Economic CapsuleMay 2016

Research & Development Unit

233rd Issue

C O N T E N T S

BANKING AND FINANCE FinanceAsia Declares Commercial Bank Best Bank in Sri Lanka Banking Sector Performance – 1Q, 2016

ECONOMY & BUSINESS Sri Lanka Seeking to Borrow USD 3.5 bn through Foreign Debt Japan to Lend USD 4.2 bn to Sri Lanka Import Duty Changes on Vehicles Sri Lanka Vehicle Registrations Subdued in April 2016 Sri Lanka Signs MOU with Siemens to Develop Megapolis Smart Cities London Stock Exchange Group Enters into Agreement with Sri Lanka’s BOI Tea Dips USD 23.1 mn in 1Q, 2016 Shangri-La opens 145-acre Resort in Hambantota Sri Lanka Economic Update CEAT Sri Lanka to Raise Radial Tyre Capacity by 75 % Construction of Access Tower 2 LafargeHolcim to Exit Cement Business in Sri Lanka amanté Opens its First Exclusive Boutique in Pakistan

Condominium Industry in Sri Lanka

October, 2014

Research & Development Unit

Banking & Finance

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FinanceAsia Declares Commercial Bank Best Bank in Sri Lanka

The Commercial Bank of Ceylon has won two more prestigious international accolades, being adjudged the ‘Best Bank’ in Sri Lanka in 2016, and presented a Platinum award for 20 years of excellence by the Hong Kong based ‘FinanceAsia,’ magazine.

• This is the sixth ‘FinanceAsia Country Banking Achievement Award’ presented to Commercial Bank in the eight years since the Bank became the first entity in Sri Lanka to receive this coveted tribute in 2009.

• Additionally, as FinanceAsia celebrates 20 years covering Asia’s financial markets this year, the magazine has chosen Commercial Bank as one the recipients of a one-off Platinum Award presented to banks and corporations that have consistently excelled over the past two decades, providing utmost quality and innovation to customers.

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Total Assets Deposits Total Liabilities including Equity

Banking Sector Performance – 1Q, 2016

Cont..

Source: CBSL

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(a) Net of interest in suspense(b) Total loans and advances including non-performing loans net of interest in

suspense(a) Profit after tax as a percentage of average equity (b) Profit before tax (annualised) as a percentage of average assets

Banking Sector Performance – 1Q, 2016 (cont..)

Source: CBSL

Condominium Industry in Sri Lanka

October, 2014

Research & Development Unit

Economy & Business

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Sri Lanka Seeking to Borrow USD 3.5 bn through Foreign Debt

• The borrowing plan comes as Sri Lanka seeks to fix its precarious balance of payments position after a sharp depletion of its foreign exchange reserves.

• "A USD500 mn syndicated loan is almost done with Credit Suisse. Once that is done, we will be going for another USD500 mn syndicated loan," according to Mr. Ravi Karunanayake."Then we will go for the sovereign bond within two to three weeks. We will also go for a sukuk."

• The minister has also stated that government has appointed eight banks and four non-banking institutions as the lead managers for the upcoming sovereign bond. He added the government may look to sell bonds to Chinese and Japanese investors. Source: Reuters

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Sri Lanka is in the process of borrowing up to USD 3.5 bn from foreign sources via syndicated loans, sovereign bonds, and sukuk, the according to country's finance minister.

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Japan to Lend USD 4.2 bn to Sri Lanka

• Japan will lend USD 4.2 bn to Sri Lanka through both a loan and bond financing for budgetary support in the next two years, including infrastructure development, according Sri Lanka’s finance minister Ravi Karunanayake.

• According to the minister, Japan has committed USD 2.9 bn at a low interest rate of 0.01 % over the next two years. The repayment period for the loan would be 40 years. Additionally a USD 1.3-bn bond would also be issued in Japan.

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Source: Reuters

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Import Duty Changes on Vehicles

The Gazette notification issued by the Ministry of Finance

• Prices of vehicles with above 1,000cc engine capacity will increase following the increase of the minimum unit tax according to Vehicle Importers Association.

• According to car dealers the tax range for 800 and 1,000cc cars is expected to come down from its present tax range of Rs 1.5 to 1.6 mn to about Rs 1.35 mn.

• However, the India-made three wheeler auto taxies have been hit by a raised band and will have an increased rate of customs duty.

• Users of SUVs are the worst-hit, with the import tax on one particular brand, which stood at about Rs 5.4 mn, rising up to above Rs 7.6 mn.

Source: Press Trust of India

According to a gazette notification released by the Ministry of Finance, Sri Lanka has reduced import duties on cars with engine capacity of 800 and 1,000 cubic centimetre (cc) while increasing duty on higher engine capacity cars.

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Sri Lanka Vehicle Registrations Subdued in April 2016

• Motor car registrations recorded 3,618 units in April 16 up from 3,326 units a month ago and significantly down from 5,116 units 12 months ago.

• Brand new segment registrations recorded 1,709 units in Apr 16 significantly up from 1,186 units the previous month but significantly down from 2,926 units recorded 12 months ago.

• Pre-owned car registrations recorded 1,909 units in Apr 16 marginally down from 2,140 units a month ago and also marginally down from 2,190 units 12 month ago.

Cont..

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Sri Lanka Vehicle Registrations Subdued in April 2016 (cont..)

• Maruti recorded 1,142 units in Apr 16 significantly recovering from 639 units the previous month and the extremely low 255 units in Jan 16 but yet significantly down from 2,239 units 12 months ago.

• Electric cars recorded 85 units in Apr 16 significantly down from 185 units the previous months and 152 units 12 months ago. Nissan Leaf accounted for 74 of the units down from 160 units the previous month.

• 3-wheeler registrations recorded 4,151 units in Apr 16 up from 3,978 units the previous month but significantly down from 10,839 units 12-month ago. At the peak in Nov 15 registrations hit 13,668 and in Feb 16 registrations at 2,939 units was a 60-month low.

Source: JB Securities

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Sri Lanka Signs MOU with Siemens to Develop Megapolis Smart Cities

Source: Siemens

Siemens, a renowned global leader in the area of Smart Cities, strengthened its partnership with Sri Lanka by signing a Memorandum of Understanding (MoU) with Ministry of Megapolis and Western Development to offer expertise and best practices from its globally-proven, state-of-the-art, Sustainable, Smart City solutions portfolio.

• 'Smart City' application involves efficient deployment and management of transport, power, waste disposal, healthcare and other urban infrastructure and services.

• According to Lakshman Jayasekara, Project Director of the Western Region Megapolis Planning Project, Siemens expertise and technologies will help eliminate congestion pressures on urban infrastructure, services and environment and reduce the per unit capital cost of infrastructure.

• Sunil Mathur, Managing Director and CEO, Siemens Limited India has stated the firm had the expertise to help cities become more liveable, more competitive and more sustainable.

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London Stock Exchange Group Enters into Agreement with Sri Lanka’s BOI

The Board of Investment of Sri Lanka signed an agreement with “London Stock Exchange Group” (LSEG) to set up their global business services arm in Sri Lanka.

• The new facility will directly employ 400 personnel in high technology jobs. These employees will be providing technology services which are central to the group’s global network.

• LSEG will invest and recruit in Sri Lanka which will further boost the country’s IT Sector. The facility will be located in the Trace Expert City of Colombo.

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Tea Dips by USD 23.1 mn in 1Q, 2016• According to Ceylon Tea Brokers in its latest Tea Industry Overview, Iraq

emerged as the unlikely top buyer of Ceylon Tea as Sri Lanka’s first quarter tea exports dropped to USD 311.8 mn in 2016 from USD 334.9 mn in 2015 as producers battled with bad weather and volatile markets.

• Sri Lanka tea exports for the 1Q of 2016 amounted to 74.45 m kg vis-à-vis 73.21 m kg recorded for the same period last year (+1.24 m kg), the FOB average price per kilo for this period stood at Rs.605.37 marginally lower than Rs.606.37 (-Rs 1.0 YOY) for the same period.

• The total Sri Lanka tea production for 1Q 2016 recorded 70.26m kg in comparison to 79.35m kg (-9.09m kg) for the same period last year. Though production has declined by 9.09m kg, exports have increased by 1.24 m kg compared to the same period in 2015.

• However, the industry could recover some of its lost momentum in the second half of this year due to shifts in global politics and in oil prices, the prized commodity on which the majority of Sri Lanka’s tea importing countries depend for their economic wellbeing. Oil prices have seen a steady upward momentum in 1Q of this year. Cont..

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Tea Dips by USD 23.1 mn in 1Q, 2016 (cont..)

• According to the report, Iraq has emerged as the largest buyer of Sri Lankan tea, outplacing Russia in the first quarter. Turkey, the second largest importer of Sri Lanka tea in 2015, has shown a significant decline in its purchases in the first quarter, moving down to the fifth position.

• Whilst countries with dependency on oil exports and internal strife continue to rotate their positions on the top segment of the importer list, countries with economic and political stability remained untapped.

• India is seen forging ahead in its appetite to grab market share and even outpacing Sri Lanka as the market leader in Russia.

• The rapid globalisation continues to diminish traditional strengths and create new opportunities; tea trading hubs are being consolidated in Europe and in Dubai.

• Sri Lanka’s inability to penetrate into new markets remains a major drawback whilst China, Kenya and India has seen an upturn in their export earning Y-0-Y while Sri Lanka’s earnings seems to have reversed. Further continuous dependence on oil exporting countries has led to a reduction in export earnings, according to the Ceylon Tea Brokers report.

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Shangri-La opens 145-acre Resort in Hambantota Sri Lanka

• Shangri-La opened its 145-acre Hambantota Resort & Spa in the Southeast Sri Lanka, one of the major hotel chains to enter Sri Lanka after the end of a war.

• The 300-room beachfront resort, which includes an 18-hole golf course and an artisan village, launched with special packages for wild-life enthusiasts, newlyweds and families.

• The chain has separately invested in a 500-room hotel in Colombo scheduled to open in 2017.

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Economic Update

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M2b, Credit to Private Sector & Inflation • The year-on-year growth of broad money (M2b) (sum

of currency held by the public and all deposits held by the public with commercial banks) indicated some deceleration, recording 18.9 % in March 2016, compared to 19.8 % in February 2016.

• The expansion in domestic credit remained the key driver of broad money growth, within which credit extended to the private sector by commercial banks recorded a year-on-year growth of 27.7 % in March 2016, compared to 26.5 % in the previous month.

• Industry and Services sectors attracted the highest levels of credit disbursements, while personal loans and advances also recorded a substantial increase.

• The expansion in broad money (M2b) that has been recorded over a period of time (see figure) has resulted in applying upward pressure on inflation with a lagged effect.

Cont..

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Economic Update

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• Headline inflation, measured by CCPI, accelerated to 4.8%, Y-o-Y, in May 2016 compared to 3.1% in April. Annual average headline inflation edged up to 1.7 % in May from 1.3 % in April.

• Core inflation Y-o-Y was at 6.6% in May 2016, compared to 4.5% in the previous month.

• Meanwhile, the National Consumer Price Index (NCPI, 2013=100) based headline inflation increased to 4.3%, year-on-year, in April 2016 compared to 2.2% in the previous month.

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CEAT Sri Lanka to Raise Radial Tyre Capacity by 75 %

• CEAT Sri Lanka has announced it will invest Rs 800 mn over the next 12 months to increase radial tyre production capacity by 75 %, to 70,000 tyres a month from 40,000 to meet growing local and export demand.

• CEAT has a 30% share of the radial tyre market and supplies nearly half of Sri Lanka’s overall requirement of pneumatic tyres.

• About a third of CEAT Sri Lanka’s current tyre production is exported to 15 countries in South Asia, the Middle East, Africa and the Far East.

Construction of Access Tower 2

• Access Tower 2, the latest investment by Access Realties 2 Ltd.; a subsidiary of Access Engineering PLC is taking shape to serve the unfilled demand for commercial spaces in the financial city of Colombo.

• The property which is now under construction will consist of 190,000 rentable square feet in G+29 storey building with office spaces that vary in size from 2,500 sq. ft. to 9,000 sq. ft. across 29 floors.

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LafargeHolcim to Exit Cement Business in Sri Lanka

• Switzerland-based LafargeHolcim, a materials group, is exiting Sri Lanka's cement business where it operated Sri Lanka’s only integrated factory and had annual business volumes of USD 150 mn.

• According to a spokesperson the decision to sell Holcim Lanka was part of a larger global divestment strategy of the Swiss materials group.

amanté Opens its First Exclusive Boutique in Pakistan

• amanté opened its first flagship store in Pakistan at the Dolman Mall, Clifton, Karachi. This is the first international franchise, outside of India for the brand.

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 >