Economic Capsule - August 2016

Economic CapsuleAugust 2016

Research & Development Unit

236th Issue

C O N T E N T S

BANKING AND FINANCE Commercial Bank declared the ‘Strongest Bank’ in Sri Lanka Commercial Bank is Sri Lanka’s Most Respected Bank for 12th successive year

ECONOMY & BUSINESS CB Governor urges private sector to grab SL’s best growth opportunity An increase in government revenue Inflation comes down Credit expands Tourist arrivals to Sri Lanka hit an all-time high in July Earnings from tourism & Workers’ remittances Visa (cards) International opens office in Sri Lanka

Fed's Yellen sees stronger case for interest rate hike U.S. trade deals in doubt China's economic slowdown deepens

Condominium Industry in Sri Lanka

October, 2014


Banking & Finance

4< Research & Development Unit >

Commercial Bank declared the ‘Strongest Bank’ in Sri Lanka

• Commercial Bank has been adjudged ‘The Strongest Bank in Sri Lanka in 2016’ following a detailed and transparent scorecard compiled and analysed by The Asian Banker, a leading provider of strategic intelligence on the financial services industry.

• Based on an independent assessment of six areas of balance sheet financial performance – the ability to scale, balance sheet growth, risk profile, profitability, asset quality and liquidity – the accolade ranks Commercial Bank amongst the 500 strongest banks in the Asia Pacific Region.


Commercial Bank is Sri Lanka’s Most Respected Bank for 12th successive year

• Commercial Bank has been rated the most respected bank in Sri Lanka for the 12th year running and the second ‘Most Respected’ corporate entity in the country overall for the sixth successive year in the 2016 LMD rankings of the Most Respected Entities in Sri Lanka.

• The Bank has retained its No 1 ranking in Sri Lanka for ‘Honesty’ for the fourth consecutive year, and has been rated No 1 overall for Financial Performance for two consecutive years.

• Commercial Bank remains the only bank among the top five Most Respected entities in Sri Lanka in 2016.


October, 2014


Economy & Business


CB Governor urges private sector to grab SL’s best growth opportunity

Delivering the keynote address at the CIMA Sri Lanka Business Leaders Summit, Central Bank Governor Dr. Indrajit Coomaraswamy noted that the Government was committed to building a private sector-led competitive social market economy, and there was greater focus on export development and luring more foreign direct investments.

• Dr. Coomaraswamy noted that today prospects for Sri Lanka looked much better due to factors such as peace, growing international good will and strong ties with both the West and capital-surplus Asian countries as well as the country’s strategic location. Cont…

Opportunities


CB Chief urges private sector to grab SL’s best growth opportunity (cont…)

• Impending new trade agreements with India, China, Singapore, Japan and GSP+ provide Sri Lanka preferential market access to 3 bn people. • The Megapolis, the International Financial Centre, and regional development initiatives

covering the southern province, north, Trincomalee, Kandy, etc. were also significant.

Challenges• The Central Bank Chief emphasised reducing the fiscal deficit was key and noted the

Government’s commitment to reduce it to 3.5% of GDP was encouraging. • Since Sri Lanka can no longer benefit from concessionary aid, the country needs more

FDIs. For this, Sri Lanka will need to leverage its future preferential trade/market access. • Sri Lanka has begun to age before achieving development transition and this was

another challenge. Cont…


CB Chief urges private sector to grab SL’s best growth opportunity (cont…)Challenges• “We can’t drive growth with cheap labour augmentation but focus more on greater

productivity, skills, training and development and competitiveness,” he said adding “globalisation places high premium on competitiveness.”

• Sri Lanka has no choice but to pursue a private sector-led growth since the country has “maxed-out” on concessionary credit and the Government doesn’t have money. State revenue is needed to repay debts.

• “In that context, private sector has to step up,” he reiterated. This together with more FDIs, and exports will be key to achieve higher 7-8% economic growth.

Source: Daily FT

10 < Research & Development Unit >

An increase in government revenue

Institution 2014 2015 2016% Change

15/16

Inland Revenue Department 211,006 191,596 242,811 26.0

Department of Sri Lanka Customs 266,842 376,994 457,616 21.5

Excise Department 37,818 57,276 69,326 21.0

Total 515,666 625,866 769,753 23.0

This is seen as a positive development towards achieving fiscal consolidation since Sri Lanka has been experiencing a continuously declining Government Revenue/GDP ratio since 2006 (although there was a slight increase in the ratio in 2015, it was mostly due to the one-off ‘Super Gains tax’ and increase in trade related taxes due to high vehicle imports).

Revenue details from January to July (in Rs Mn)

Source: Daily FT


Inflation comes down

• Both headline and core inflation, measured on a year-on-year basis, edged down further in August 2016.

• According to CBSL, the normalisation observed in domestic supply conditions as well as the suspension of the revisions made to certain taxes moderated consumer price inflation.


Credit expands

• According to CBSL a high intake of credit to the Industry and Services sectors together with a substantial growth in personal loans and advances drove the credit expansion during the first half of the year.

• Reflecting these developments, the growth of broad money (M2b) accelerated to 17.0 % in the month of June 2016 from 16.5 % recorded in the previous month.

• Short term interest rates increased considerably in response to monetary tightening measures adopted by the Central Bank during the first seven months of the year, leading to a sharp upward adjustment in both lending and deposit rates in the financial sector.

• Credit granted to the private sector by commercial banks continued to increase at a significantly high rate of 28.2% in June 2016, on a year-on-year basis, in comparison to 28.0% recorded in the previous month.

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Tourist arrivals to Sri Lanka hit an all-time high in July

Tourist arrivals to SL hit an all-time high in July this year. The number of arrivals, which clocked 209,351, represented a growth of 19.1% compared to July last year and is the highest number recorded in a single month since records began in the sixties.

< Research & Development Unit >

Source: SLTB

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Earnings from tourism & Workers’ remittances

• Earnings from tourism were estimated to have increased by around 16.7 % during the period from January to July 2016, with a record number of tourist arrivals during the month of July.

• Workers’ remittances increased by 3.8 % during the first seven months of the year.

• These inflows, coupled with the renewed foreign interest in investments in government securities and the realisation of medium to long term financial flows to the government, eased the pressure on the balance of payments and the exchange rate.

• Meanwhile, gross official reserves were estimated to have improved to USD 6.5 bn by end July 2016 from USD 5.3 bn in end June 2016.

< Research & Development Unit >


Visa (cards) International opens office in Sri Lanka• Visa international has opened its Colombo office - the second in the region of

South Asia.

• According to Visa Asia Pacific Group Executive, Chris Clark;“Sri Lanka is a priority market for Visa in South Asia and one where we see tremendous opportunity for growth. However, there is a tremendously low level of personal consumption expenditure penetration of electronic payments in Sri Lanka and the actual acceptance of electronic payments is also relatively low compared to other countries in the region.So, we take a lead by opening an office here to help grow that penetration providing Sri Lankans with easier and more secure payment options”.

• Visa has been present in Sri Lanka since 1989 and has witnessed a growth of 85% and 25% in terms of Visa debit and credit card usage over the last five years. Visa currently works with 19 banks in Sri Lanka and nine other issuers of Visa card.


October, 2014


International


Fed's Yellen sees stronger case for interest rate hikeSpeaking at an annual meeting of central bankers, Janet Yellen was cautiously upbeat about the US economy.Economic growth and a stronger jobs market meant "the case for an increase in the federal funds rate has strengthened in recent months".There has been a growing expectation that US interest rates will rise this year.Some economists are saying that the next hike could even come next month.The central bank raised interest rates at the end of last year for the first time in nearly a decade, but has held them steady amid concerns over persistently low inflation.

Signs of slow improvements in the US economy came in data published on Friday (26.8.16). Although the growth rate of second quarter GDP was revised down slightly, from an annual rate of 1.2% to 1.1%, consumer spending - which makes up more than two-thirds of US economic activity - was revised up from 4.2% to 4.4%.

Separately, US Labor Department figures showed that claims for state unemployment benefits slipped 1,000 to a seasonally adjusted 261,000 for the week ended 20 August. It was the third straight weekly decline in claims.

Commerce Department data showed that US new homes sales jumped in July to their fastest rate in nearly nine years. Source: BBC


U.S. trade deals in doubtFrance demands an end to TTIP talksFrance cast serious doubt on the prospects of an EU free trade deal with the United States, adding to opposition within Germany and growing scepticism among Americans.

− Washington and Brussels are officially committed to sealing the Transatlantic Trade and Investment Partnership (TTIP) before U.S. President Barack Obama leaves office in January, but their chances of doing so are being eroded by approaching elections on both sides of the Atlantic and Britain's vote in June to leave the European Union.

− In the United States, Obama has promoted the accord, saying it would fuel growth. But the public mood is turning increasingly negative, with Republican presidential candidate Donald Trump making attacks on international trade deals a cornerstone of his campaign, saying they have cost U.S. jobs.

− His opponent, Democratic nominee Hillary Clinton, has also stepped back from her previous support for free trade when she was U.S. Secretary of State, and has questioned whether trade deals hold down U.S. wages.

Pacific trade pact remains top issue for Obama administrationTrans-Pacific Partnership (TPP) is the economic pillar of Obama's broader plan to shift U.S. foreign policy toward Asia and counter the rising economic and military might of China.The agreement's fate remains uncertain as both Republican Donald Trump and Democrat Hillary Clinton have said they oppose the TPP, citing past trade deals that have cost Americans jobs.

Source: Reuters


China's economic slowdown deepens

− Fresh economic data from China has added to a raft of indicators suggesting the world's second largest economy remains in the doldrums.

− Both industrial output and retail sales fell short of expectations for the month of July.

− The figures underline China's difficulty of transforming the economy away from factories and exports.

− The data come just as economic growth had ever so slightly improved in the second quarter.

− China's latest trade data had also pointed to a further slowdown.

Source: Reuters

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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Economy & Finance

Economic Capsule - August 2016