Economic Capsule - October 2016

Economic CapsuleOctober 2016

Research & Development Unit

238th Issue

C O N T E N T S

BANKING AND FINANCE Commercial Bank wins 4 Prestigious Awards at South Asian Partnership Summit Commercial Bank Honoured in USA& Hong Kong Commercial Bank’s Rs. 5 bn Debenture Issue Oversubscribed

ECONOMY & BUSINESS

Nobel Prize in Economics – 2016 Private Credit Soars to Rs.411bn in First 7 Months of 2016 Sri Lanka External Sector Performance – July 2016 Strong Growth for Sri Lankan Telcos, Despite Higher Taxes : Fitch New Initiative to Make the Country Self-Sufficient in Sugar Manufacture Algeria’s Rebrab to Build Euro 150 mn Sugar Refinery in Sri Lanka Chinese Partner to Forge a Private-Public Partnership for the Hambantota Port

Sri Lanka’s Growth Will Be Below Average for South Asia: World Bank

ANALYSIS & FORECAST

International Trade in 2016 to Grow at Slowest Pace Since the Financial Crisis - WTO

Condominium Industry in Sri Lanka

October, 2014


Banking & Finance

4< Research & Development Unit >

Commercial Bank wins 4 Prestigious Awards at South Asian Partnership Summit

The most-awarded bank at the ceremony, Commercial Bank received the awards for ‘Best in CSR Practices, ‘Best in Brand Excellence in Banking and Financial Services and Insurance Industry,’ and ‘Best Sustainable Bank’ in addition to being named the ‘Best Private Sector Bank.’

The South Asian Business Awards honour and celebrate leaders around the region working to strengthen unity and increase economic opportunity. The goal of the South Asian Partnership Summit is to provide a forum to establish the standards of excellence for quality development and to honour the people and organisations responsible for developing the most effective actions that exemplify that excellence.

Commercial Bank was declared the Best Private Sector Bank in Sri Lanka and best for CSR, Brand Excellence and Sustainability in the Banking industry


Commercial Bank Honoured in USA & Hong Kong

The Global Finance award was the 17th such accolade Commercial Bank has been presented with by the widely read magazine, while the one-off Platinum Award from Finance Asia complements the sixth ‘Country Banking Achievement Award’ presented by the magazine earlier this year to Commercial Bank.

Commercial Bank’s Rs. 5 bn Debenture Issue oversubscribed Commercial Bank’s second issue of debentures for 2016

opened on Monday, 24th October 2016. The Bank was seeking to raise Rs 5 bn with an option to increase it by a further Rs 2 bn to strengthen its Tier II capital and to raise long term funds for expansion.

The Listed, Rated, Unsecured, Subordinated, Redeemable Debentures in the denomination of Rs 100 was offered in two tenures – Type A with a 5 year tenure and Type B with a 10 year tenure.

The 5-year debentures carry a fixed interest rate of 12.00% p.a. (AER 12.36%) payable semi-annually, while the 10-year debentures offer a fixed interest rate of 12.25% p.a. (AER 12.63%), also payable semi-annually.

The debentures were rated AA- (lka) by Fitch. The Investment Banking Division of Commercial Bank of Ceylon PLC was the Manager to the Issue.

< Research & Development Unit > 6

Commercial Bank’s Rs 5 bn debenture issue has been oversubscribed within minutes of opening with subscriptions of over Rs 7 bn being received.

Therefore the Bank has decided to exercise its option of enlarging the issue to Rs. 7 bn.

The basis of allotment of the debentures will be decided by the Board of Directors of the bank and will be notified to the CSE in the near future.


October, 2014


Economy & Business

Nobel Prize in Economics - 2016The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2016 was awarded jointly to Oliver Hart and Bengt Holmström "for their contributions to contract theory"

This year’s laureates have developed contract theory, a comprehensive framework for analysing many diverse issues in contractual design, like performance-based pay for top executives, deductibles and co-pays in insurance, and the privatisation of public-sector activities.

In the late 1970s, Bengt Holmström demonstrated how a principal (e.g., a company’s shareholders) should design an optimal contract for an agent (the company’s CEO), whose action is partly unobserved by the principal.

Source: www.nobelprize.org


In the mid-1980s, Oliver Hart made fundamental contributions to a new branch of contract theory that deals with the important case of incomplete contracts.

Through their initial contributions, Hart and Holmström launched contract theory as a fertile field of basic research. Over the last few decades, they have also explored many of its applications.

Their analysis of optimal contractual arrangements lays an intellectual foundation for designing policies and institutions in many areas, from bankruptcy legislation to political constitutions.


Private Credit Soars to Rs.411 bn in First 7 Months of 2016

Credit extended to the private sector from the banking system increased to Rs. 411 bn during the first seven months of 2016 compared to Rs. 246 bn during the corresponding period in 2015.

The banking sector credit to private sector recorded a historical high of Rs. 691 bn in 2015.

According to the data released so far for 2016, the highest monthly private credit was seen in March, where it grew by Rs.88 bn, followed by Rs.76 bn in June and Rs.63 bn in July.

The Central Bank twice raised the key policy rates by 50 bps each in February,2016 and July,2016 after increasing the banks’ statutory reserves ratio by 150 bps in January,2016 to curb credit flows into the economy. Source: CBSL

10

External Sector Performance – July 2016

Cont..

Exports Continuing the y-o-y declining trend, which began from March

2015,earnings from exports declined by 4.4 % in July 2016 due to subdued performance in agricultural and industrial exports, owing to lower international commodity prices and lower domestic supply.

However, earnings from sea food exports to the EU grew by 19.9 %, y-o-y, mainly as a result of the removal of the fish ban imposed by the EU on Sri Lanka, with effect from end June 2016.

Earnings from textiles and garments exports, which account for around 48 % of total export earnings, grew by 3.0 %, y-o-y, to USD 426 mn, due to higher garment exports to the EU and non-traditional markets such as Canada, China, Australia and the UAE.

Category Jan-July 2015

Jan-July 2016

Change (%)

Industrial Exports 4,836.7 4,660.4 (3.6) Textiles and garments 2,818.5 2,940.2 4.3Agricultural exports 1,490.1 1,312.6 (11.9) Tea 809.4 726.1 (10.3)Mineral and other 29.7 25.9 (12.7)Total exports 6,356.5 5,998.9 (5.6)

Source: CBSL

The leading markets for merchandise exports of Sri Lanka during the first seven months of 2016 were the USA, UK, Germany, India and Italy accounting for about 53 % of total exports.

< Research & Development Unit >

11

Sri Lanka External Sector Performance – July 2016 (cont…)

Source: CBSL

Imports Expenditure on imports contracted by 6.6 %, (YoY) in July 2016 due

to significant decline in expenditure on vehicle imports, followed by fuel and wheat imports.

Importation of motor cars, hybrid electric vehicles, motor cycles, buses, agricultural tractors and auto –trishaws declined significantly during the month.

Import expenditure on fuel declined by 18.6 %, (YoY) , during the month mainly due to the drop in average import prices of crude oil and coal together with the significant reduction in import volumes of refined petroleum products.

The average import price of crude oil declined to USD 46.10 % in July 2016 from USD 50.95 pbl in the previous month and USD 60.49 % pbl in July 2015.

Category Jan-July 2015

Jan-July 2016

Change (%)

Consumer goods 2,722.1 2,431.1 (10.7) Food and beverages 1,003.3 896.5 (10.6)

Non-food consumer goods 1,718.8 1,534.6 (10.7)

Vehicles 744.4 472.9 (36.5)

Intermediate goods 5,703.9 5,485.1 (3.8) Fuel 1,648.2 1,320.2 (19.9)

Investment goods 2,643.6 2,829.9 7.0Machinery and equipment 1,321.8 1,596.5 20.8Total Imports 11,080.6 10,753.8 (2.9)

On a cumulative basis, expenditure on imports during the first seven months of 2016 contracted by 2.9 % mainly due to reductions recorded in fuel, vehicle and rice imports.

During the first seven months of 2016, main import origins were China, India, Singapore, Japan and the UAE accounting for about 57 % of total imports.

< Research & Development Unit > Cont..

Inflows to the financial account strengthened during the first seven months of 2016 with the proceeds of USD 1,500 mn from the issuance of the 10th international sovereign bond, USD 300 mn from the Syndicated Loan facility and net inflows recorded in the government securities market and the Colombo Stock Exchange (CSE), easing the pressure on the Balance of Payments.

During the first seven months of 2016, the overall BOP is estimated to have recorded a surplus of USD 356.0 mn, compared to a deficit of USD 1,229.6 mn recorded during the corresponding period of 2015.

Gross official reserves increased to USD 6.5 bn by end July 2016 and were equivalent to 4.2 months of imports.

CategoryJan-July

2015Jan-July

2016Change

(%)

Trade Balance -4,724.1 -4,754.9 0.7

Earnings from Tourism 1,667.1 1,945.2 16.7

Workers’ Remittances 4,032.0 4,185.9 3.8

Inflows to the CSE (Net) 40.0 -30.8 -177.0

Inflows to the Government 1,970.6 3,286.3 66.8

Treasury Bills and Bonds 631.3 909.5 44.1

International Sovereign Bonds 650.0 1,500.0 130.8

Syndicated Loan - 300.0 -

Long term Loans 629.9 563.3 -10.6

Foreign Direct Investments (Jan-Jun) 533.8 335.9 -37.1

Sri Lanka External Sector Performance – July 2016 (cont…)



New Initiative to Make the Country Self-Sufficient in Sugar Manufacture Having targeted to make Sri Lanka self-sufficient in sugar manufacture, plans are afoot to increase sugarcane

cultivation and set up of 15 new manufacturing plants in the country.

Under the first stage of the project, the country expects to manufacture 50% of its sugar requirement locally by 2020. The second stage of the project will be implemented with the participation of the private sector to make the country self-sufficient in sugar by 2025.

In addition to the current 26,000 hectares owned by the prevailing four sugar manufacturing factories, another 31,000 hectares of land should be cultivated by 2020. It has been calculated that a total number of 102,000 hectares should be cultivated to make the country self-sufficient in sugar.

104,000 hectares of cultivable land have already been identified in the districts of Moneragala, Batticaloa, Kilinochchi, Anuradhapura, Trincomalee, Ampara, Badulla and Polonnaruwa.

There are four sugar factories engaged in the industry and they annually manufacture 56,000 metric tons of sugar. SL consumes 700,000 metric tons of sugar annually and it spends Rs.35 bn to import 644,000 metric tons. Only 56,000 metric tons or 8% of the total requirement is manufactured locally and the balance 92% is imported.

With the completion of the new project, the country will be able to save Rs.35 bn foreign exchange. In addition, several byproducts will also be manufactured and subsequent to this, the current production cost of Rs.98 per kilogram for byproducts will be reduced to Rs.70 per kilogram.

Source: Ministry of Finance


Algeria’s Rebrab to Build Euro 150 mn Sugar Refinery in Sri Lanka

The ninth wealthiest businessman in Africa, and the founder of Cevital, Issad Rebrab, will invest in Sri Lanka in a sugar refinery and a vegetable oil plant in the Southern Province.

Cevital will invest 150 mn Euros to build the sugar refinery and also a power plant.

In addition a further 45 mn Euro will be invested to manufacture vegetable oil.

Rebrab built the world’s largest sugar refinery in Algeria, which has no natural resources for sugar, and is expected to utilize Hambantota port facilities for the project.

Source: Dailynews

Rebrab, has been named the wealthiest man in North Africa by the Forbes 2015 rankings. He is the only billionaire in his country and has estimated assets of USD 3.2 billion. He gained 28 positions in the previous year and is now the 549th richest person in the world, and one of the ten wealthiest Africans.

The Government has decided to enter into an agreement with China Merchants Holdings (International) Company Ltd to develop the Hambantota Port on a Private-Public Partnership (PPP) basis with 80 % of the shares transferred to the company.

In addition, the Government had shortlisted four major airline companies to revive debt-ridden national carrier Sri Lankan Airlines.

Chinese Partner to Forge a Private-Public Partnership(PPP) for the Hambantota Port


Source: www.dailymirror.lk, www.ft.lk

http://www.dailymirror.lk/

http://www.ft.lk/


October, 2014


International


The World Trade Organization has cut its forecast for global trade growth this year by more than a third , reflecting a slowdown in China and falling levels of imports into the United States.

The contraction was driven by slowing GDP and trade growth in developing economies such as China and Brazil but also in North America, which had the strongest import growth of any region in 2014-15 but has decelerated since then.

Certain trade related indicators have improved, including export ‐orders and container port throughput, but overall momentum in trade remains weak.

The latest figures are a disappointing development and underline a recent weakening in the relationship between trade and GDP growth.

Trade in 2016 to Grow at Slowest pace Since the Financial Crisis - WTO

Cont..

Over the long term trade has typically grown at 1.5 times faster than GDP, though in the 1990s world merchandise trade volume grew about twice as fast as world real GDP at market exchange rates.

If the revised projection holds, 2016 will be the first time in 15 years that the ratio between trade growth and world GDP has fallen below 1:1.

Historically strong trade growth has been a sign of strong economic growth, as trade has provided a way for developing and emerging economies to grow quickly, and strong import growth has been associated with faster growth in developed countries.

However the increase of the number of systemically important trading countries and the shift in the ratio of trade and GDP growth makes it more difficult to forecast future trade growth.

Trade in 2016 to Grow at Slowest Pace Since the Financial Crisis – WTO (cont…)


Cont..



Cont..



Cont..

Merchandise trade volume and real GDP, 2012-2017 Annual % change




October, 2014


Analysis & Forecast

Sri Lanka’s Growth Will Be Below Average for South Asia: World Bank

2016 e 2017 fSouth Asia 7.1 7.3

Afghanistan 0.5 1.8

Bangladesh 7.1 6.8

Bhutan 7.3 9.8

India 7.6 7.7

Maldives 3.5 3.9

Nepal 0.6 5.0

Pakistan 5.7 5.0

Sri Lanka 4.8 5.0

• Sri Lanka’s economic growth is projected to grow at 5.0 % in 2017, up from 4.8 % in 2016 and driven by increased private consumption and postponed investment in 2015.

• It is imperative for Sri Lanka

- to expedite high priority structural reforms to increase competitiveness,

- improve governance and

- consolidate its fiscal balance

in order to ensure sustained growth and development.

Source: South Asia Economic Focus Fall 2016 - WB < Research & Development Unit > 23


Sri Lanka’s Growth Will Be Below Average for South Asia: World Bank (cont…)Outlook

Monetary tightening and enhanced currency flexibility have contributed to improving short-term stability.

The IMF program will add to the confidence while supporting fiscal sustainability. Structural reforms supported by the IMF Extended Fund Facility (EFF) will yield benefits in the medium term.

Growth is expected to remain unchanged in 2016 and grow marginally over 5.0 % beyond, driven by private consumption and postponed FDI in 2015.

The reduced drag from imports on account of low commodity prices along with recent policy measures will contribute to the increase in growth.

The impact of past currency depreciation and the increase of the VAT rate will increase inflation in 2016 and 2017 despite downward pressure from low international commodity prices.

The external current account is projected to improve in 2016 with reduced imports and increased tourism.

The fiscal deficit is projected at 5.7 % of GDP for 2016 after considering delays in implementation of revenue measures.

Source: South Asia Economic Focus Fall 2016 - WB

The immediate challenge is to increase 2016 revenue amid legal obstacles on VAT.

Structural challenges include increasing fiscal revenue in the medium term to meet the requirements of a middle income country; and narrowing a persistent current account deficit linked to structural competitiveness issues.

Key risks include a growth slowdown, which would lead to fast rising public debt.

While the direct impact of a slowdown in China and the Brexit would be limited, continued economic woes in the Middle East, the EU and Russia could adversely affect exports and remittances.

Tightening global financial conditions could elevate capital outflows and make borrowing more expensive.

Sri Lanka’s Growth Will Be Below Average for South Asia: World Bank (cont…)

< Research & Development Unit > Source: South Asia Economic Focus Fall 2016 - WB 25

Risks and Challenges

Sri Lanka’s Growth Will Be Below Average for South Asia: World Bank (cont…)

Source: South Asia Economic Focus Fall 2016 - WB


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 >

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Economic Capsule - October 2016

Economy & Finance