Economic Capsule - May 2015

Economic CapsuleMay 2015

Research & Development Unit

221st Issue

C O N T E N T S

BANKING SECTOR NEWS CBC Group Results - for the 03 Months Ended 31 March, 2015 Commercial Bank Adjudged among Best in Asia by FinanceAsia Commercial Bank Launches ‘Divisaru’ Savings Account to help Micro Businesses

ECONOMIC & BUSINESS NEWS Colombo Fastest Growing City in MasterCard Global Destination Cities Index

SL Tourist Arrival up 26% in May 15

External Sector Performance – 1Q, 2015

Foreign Borrowings

Reserves Position

Penal Interest Rates on Exporters

A Toxic Mixture

ANALYSIS

INTERNATIONAL NEWS UK Inflation Rate Turns Negative

Reforms at Risk as China Eyes 2020 Growth Goal

U.S. Economy Contracts in First Quarter

Euro Zone Economy Picks Up Pace but Germany Lags

Condominium Industry in Sri Lanka

October, 2014


Banking News

CBC Group Results- for the 03 Months Ended 31 March, 2015

4< Research & Development Unit >

PBT (after VAT) PAT -

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

3,325

2,302

3,632

2,537

Profits

31.03.2014 31.03.2015

in Rs.Mn.

Due to other Customers Loans and Receivables to other Customers

460,000

480,000

500,000

520,000

540,000

560,000

529,267

498,165

549,003

499,081

Due to Other Customers & Loans and Receivables

31.12.2014 31.03.2015

in Rs.Bn.


CBC 600,000

650,000

700,000

750,000

800,000

850,000

797,258 809,474

Total Assets

31.12.2014 31.03.2015

in Rs.Bn.

CBC1%

2%

3%

4%

3.47% 3.40%

Gross NPA Ratioin Percentage

(Bank)

31.12.2014 31.03.2015

CBC30%

35%

40%

45%

50%

55%

49.90% 49.12%

Cost Income Ratioin Percentage

31.03.2014 31.03.2015

CBC Group Results- for the 03 Months Ended 31 March, 2015 (Cont…)

Commercial Bank Adjudged among Best in Asia by FinanceAsia

Commercial Bank has been adjudged the ‘Best Bank’ in Sri Lanka in 2015 by Hong Kong based ‘FinanceAsia,’ one of the most eminent financial publications in the region.

This will be the fifth ‘FinanceAsia Country Award for Achievement’ presented to Commercial Bank in the seven years since the Bank became the first entity in Sri Lanka to receive this prestigious accolade in 2009.


Commercial Bank Launches ‘Divisaru’ Savings Account to help Micro Businesses

A special Savings Account designed to support micro entrepreneurs and promote financial inclusivity to this segment has been launched by the Commercial Bank of Ceylon.

Linked to this new savings account branded ‘Divisaru’, a micro loan will extend up to 25 times an agreed value of monthly savings, up to a maximum of Rs 125,000.

Intended to support micro enterprises in all sectors including fishing, livestock agriculture and similar pursuits, the Divisaru account can be opened with an initial deposit of just Rs 100, and requires a minimum monthly saving of Rs 1,000 to qualify for a loan.

< Research & Development Unit >


October, 2014


Economic & Business News

Colombo Fastest Growing City in MasterCard Global Destination Cities Index

Forecasted top 10 fastest growing cities are: 1. Colombo – 21.1%, 2. Chengdu – 20.7%, 3. Abu Dhabi – 20.4%, 4. Osaka – 19.8%, 5. Riyadh – 18.0%, 6. Xi An – 16.2%, 7. Taipei – 14.9%, 8. Tokyo – 14.6%, 9. Lima – 13.9%, and 10. Ho ChiMinh City – 12.9%

Colombo leads the pack as the fastest growing city in terms of international overnight visitor numbers in the annual MasterCard Global Destinations Cities Index.


SL Tourist Arrival up 26% in May 15

Sri Lanka's tourist arrivals rose by 26 % to 113,529 in May 2015, driven by arrivals from China and India.

Cumulative arrivals rose by 14.5% to 714,584 during the first five months of 2015. Indian visitors were up 26.8% to 119,593 and South Asian visitors rose by 18% to 172,255.

East Asian visitors were up 31.8% to 143,485 with Chinese tourists growing by 80.2% to 79,098. China is now the second largest source of tourists to Sri Lanka after India.

Western European arrivals rose 14.1% to 228,791 with UK tourists up 9.7% to 64,000 and Germany up 12.9% to 51,413 in 2015.


In USD Mn Jan-Mar 2014 Jan-Mar 2015 Change (%)

Exports

Industrial Exports 2,114.2 2,228.6 5.4 Textiles and garments 1,264.8 1,258.0 -0.5 Transport equipment 46.0 165.4 259.9 Agricultural Exports 661.0 618.9 -6.4 Tea 387.0 335.3 -13.3Mineral and other 41.2 14.0 -66.0 Total Exports 2,816.4 2,861.5 1.6

Imports

Consumer goods Imports 780.4 1,191.3 52.6 Vehicles 148.6 290.5 95.5 Intermediate goods Imports 2,983.3 2,397.0 -19.7 Fuel 1,445.4 709.1 -50.9 Investment goods Imports 981.9 1,201.7 22.4Unclassified 2.3 2.1 -7.3 Total Imports 4,748.0 4,792.1 0.9 Trade Balance (surplus(+)/deficit(-)) -1,931.6 -1,930.6 0.1 Earnings from Tourism 671.0 762.3 13.6Workers’ Remittances 1,663.4 1,679.4 1.0

External Sector Performance – 1Q, 2015


Sri Lanka's exports slipped marginally by 0.9 % from a year earlier to USD 1,060 mn, and imports fell 5.5 % with lower payments for oil, narrowing the trade gap 13.5 % to USD 520.5 mn.

Non-oil imports were picking up with less money being spent on oil and lower interest rates.

Apparel exports fell 6.2 % to USD 428.2 mn, tea exports fell 27 % to USD 113.4 mn and sea food exports fell 36.5 % to USD 15.7 mn.

According to Central Bank seafood exports fell after the European Union blocked Sri Lankan shipments over charges of illegal fishing.

Imports of consumer goods rose 45.7% to USD 441.6 mn. Food & Beverages category rose 10.8% while vehicle imports rose 122.6% to USD 132.3 mn. Other consumer goods (excluding Vehicle & Food imports) rose 46.5% to USD 162 mn.

Spending on fuel in March fell sharply by 66 % to USD 155.5 mn. Spending on fertilizer imports were down by 48 % to USD 24.8 mn.

Investment goods imports were up 23 % with transport equipment up 225 % to USD 136.3 mn. Building material imports were down 12.6 % to USD 88.7 mn and machinery and equipment were down by 3.9 % to USD 172.3 mn.

External Sector Performance – March 2015

< Research & Development Unit > 12

Foreign Borrowings

Available Amount Obtained Amount Balance Amount

USD 1.5 bn USD 400 mn USD 1.1 bn

Currency Swap with the Reserve Bank of India (March 2015)

Sri Lanka Development Bonds (SLDBs) (May 2015)

Amount Accepted Interest Rate

13 months USD 329 mn 6M Libor + 316.69 bps

35 months USD 9 mn 6M Libor + 353.89 bps


Foreign Borrowings (cont..)

Amount Period Interest Rate

USD 650 mn 10 years 6.125

International Sovereign Bond Issue (March 2015)

At a final price of 6.125 % the bonds had spread of 397.7 basis points above 10-year US Treasuries.

In 2012, Sri Lanka sold 10-year bonds to yield 5.875 %, or 444 basis points above similar tenor US Treasuries, but raised a higher volume of a billion US dollars.

Year Amount(USD mn) Period Interest

Rate %

2007 500 5 year 8.25

2009 500 5 year 7.40

2011 1000 10 year 6.25

2012 1000 10 year 5.875

2014 Jan 1000 5 year 6.00

2014 Apr 500 5 year 5.125

Previous Sovereign Bond Issues



Reserves Position Sri Lanka’s gross official reserves as at end March

2015 are estimated to be USD 6.8 bn, equivalent to 4.2 months of imports.

The gross official reserves increased to USD 7.5 bn by end April 2015, which included proceeds of USD 400 mn from the currency swap arrangement between Central Bank of Sri Lanka and Reserve Bank of India.

With the proceeds of the international sovereign bond & Sri Lanka Development Bonds (SLDBs) gross official reserves are estimated to be around USD 8.0 bn at present.

With the expected proceeds of the balance portion of USD 1.1 bn from the currency swap agreement between Sri Lanka and India together with other regular investment inflows, gross official reserves are expected to increase further during the next few months.


Penal Interest Rates on ExportersSri Lanka is slapping penalty interest rates on exports from June 01, 2015 to force exporters to covert dollars reviving measures usually imposed by the Central Bank during a balance of payments crisis.

Under a circular issued to banks, exporters with packing credit facilities who do not use export proceeds to settle the accommodations after 90 days will be charged a 5 % penal interest and then 2 % per month, for every month they delay.

Exporters can borrow rupees and keep their dollars without settling their export credit facilities expecting the rupee to depreciate.

Sri Lanka first imposed similar regulations with a 10 % extra penalty rate, during a balance of payments crisis in 2001, but they were removed in October 2014.

Sri Lanka gets into regular balance of payments trouble by trying to manipulate both interest rates and exchange rate simultaneously.

Analysts had warned that historic low interest rates which was pushing up consumption and rising state credit will put pressure on the balance of payments.


October, 2014


Analysis

A Toxic MixtureTrying to control interest rates & exchange rate at the same time- The resulting credit boom has fuelled imports


The Resulting Credit Boom has Fuelled Imports

• The credit boom will eventually result in an increase in interest rates.

• However, in the run-up to the general election the government is expected to keep interest rates under control.

• Therefore any increase in interest rates can be expected only after the general election.


• Low interest rates have boosted consumption oriented lending thereby boosting non-fuel imports.

• Vehicle imports in particular had risen by 122.6% to USD 132.3 mn in March 2015.

• Other non-food consumables (excluding medical and pharmaceuticals) had risen 50% to USD 154.9 mn in March.

• If this high import momentum continues in the following months, the pressure on the rupee to depreciate will further exacerbate.


Pressure on the USD/LKR Exchange Rate

Pressure on the USD/LKR Exchange Rate (Cont…)

• Rupee forwards fell due to importer dollar demand amid outflows from foreign sales in government securities, dealers said, with further weakening expected due to lower interest rates.

• Actively traded three-month forwards ended at 139.00/10 per dollar, compared with May 26 close of 137.10/40.



03 Key External Risks

Possible further increase in the price of oil (Tensions in Libya, Venezuela and Nigeria)

Depreciation of the Euro could erode the competitiveness of exports to EU which absorbs 30% of Sri Lanka’s exports. This may reduce the benefits of a possible regain of the GSP+ concessions.

Sept-Dec 2015: US may tighten monetary policy. Foreign investment in T-bills and Bonds - LKR 452bn or USD 3.3Bn amounting to 46% of Gross Official Reserves – part of this can move out.


October, 2014


International News

UK Inflation Rate Turns Negative The main measure of UK inflation turned negative in

April 2015 for the first time on record, with the rate falling to -0.1%.

It is the first time Consumer Price Index (CPI) inflation has turned negative since 1960, based on comparable historic estimates, according to the Office for national static.

The biggest contribution to the fall came from a drop in air and sea fares.

Reforms at Risk as China Eyes 2020 Growth Goal China anticipates a target annual growth of about 7% in its next five-year plan so it can hit ambitious 2020

goals, raising concerns that politics could trump a commitment to disruptive reforms entailing slower but more sustainable growth.

Many economists already think 2015 growth will miss that mark - the IMF expects 6.8% followed by 6.25% in 2016 - but Beijing needs average growth of close to 7% to hit a previously declared aim of doubling gross domestic product and per capita income by 2020 from 2010.


A slowdown in Germany weighed on the euro zone in the 1Q 2015, but the bloc's economy still grew at its fastest in almost two years as cheap food and fuel boosted spending and a central bank stimulus programme kicked in.

Gross domestic product in the 19 countries sharing the euro rose 0.4% quarter-on-quarter for a 1.0% year-on-year rise.

Overall, however, growth in Europe's largest, and traditionally export-led, economy Germany slowed more than expected as imports rose more sharply than sales abroad.

Germany's GDP grew 0.3% on the quarter, down from 0.7% in the previous three months.

Euro Zone Economy Picks Up Pace but Germany Lags

U.S. Economy Contracts in First Quarter The U.S. economy contracted in the 1Q 2015, as it buckled under the weight of unusually heavy snowfalls,

a resurgent dollar and disruptions at West Coast ports, but activity already has rebounded modestly.

The government slashed its gross domestic product estimate to show GDP shrinking at a 0.7% annual rate instead of the 0.2% growth it estimated in April 2015.

With growth estimates for the second quarter currently around 2%, the economy appears poised for its worst first-half performance since 2011. The economy's recovery from the 2007-2009 financial crisis has been erratic.


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.

Quote from Reader’s Digest - June 2015

Steven Spielberg - film director and producer

On Listening: From a very young age, my parents taught me the most important lesson of my whole life: Listen to everybody before you make up your own mind. When you listen, you learn. You absorb like a sponge. Your life becomes so much better than when you are just trying to be listened to all the time.

< Research & Development Unit >

Economy & Finance

Economic Capsule - May 2015