there was an exodus out of town in search of larger properties, but there is a new emerging segment for rental apartments in the city.

Sri Lanka to see Oversupply in the Luxury Property Market

Cont..


Currently, more than a third of premium residential sales are generated by Sri Lankans living abroad, while less than 4% of investments are made by foreign buyers, with the balance coming from locally based, high-net-worth individuals.

The high-speed Colombo-Kandy Expressway is set to transform Kandy into a centre for real estate investment, with moves already under way to develop high-end residences.

Rajagiriya has seen an increase in real estate prices in recent years and is expected to generate greater demand going forward given its location between the administrative and commercial capitals of the country.

Further improvements to connectivity across Sri Lanka, including upgrades and construction of roads to the east of the island and reopening of routes closed due to previous unrest in the north, could help property development opportunities expand to other regions of the country.

Sri Lanka to see Oversupply in the Luxury Property Market (cont..)

Source: Oxford Business Group/ Real Estate Intelligence Unit


Sri Lanka Private-Sector Hospitals Positioned for Sustainable Growth

Favourable Demographic Trends: Sri Lanka’s private hospitals are poised for strong growth, with one of the world’s fastest-growing, ageing populations.

Nearly 9% of the population was 65 years of age and over at end-2014. This is likely to double by 2030, and the public sector alone has insufficient capacity to handle the growth.

Demand for private health care is also driven by rising per capita income, enabling more people to afford paid healthcare.

Sri Lanka’s per capita healthcare spend of USD102 (2013) is significantly below the average per capita for higher-middle-income countries at USD465, highlighting the growth potential in the medium term. Cont..


Sri Lanka Private-Sector Hospitals Positioned for Sustainable Growth (cont…)

Rising Incidence of NCDs: Sri Lanka’s Health Ministry estimates that 25% of the adult population is already suffering from hypertension, and half of the population is likely to suffer from diabetes by 2050. These dynamics should be a catalyst for strong demand, given that treatment of NCDs involves long hospital stays and advanced procedures.

Growth Through Medical Tourism: SL is treating an increasing number of patients from countries such as India, the Maldives, Bangladesh and the Seychelles.

Low Medical Insurance Penetration: Only 4% of the private healthcare spend was attributable to insurance in 2013. A meaningful increase in medical insurance coverage would result in more patients opting for paid healthcare by shifting away from state-run hospitals

Private-Sector Expansion Essential: Congestion at public hospitals and low government investment has created a pressing need for greater private-sector participation. The top five private hospitals account for 45% of the private-sector bed capacity, with most investing in further capacity expansion.

Skilled Professionals – Key Constraint Public Sector Still Dominates: The public sector accounted for 73% of the hospitals and 93% of the

available bed capacity as of end-2014, while its share of patient admissions and outpatient visits was >90%. Source: Fitch Ratings


October, 2014


Analysis & Forecast


IMF Todd Schneider on Sri Lanka

GDP to grow: pick up in growth likely to continue in the range of 5 to 5.5 % through end-2015-driven mainly by strong growth in services and a recovery in agricultural output.

CBSL’s exchange rate move welcomed: IMF welcomes the CBSL’s recent decision to cease setting daily spot prices for the rupee and let market forces play a greater role in determining the exchange rate.

Financial system stable: IMF found the overall financial system stable and current monetary stance appropriate.

International Monetary Fund (IMF) mission leader to Sri Lanka Todd Schneider

Positives

Cont..


IMF Todd Schneider on Sri Lanka (cont..)

Downward pressure on FX reserves− The increase in consumer spending created by the sharp rise in public wages and salaries has

contributed to a sizeable increase in imports of consumption and other goods—more than offsetting savings from lower oil prices.

− The resulting deterioration in the non-oil trade balance has contributed to persistent downward pressure on central bank foreign exchange reserves during the first eight months of the year.

Rising core inflation & the resurgence of private credit − Headline inflation is currently near zero but is expected to end the year around 3%. Core inflation

has risen steadily since the beginning of the year, consistent with higher demand for domestic non-tradables and a gradual reduction in economic slack.

Expected monetary policy tightening by the US− Risks to outlook are tilted to the downside with more volatile external financing conditions

resulting from the expected monetary policy tightening in the U.S. and uncertainties over growth prospects in emerging markets.

Risks

Cont..


Reestablish fiscal consolidation and reduce public debt: − Restricting the 2016 fiscal deficit to 5.5 % of GDP

− Eliminate tax expenditures (exemptions, tax holidays and reduced rates) as the most important component in a strategy to make the tax system simple, fair, and efficient.

Market-based structural reforms− Fuel and electricity pricing, subsidies, trade policy, liberalization of factor markets (particularly

land), and the investment environment are areas that could play an essential role in sustaining high rates of economic growth.

− Putting state firms on a commercial footing, allowing them to make market-based financial decisions.

Policy tightening recommended− Vigilance is required given rising core inflation, the resurgence of private credit, and signs of

receding slack in the economy. In this context, a tightening bias appears prudent.

IMF Todd Schneider on Sri Lanka (cont..)

Recommendations

Source: IMF


The central bank chief however expected 'macro-prudential measures' already taken, including the floating of the currency and limits on vehicle loans, to curb credit growth.

Rates also should not fall too low since foreign investors in bonds had to be taken into account. The rupee was now market determined and a recent fall in the rupee will increase export

competitiveness. Lenders were asked to finance only 70 % of loans of cars, which were being imported in large

numbers, taking away any advantage from a reduction in oil prices. Uncertainty in global market had made many currencies volatile and the situation may continue

until the US hikes rates. An eventual hike in US interest rates need not necessarily signal a domestic hike, if credit, inflation and balance of payments are stable

Governor’s Views on a Rate Hike

Sri Lanka's private sector credit grew 21 % in July from a year earlier, its fastest pace since mid-2012. In June, annual credit growth was 19.4 %. According to CBSL governor, Sri Lanka will not rule out a rate hike if high credit growth continues.

Source: Reuters, EconomyNext


Sri Lanka Squanders Oil Gains on Cheap Cars

According to CBSL governor Arjuna Mahendran, Sri Lanka has spent all the savings from lower oil prices this year to import cars financed through cheap and easy credit.

Foreign exchange savings from international oil prices which fell sharply this year on the back of a rising US dollar had gone back to import motor vehicles, mainly cars and three-wheel taxis.

The governor warned that Sri Lanka's financial institutions, including banks were heading towards a repetition of the 2012 pawning crisis when borrowers were unable to pay back loans they had obtained by offering gold as collateral.

When gold prices were rising on a daily basis in 2010 and 2011, banks and finance companies accelerated their pawning business but with the price of gold collapsing in 2012 the bubble burst and banks were left with bad loans.

He compared the financing of car imports to the gold pawning bubble.Source: EconomyNext


October, 2014


International News


RBI cuts interest rate more than expected The Reserve Bank of India (RBI) cut its policy interest rate to a 4-1/2 year low of

6.75 % on Tuesday (29), in a bigger-than-expected move that, with inflation running at record lows, could help an economy in danger of slowing down.

Stronger U.S. second quarter growth backs case for Fed hike The U.S. economy expanded more than previously estimated in 2Q on stronger

consumer spending and construction, backing the case for an interest rate rise before the end of the year despite data sounding a note of caution for September. Gross Domestic Product rose at a 3.9 % annual pace in the April-June quarter. The data supports the case that the U.S. economy may be gaining enough strength to withstand an increase in benchmark interest rates from record low levels despite growing concerns about the global economy.

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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Goh Keng Swee - independent Singapore's first Finance Minister

"The way to a better life is through hard work, first in schools, then in universities or polytechnics and

then on the job in the work place. Diligence, education and skills will create wealth."

economic capsule - september 2015

Economy & Finance