Economic Capsule - June 2014

Economic CapsuleJune 2014

Research & Development Unit

ECONOMIC & BUSINESS NEWS

Commercial Bank in World’s Top 1000 Banks for 4th successive year Commercial Bank Branch Openings Commercial Bank Opens Drive-through ATM at ‘K Zone’ Ja Ela Commercial Bank Joins LankaPay Sri Lanka Banking Sector Performance – 2013 Moody's: Outlook for Sri Lanka Banking System Stable

FINANCIAL SECTOR NEWS

Sri Lanka Economy Grows 7.6% in 1Q Summary of the Budget: January April‐ External Sector Performance – April 2014 Sri Lanka Ranked 89th in the Logistics Performance Index Sri Lanka Soars 41 Paces in the UN e-Government Development Index High Demand for SLDBs Sri Lankan Airlines Bond Issue Oversubscribed IFC Increases Syndicated Financing to NDB World Bank Approves USD 101.5 mn to Sri Lanka for the Skills Development Project SL to set up a Carbon Nano-tube Factory Business in Asia

ANALYSIS & FORECAST Sri Lanka: Opportunities & Challenges

C O N T E N T S

BANKING NEWS

< Research & Development Unit >

Commercial Bank in World’s Top 1000 Banks for 4th successive year

The Commercial Bank of Ceylon has been ranked among the Top 1000 Banks of the World for a fourth successive year in 2014, becoming the only Sri Lankan bank to achieve this feat.

This prestigious ranking published annually by ‘The Banker’ magazine of the UK, is an important endorsement of the consistent growth and key performance indicators achieved by Sri Lanka’s largest private bank.

The Top 1000 World Banks ranking is compiled from a database of over 5,000 of the world’s biggest banks and is acknowledged by the global financial community as the definitive guide to bank rankings and analysis. Begun in 1970, the ranking is widely used all year round by senior bankers, corporate treasurers, corporate financiers, the professional services community and many others in their day to day decisions relating to banking.

The Top 1000 rankings are based on the Bank’s performance in 2013, which Commercial Bank ended with gross income of Rs 73.16 billion, profit before tax of Rs 14.51 billion, profit after tax of Rs 10.445 billion and assets of Rs 606.607 billion.


Commercial Bank opened its 237th branch at Hulftsdorp, the hub of the country’s legal fraternity.

The new branch is located at the Bar Association of Sri Lanka (BASL) Modern Office Complex, No 36, St. Sebastian Hill, Colombo 12.

Commercial Bank Branch Openings

Commercial Bank opened its 236th branch at Arpico Supercentre, Nawinna

Commercial Bank Opens Drive-through ATM at ‘K Zone’ Ja Ela

Commercial Bank has commissioned a drive-through ATM at the ‘K Zone’ shopping complex in Ja Ela as part of its continuing expansion of the country’s largest electronic cash dispensing network owned by a single bank.

This is the 594th Commercial Bank ATM in Sri Lanka and the Bank’s second drive-through ATM. Commercial Bank also serves people visiting ‘K Zone’ Ja Ela with a branch inside the popular mall.

Sri Lanka’s largest common ATM network ‘LankaPay’ strengthened its presence island wide with the advent of Commercial Bank of Ceylon on to its platform.

Commercial Bank operates Sri Lanka’s single largest ATM network owned by a bank, and through its partnership with LankaPay, Combank customers and customers of all other member banks can now withdraw cash within the LankaPay network at over 2,300 ATMs for a fee of Rs.30 per cash withdrawal.

By connecting Commercial Bank, customers of all LankaPay member banks namely People’s Bank, Bank Of Ceylon, HNB, Seylan Bank, NDB Bank and Union Bank can now experience the superior services offered by Combank ATMs located island wide.

Commercial Bank Joins LankaPay



Commercial Bank Joins Central Bank’s Credit Guarantee Scheme for Pawning

Commercial Bank has entered into an agreement with the Central Bank of Sri Lanka to participate in the new credit guarantee scheme for pawning advances, introduced by the latter in June 2014.

The new credit guarantee scheme enables licensed commercial banks and licensed specialised banks engaged in pawning activities to provide an enhanced level of credit to their customers.

Commercial Bank Appoints IFC’s John Wilson as Non Executive Director

The Commercial Bank of Ceylon PLC has announced the appointment of Mr Hakan John Wilson as a non-executive director of the Bank.

Mr Wilson is the Head of Banking and Chief Banking Specialist of the IFC, the private equity arm of the World Bank Group which invests debt, equity and advisory in emerging market clients.

Commercial Bank Appoints IFC’s John Wilson as Non Executive Director

Sri Lanka Banking Sector Performance - 2013

Credit Exposure of the Banking Sector December 2013

Non-Performing Loans of the Banking Sector Trends in NPL Ratios Loans and Advances

Rupee Deposits and Foreign Currency Deposits [ Year-on-Year Growth (%) ]

Source: Financial System Stability Review 2013

Moody's: Outlook for Sri Lanka Banking System Stable

Moody's Investors Service says that the outlook for the Sri Lankan banking system is stable, as the economy now recording a GDP growth rate of 7% remains one of Asia's fastest growing economies.

"Since the end of the long civil war in 2009, the country has been rebuilding, and a pipeline of infrastructure projects is expected to boost economic growth, together with an accommodative monetary policy. In such an environment, loan growth will rebound and asset quality will stabilize“.

"Our analysis estimates 14% loan growth this year and we do not view this as excessive. Instead, the key risk to the outlook for economic growth is Sri Lanka's high current account deficit and a resulting reliance on external debt capital flows. This structural weakness exposes the economy and currency to shifts in investor sentiment,” according to Srikanth Vadlamani, a Moody's Vice President and Senior Analyst.

However, in this context, the Moody's report notes that Sri Lanka's banks and sovereign have been able to access the international debt markets at relatively attractive yields, compared to past averages, over the last year, indicating the high confidence of foreign investors in the economy.

On the issue of pawning loans, the report states that non-performing loans (NPLs) which had risen because of widespread use of these gold-secured loans should stabilize after a sharp increase in 2013.

"We note that lending standards have tightened and, given that these loans have a tenure of only around 12 months, we expect NPLs in this segment to start stabilizing from around the third quarter of 2014," according to Vadlamani.

Moody's rates two of the 10 largest banks in Sri Lanka by assets The two - Bank of Ceylon and Hatton National Bank accounted for about 30% of system assets in March 2014. The 10 largest banks together represent 87% of banking system assets.


Economic & Business News


Sri Lanka Economy Grows 7.6% in 1Q

The Sri Lankan economy registered a growth of 7.6 % in the first quarter of 2014 over the growth of 6.1% recorded in the corresponding period of the previous year.

The Industry sector (32.7% of total GDP) rose 12.6% in 1Q 14 (vs. 10.7% in 1Q 13) driven by the 22.5% growth in the construction segment.

Meanwhile, the Services sector (55.8% of total GDP) growth rose to 6.5% in 1Q2014 (from 4.3% in 1Q 13) mainly due to the export trade segment rising 16.3% (vs. a decline of -6.1% in 1Q 13).

The Agriculture sector (11.5% of total GDP) rose only 0.2% in 1Q 14 (vs. a growth of 3.4% in 1Q 13), largely due to -5.7% decline in paddy segment, amidst the unfavourable weather conditions.



Summary of the Budget: January ‐ April

Sri Lanka’s tax revenue has fallen more than 15% from its target in the first four months of the year but it can still achieve its 2014 budget deficit target of 5.2% of GDP, according to the Finance Ministry.

The Government had estimated a tax revenue of Rs. 368 bn ($ 2.82 bn) at the end of April, but the collection is down 15.6% to Rs. 310.6 billion, the Ministry’s mid-year fiscal position report showed.

The International Monetary Fund said last month that “low tax revenue mobilisation remains a concern” amid relatively high debt levels and an ongoing shift from concessional to more expensive loans on commercial terms.

The Budget deficit in the first four months hit Rs. 347 bn, or 3.5% of Gross Domestic Product (GDP), compared with the full-year deficit target of 5.2% of GDP or Rs. 516.1 bn, according to data.

However, the Finance Ministry said revenue would be higher during the second half due to improved tax collection and stronger domestic economic activities from lower interest rates.


External Sector Performance – April 2014

January - April 2014 (in USD Mn)

Jan-Apr 2013

Jan- Apr 2014

Growth (%)

Exports 3,054.9 3,571.1 16.9

Agricultural Products 726.8 860.8 18.4

Tea 440.0 503.8 14.5

Industrial Products 2,318.1 2,666.2 15.0

Textiles and Garments 1,325.0 1,601.6 20.9

Mineral Products 6.0 39.5 562.7

Imports 6,035.9 6,192.4 2.6

Consumer Goods 983.9 1,044.3 6.1

Intermediate Goods 3,528.3 3,872.6 9.8

Fuel 1,440.9 1,761.7 22.3

Investment Goods 1,520.0 1,271.1 -16.4

Deficit in the Trade Account -2,980.9 -2,621.3 -12.1

BOP: High inflows to the current account, issuance of international sovereign bonds and other inflows to the financial account during the first four months of the year have resulted in the overall BOP recording a significant surplus of USD 1,544.6 mn compared to a surplus of USD 352.5 mn recorded during the corresponding period of 2013.

Reserves: Sri Lanka’s gross official reserves amounted to USD 8.9 bn by end April 2014. In terms of months of imports, gross official reserves were equivalent to 5.9 months of imports at end April 2014.

Cont…< Research & Development Unit >


External Sector Performance – April 2014 (cont…)

Exports: The growth in earnings from exports was led by improved performance in industrial exports which grew by 8 % (y-o-y), in April 2014 to USD 559 mn.

Industrial exports led by the earnings from export of textiles and garments, increased by 22.5 %, contributing 94 % to the total increase in exports. Industrial exports accounted for more than 73 % of total exports

Imports: Expenditure on imports declined in April 2014 driven by reductions in both consumer and investment goods. Expenditure on consumer good imports declined by 3.2 % in April 2014, reflecting a decline in expenditure on most of food categories.

Source: CBSL



Sri Lanka Ranked 89th in the Logistics Performance Index

World Bank has ranked Sri Lanka in the 89th position according to the logistics performance index, with a score of 2.70.

Germany topped the rankings with an impressive score of 4.12. World Bank recognises developments in logistics as a key economic indicator

and has developed the Logistics Performance Index (LPI) to measure and compare logistics performances across the world. LPI has six dimensions and the weighted average of them is calculated as the LPI of a country.

Sri Lanka has come out increasing all dimensions from 2007 to 2012. LPI has risen from 2.4 in 2007 to 2.70 in 2014. The slight drop of rank and score from 2012 is because 2014 is yet to be completed and once it is done, the rating for international shipments and infrastructure can be higher.

Average LPI of the South Asian region was 2.61 in 2014 with India overtaking other countries by a mile by scoring a rating of 3.08. Source: World Bank


Sri Lanka Soars 41 Paces in the UN e-Government Development

Index Making the biggest progress by a member country from its preceding ranking in the 2014

United Nations eGovernment Development Index (eGDI), Sri Lanka has advanced to the 74th position.

At the preceding survey determining the eGDI which was in 2012 Sri Lanka’s position out of 193 countries was 115. Thus the 2014 United Nations eGDI of Sri Lanka is a jump traversing 41 positions.

The rank reached by Sri Lanka out of 193 countries also places it within the first half of the highest ranked countries as well as the in the first position out of South Asian countries. The Maldives is at the 94th position.

“The Sri Lankan Government has made a substantial effort to develop its online portal which now ranks 74th in the world. The online portal offers A-Z government web indexes, 108 e-services for citizens, 51 e-services for businesses and 10 non-residence related e-services. The portal also offers extensive mobile and SMS services, an e-participation portal, government forms easily accessible online, a developed open data portal with data available in various formats, as well as a whole-of-government strategy,” according to the 2014 UN – egov Development Index Report.

e-government describes the use of technologies to facilitate the operation of government and the dispersement of government information and services. e-government, short for electronic government, deals heavily with Internet and non-internet applications to aid in governments.


High Demand for SLDBs

Amount(USD Mn ) Tenure Bids Received

(USD Mn)

Amount Accepted(USD Mn)

Rate

June 2014 50 3 year 239.50 239.50 USD 6m LIBOR+375 bps (LIBOR rate: 0.324%)

March 2014 60 3 year 187.00 187.00USD 6m LIBOR+400 bps (LIBOR rate: 0.3318%)

June 201350 3 year 90.00 90.00 USD 6m LIBOR+400 bps

(LIBOR rate: 0.4138%)25 5 year 164.00 164.00

March 2013 50 3 year 129.00 129.00USD 6m LIBOR+400 bps (LIBOR rate: 0.4454%)

February 2013 60 3 year 151.12 151.12 USD 6m LIBOR+400 bps (LIBOR rate: 0.4649%)

Sri Lanka’s USD 239.5 mn bond issue was 4.8 times oversubscribed, with USD 239.5 mn total bids received. The central bank has decided to accept the entire sum after considering the high demand at a highly competitive margin

for the development bonds and giving investors an opportunity to commit funds for a longer period.< Research & Development Unit >


Sri Lankan Airlines Bond Issue Oversubscribed

Amount : USD 175 mn

Date of issue : 23 June, 2014

Due in : 2019

Priced at : 5.3%

Book runner : Standard Chartered Bank

Final order book : USD 3.0 bn/85 participants

Oversubscribed by : 17 times

This is the lowest rate achieved to date, in the international market, by a Sri Lankan corporate or bank.


The International Finance Corporation (IFC) has concluded its largest syndication of USD 200 mn to National Development Bank (NDB) by including an addition of USD 75 mn to the already-extended USD 125 mn.Led by the IFC, the syndication which is expected to give a fresh boost to the nation’s Micro, Small and Medium Enterprises (MSMEs) was initially signed in March 2014.


IFC Increases Syndicated Financing to NDB

The World Bank has approved a USD 101.5 mn IDA credit to expand the availability of employable workers by increasing access to high quality, labor market relevant skills development programs in Sri Lanka.

This Project supports the Skills Sector Development Program (SSDP) launched by the Government of Sri Lanka as part of its Public Investment Strategy for 2014-16.

World Bank Approves USD 101.5 mn to Sri Lanka for the Skills Development Project



SL to set up a Carbon Nano-tube Factory Sri Lanka is to change the age-old practice of exporting raw graphite with

the innovation of a value added graphite product using nano technology, according to Senior Minister for Scientific Affairs Prof. Tissa Vitharana

Sri Lanka Institute of Nano Technology (SLINTEC) has carried out extensive research relating to carbon nano-tubes composed of carbon atoms built at nano-scales. The minister has further stated that these nano-tubes have the strength approximately 100 times that of steel while the weight is one sixth of the weight of steel.

It is used for computer components, electronics and space technology. Such high-tech products made of Sri Lanka’s graphite is worth around Rs. 150,000 per gram. The minister has revealed that a Sri Lankan company is to set up a carbon nano-tube factory with foreign assistance to meet the high demand for such material made of Sri Lanka’s graphite.

Currently, Sri Lanka exports raw graphite at a price of around Rs. 200 per kilogram.

Business in Asia

Source: The Economist< Research & Development Unit >

Analysis & Forecast


ADB President Takehiko Nakao

Sri Lanka: Opportunities & Challenges

I. First, it is imperative to maintain sound macroeconomic policy. The country has done extremely well in this area and all the signals are pointing in the right direction. However, as I’ve already mentioned, there is still work to be done to raise revenue. There is also a need to reform state-owned enterprises (SOEs). Indeed, fiscal consolidation and efficient use of public resources will depend on this reform. Several strategic enterprises may remain publicly owned, but they must be streamlined and reformed to ensure much greater operational, managerial and financial efficiencies.

II. Second, Sri Lanka will need to keep investing in physical infrastructure. I am a firm believer that the public sector should play a pivotal role in infrastructure development. In addition to promoting public private partnerships (PPPs) to mobilize private sector resources, there is a clear need for the government itself to implement well-designed public works backed by its own resources and supported by international partners such as ADB

III. Third, the country needs a highly skilled labor force to fully tap its potentials. Investment in skills development, including technical and vocational training, is already underway, but I encourage unrelenting investment in upgrading human capital. This will create good jobs and income, and attract new investments from home and abroad.

IV. Fourth, the Government should improve the investment climate and facilitate private sector development. Foreign direct investment should be encouraged to bring along new and improved technologies, as well as new markets and management skills. The government should set in place sound regulation and legal frameworks, trade facilitation, property rights protection, and financial sector development. It goes without saying that good governance and the rule of law are a fundamental requirement. Sri Lanka would also benefit from building on its already successful PPPs, such as the Colombo Port terminal. PPPs can complement public investment and be a means to bringing about efficiency in public service delivery

Cont…< Research & Development Unit >


Sri Lanka: Opportunities & Challenges (cont…)

V. Fifth, economic growth needs to be inclusive. Infrastructure development should prioritize regions and sectors that are currently lagging behind. This is important to reduce inequalities and create access to opportunity. Investment in human capital is also fundamental to inclusive development. A progressive tax system and spending on social protection programs should also help mitigate income gaps in the society.

VI. Finally, one of the most important tasks for the government is to have a clear vision or strategy for development and to share it with the people. While we know from the economic history of the world that the private sector is an engine for growth in any country, it is the responsibility of the government, especially in developing countries, to set policies in line with the national strategy, prioritize its spending and investments, and appropriately guide the private sector. The strategy should be based on professional assessments of the country’s comparative advantage and evolving global economic landscape. It should also be pragmatic, realistic and flexible, depending on changing circumstances.

VII. To fulfill all these mandates of the government, highly motivated and qualified civil servants are crucial.

“In conclusion, let me share with you, again, my strong belief that Sri Lanka can and should become another Asian economic success story, and in this sense the next Asian Miracle.”


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.

It’s not success that creates happiness,

but happiness that creates success!

Ajahn Brahmavamso, The world-renowned meditation teacher

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Economic Capsule - June 2014

Economy & Finance