Economic Capsule - July 2017

Economic CapsuleJuly 2017

247th Issue

Research & Development Unit

C O N T E N T S

ECONOMY & BUSINESS

IMF completes second review of Sri Lanka’s EFF arrangement

Moody's: Sri Lanka balances robust growth potential with high debt burden, external risks

The impact of recurring natural disasters: World Bank

Sri Lanka tax revenue up 25.6% in Jan-Apr 17

External Sector Performance – April, 2017

Sri Lanka's hill country among lonely planet's best places to visit in 2017

Customs launch online payment platform

New Appointments

Orion Towers to open doors by Q1, 2018

Sri Lanka’s first Marriott Resort and Spa opens at Weligama Bay

Volvo to check on buying rubber components from Sri Lanka

INTERNATIONAL

IMF World Economic Outlook Update, July 2017

BANKING & FINANCE

COMBANK among World’s Top 1000 Banks for 7 consecutive years

Commercial Bank wins 4 CSR and sustainability Awards from CMO Asia Council

Commercial Bank introduces Sri Lanka’s first Chip & PIN debit card

Condominium Industry in Sri Lanka

October, 2014


Banking & Finance

< Research & Development Unit >

COMBANK among World’s Top 1000 Banks for 7 consecutive years

• Commercial Bank is the only Sri Lankan bank to be in the Top 1000 ranking for seven years running and is the only bank to record a double digit upward movement in the 2017 rankings.

• The Top 1000 Banks of the World are ranked on the basis of Tier I capital, assets, capital assets ratio, pre-tax profits, return on capital, return on assets, BIS (Basel) Capital ratio, NPL to total loans, loans to assets ratio, risk weighted assets (RWA) to total assets (TA) ratio and cost income ratio.

Commercial Bank has been ranked among the Top 1000 Banks of the World for a seventh consecutive year in 2017, and moved up 19 places in this prestigious global list compiled by ‘The Banker’ magazine of the UK.


Commercial Bank wins 4 CSR and sustainability Awards from CMO Asia Council

The Bank received the awards for;

Best Use of CSR Practices in Banking and Finance

Developing Sustainability Strategies

Concern for Health and

Support and Improvement in Quality of Education

All in the sphere of Corporate Social Responsibility

Commercial Bank won four awards at the Sri Lanka Marketing, HR and CSR Leadership Awards presented by the CMO Asia Council.


Commercial Bank introduces Sri Lanka’s first Chip & PIN debit card

Commercial Bank has introduced Mastercard debit cards with Chip & PIN technology for the first time in Sri Lanka.

• These cards replace the existing Maestro debit cards with magnetic strips. The new Chip & PIN debit card will minimise the possibility of fraudulent transactions at Point-of-Sale (POS) due to the PIN requirement.

• This technology renders the new Mastercard debit cards smart and significantly increases the security level of the card when transacting.


October, 2014


Economy & Business


• While noting that the targets for the fiscal balance and tax revenue have been met, the IMF has cautioned that Sri Lanka’s high debt burden and gross financing needs require further revenue-based consolidation.

• The IMF has further observed that “timely progress in structural reforms, including tax administration and energy pricing, will strengthen the platform for durable consolidation”.

• While noting the monetary tightening in March, 2017, the IMF is of the view that “further tightening is desirable until clear signs emerge that inflation pressures and credit expansion have subsided”.

IMF completes second review of Sri Lanka’s EFF arrangement

The IMF Executive Board has completed the second review of Sri Lanka’s Extended Fund Facility (EFF) arrangement and approved the disbursement of about USD 167.2 mn.

The reform program, supported by the IMF, aims to reduce the fiscal deficit, rebuild foreign exchange reserves, and introduce a simpler, more equitable tax system to restore macroeconomic stability and promote inclusive growth.

Cont…


• The IMF has further stated that “continued international reserves accumulation and enhanced exchange rate flexibility, to which the authorities are committed, would reduce Sri Lanka’s external vulnerabilities.”

• The CBSL is planning to end 2017 with about USD 7.2 bn in foreign reserves, which is USD 200 mnmore than the present level of USD 7 bn.

• Unless the country’s macro-economic condition improves considerably, Sri Lanka will have to pay a hefty risk premium for its international borrowings, particularly at a time when the interest rates in the United States treasuries are set to increase further.

• Additionally, the IMF has stated that the Inland Revenue Bill, which has been submitted to parliament, will support fiscal consolidation, make the tax system more efficient and equitable, and generate resources for social and development programs.

IMF completes second review of Sri Lanka’s EFF arrangement (cont…)

Source: IMF


• In 2017, Moody's expects real GDP growth of 4.6%, which reflects the temporary negative impact of adverse weather-related events during the first half of the year. Meanwhile, Moody's expects GDP growth to average 5.2% per year in 2017-21, a robust growth rate.

• Sri Lanka has progressed with some reforms under its three-year International Monetary Fund (IMF) Extended Fund Facility (EFF) program. In particular, revenue measures aimed at increasing taxes, such as last year's value-added tax (VAT) rate hike and this year's pending new Inland Revenue Reform act, have the potential to sustainably increase government revenues.

• Despite ongoing fiscal consolidation, Sri Lanka's credit profile will remain constrained by its large debt burden and very low debt affordability, combined with contingent liability risks from state-owned enterprises.

Moody's: Sri Lanka balances robust growth potential with high debt burden, external risks

Sri Lanka's B1 rating is supported by robust medium-term GDP growth prospects, relatively large economy, and high income levels when compared with similarly rated sovereigns.

Credit challenges include high general government debt, very low debt affordability and large borrowing requirements. Moreover, Sri Lanka's external payments position also remains fragile.

Cont…


• Moody's expects general government debt to decline only gradually to around 78% of GDP in 2018, from 79.3% in 2016, significantly higher than the median of 53% for B-rated sovereigns.

• Progress on reducing external vulnerability has been slower. External and foreign currency debt account for about 43% of total government debt, giving rise to significant exposure to external financing conditions.

• In particular, large volumes of external government debt maturing in 2019-22 will test government liquidity and external vulnerability. Further measures to build foreign-exchange reserves would help establish buffers against external pressure, in particular ahead of 2019.

• Signs that planned fiscal consolidation measures are less effective than Moody's currently expects or that the authorities' commitment towards such steps has diminished would weigh on Sri Lanka's rating, particularly if foreign-exchange reserves remain low while refinancing of market debt is challenging.

• Meanwhile, evidence of effective implementation of reforms that leads to significant and lasting improvements in tax collection, and more stable external financing conditions, would support a return of the rating outlook to stable.

Moody's: Sri Lanka balances robust growth potential with high debt burden, external risks (cont…)

Source: Moody’s


• May 2016 floods and landslides had a total estimated impact of LKR 100 bn. It was

estimated that the damage was mainly to the private sector (housing, industry and commerce, LKR 90 bn), while the effect on the public sector was mainly through infrastructure and transport sector damage (LKR 8 bn). The disaster affected mainly the Colombo and Gampaha urban areas, which has a large number of people living in or close to poverty.

• Late 2016 drought’s impact mainly affected the agricultural sector, and led to

widespread food insecurity in the affected regions. It led to decreased exports of agricultural exports, mainly tea, and increased imports of petrol, as hydropower reservoirs ran dry. The impact can also be seen on GDP growth, where the negative impact on agriculture dragged down growth.

The impact of recurring natural disasters: World Bank

Cont…


• Floods and landslides in late May 2017 have affected districts in the South-West,

affected more than half a million people and caused 213 deaths and 77 people missing. This disaster destroyed over 3000 houses and partially damaged more than 20,000 houses. The economic impact of the event is being currently studied.

• On average over the long term, annual losses for housing, infrastructure, agriculture, and

relief from natural disasters are estimated at LKR 50 bn (or around USD 327 mn), with the highest annual expected losses from floods (LKR 32 bn), cyclones or high winds (LKR 11 bn), droughts (LKR 5.2 bn) and landslides (LKR 1.8 bn). This is equivalent to 0.4 % of GDP or 2.1 % of government expenditure.

• The execution of the budget is knocked off track continuously due to the impact of natural disasters, which seem to have increased in frequency, severity and economic impact as Sri Lanka’s economy has grown and has become more sophisticated. Although fewer people were impacted than in previous floods, the damage caused by the 2016 floods and landslides was more than twice as high in US dollar terms than the worst flood disasters between 1992 and 2011.

Source: Sri Lanka Development Update – June 2017 – World Bank

The impact of recurring natural disasters: World Bank (cont…)


Sri Lanka tax revenue up 25.6% in Jan-Apr 17

Summary of Performance of Government Revenue (January - April)

Source: Mid – Year Fiscal Position Report 2017

Sri Lanka's tax revenues rose 25.6 % in the first four months of 2017 from a year earlier, helped by value added taxes, though excise revenues fell amid sharp hikes in tobacco and alcohol levies.


External Sector Performance – April, 2017

Jan-Apr 16USD mn

Jan-Apr 17USD mn

Y-O-Y Change %

Total Exports 3,449.6 3,569.0 3.5

Tea 406.3 458.2 12.8

Textiles & garments 1,709.8 1,626.3 (4.9)

Total Imports 6,055.4 6,882.8 13.7

Fuel 686.5 1,207.7 75.9

Vehicles 298.9 248.2 (17.0)

Trade Balance -2,605.8 -3,314.3 (27.2)

• BOP: The deficit in the trade account of the BOP increased to USD 809 mn in April 2017 compared to USD 751 mn during the corresponding period of 2016.

• GOR: Gross official reserves, which stood at USD 6.0 bn at end 2016, increased to USD 7.0 bn by end June 2017

Cont…


External Sector Performance – April, 2017 (cont..)

• Tourism: Jan-June 2017: Tourist Arrivals increased by 4.8% (y-o-y) to 1,010,444 while earnings were estimated at USD 1,733.60 mn

• Workers’ Remittances: Jan-May 2017: declined by 5.8% (y-o-y) to USD 2,797 mn.

The escalation of the Qatar-Gulf crisis could pose a risk to workers’ remittances as Qatar is a key migrant employment destination for Sri Lankans

Source: CBSL

Sri Lanka's hill country among lonely planet's best places to visit in 2017

Source: Dailymail


Sri Lanka Customs has launched a state-of-the-art online payment platform for Customs payments in partnership with the Central Bank of Sri Lanka.

Customs launch online payment platform

• The customers can now directly connect to their respective bank via any channel connected to CEFTS (Internet, Mobile, ATM or Over the Counter) to make the required payment to Customs.

• This online payment platform will facilitate online Customs payments from all commercial banks. LankaPay Online Payment Platform (LPOPP) has been designed to communicate with SL Custom’s ASYCUDA system on one side while the same payment platform will also be the front end for the participating banks of LankaClear’s Common Electronic Fund Transfer Switch (CEFTS) to liaise with SL Customs.


New Appointments

Dumindra Ratnayaka

Dumindra Ratnayaka – New BOI Chairman

Former CEO of Etisalat, Dumindra Ratnayaka has been appointed as the chairman of the Board of Investment (BOI) of Sri Lanka. Ratnayaka, a BOI director in the previous board, is the current Chairman of Martin & George limited. He is the only member reappointed from the former BOI Board of Directors to the current board.

Ajit Gunewardene

Ajit Gunewardene – New BOI Director

Currently the Deputy Chairman of John Keells Hodlings, he is also the director of several group companies. He is the Chairman of Union Assurance and a member of the board of SLINTEC and the advisory committee of the Tourism Ministry.

Mangala Yapa

Mangala Yapa – New BOI Director

Mangala Yapa, is currently the Managing Director of the Agency for Development of the Ministry of Development Strategies and International Trade. He was the former CEO/MD of Colombo Dockyard and the former CEO and Secretary General of the Ceylon Chamber of Commerce.


Cont…

New Appointments (cont…)

Deshal de Mel

Deshal de Mel – Economic advisor to the Finance Ministry

Deshal de Mel, who started his career as a research economist at the Institute of Policy Studies, went on to become a Senior Economist at Hayleys PLC in 2010. He was later appointed as the Head of Business Development at HayleysGlobal Beverages (Pvt) Ltd and a Director at Sampath Bank PLC.He had obtained his undergraduate degree in Philosophy, Political Science and Economics from Oxford and a Masters Degree in International Political Economy from the London School of Economics.

Prof. Razeen Sally

Prof. Razeen Sally – Senior Economic advisor to the Finance MinistryThe new appointment rests alongside Prof. Sally’s position as Chairman of the Institute of Policy Studies, the main economic policy think tank in Sri Lanka.Prof. Sally is an Associate Professor of the Lee Kuan Yew School of Public Policy, Singapore and Director of ECIPE, which he co-founded in 2006.He was on the faculty of the London School of Economics for 18 years, where he also received his PhD.


Thilan Wijesinghe – Chairman and Acting CEO of Public Private Partnership Unit of the Finance Ministry

Thilan Wijesinghe was formerly Chairman and Director General of the Board of Investment as well as the Bureau of Infrastructure Investment, during which time Sri Lanka successfully brokered its first PPP. Wijesinghe currently is the Chairman of TWCorp Ltd., a real estate focused investment and Development Management Company, Sapphirus Lanka Ltd. and Digital Commerce Lanka Ltd. Having commenced his career as Senior Management Consultant at Price Waterhouse Coopers, Colombo, and Head of Planning at Sampath Bank, in 1992 Thilan pursued entrepreneurial interests by co-founding Asia Capital, which became Sri Lanka’s largest investment bank in terms of market capitalization. Thilan graduated from the State University of New York and Cornell University, USA, with three BScdegrees in Business, Industrial Engineering and Economics.

Thilan Wijesinghe

Orion Towers to open doors by Q1, 2018

• Sri Lanka’s largest IT park, Orion City, has confirmed that its next building ‘Orion Tower’ – an investment of over USD 400 mn will be ready for operation by the first quarter of 2018.

• According to Orion City CEO Mr. Jeevan Gnanam, this building will add 650,000 square feet in addition to the current one million square feet we have at present.

• A mix of both local and foreign IT/BPM firms have already shown interest for space in the new building.

• In addition the firm is investing over USD 25 mn to set up a data centre project in Kandy as well as setting up a large-scale incubation space for startup companies.

(DailyFT)< Research & Development Unit >

Sri Lanka’s first Marriott Resort and Spa opens at Weligama Bay

• Sri Lanka’s latest five star Marriott Resort and Spa has opened for guests in Weligama Bay.

• The 198-bedroom resort, with a gross built up area of 350,000 square feet, is built by Weligama Hotel Properties Ltd., a subsidiary of East West Properties Plc. (DailyFT)


Volvo to check on buying rubber components from Sri Lanka

Sweden's Volvo has agreed to consider the possibility of buying rubber components from Sri Lanka for its automobiles, according to IndiraMalwatta, Chairperson of the Export Development Board (EDB).

• Sri Lanka has established a reputation for rubber gloves and tires but needs to diversify its product range.

• According to Ms. Malwatta, EDB has got consultants from Korea and Japan to work with auto component makers to upgrade quality so they can work with car manufacturers and join global value chains. (economynext)



October, 2014


International

IMF World Economic Outlook Update, July 2017


Cont…

IMF World Economic Outlook Update, July 2017 (cont…)

Source: IMF


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 >

Economy & Finance

Economic Capsule - July 2017