Current Issues & Future Prospects

Anushka WijesinhaThe Ceylon Chamber of Commerce

EXPORTS & FDI IN SRI LANKA

IDE - JETRO - MODSIT COLOMBO CONFERENCE | 21 MARCH 2017

• Sri Lanka is currently facing a growth problem• 2016: 4.4% (our lower bound forecast was 4.5%)

• GDP growth in 2016 was far below the past six years average• Previously growth model was reliant on debt-fuelled public

infrastructure drive, and driven by domestic non-tradables like construction, trading, and financial services• Not a sustainable growth trajectory given the small domestic market

• Tradable sectors need to drive the economy in order to achieve and sustain higher growth rates

Pains, growing (not ‘growing pains’)

Non-tradable have been driving recent growth

• Domestic non-tradable sectors drove growth in 2016, following the same post-war trend.• Financial Services was the strongest contributor to GDP growth, followed by Construction,

and Wholesale and Retail Trade• Credit (YoY): Construction (40.1%), Wholesale & Retail Trade (52.4%), Financial Services

(70.7%)

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21.1%

17.6%

13.4%

8.9%

6.4%

5.9%

4.2%

4.1%

3.9%

3.3%

Financial Service activities and auxiliary financial services

Construction

Wholesale and retail trade

Other personal service activities

Public administration and defense; compulsory social security

Transportation of goods and passengers including Warehousing

Manufacture of furniture

Education

Real estate activities, Including Ownership of dwelling

Mining and quarrying

Top 10 Contributors to Change in GDP (First 9 Months - 2015/2016)

Tight External Conditions for Sri Lanka

Source: International Energy Agency

• Sri Lanka enjoyed a windfall of US$ 2 bn smaller lower oil import bill in 2015 due to low prices

• Higher oil prices amidst declining export revenues will be unsustainable for LK

• Oil prices have edged up to $50/barrel amidst OPEC decision to cut production

Barr

els (m

illion

)

U.S Production Slips, while Global

Demand rises

OPEC Abandons Production Target

Kuwait Strike curbs output, Dollar

weakens

OPEC agrees on output cut at Algiers

0

10

20

30

40

50

60

70

Jan Feb

Mar

Apr

May Jun Jul Aug

Sept

Oct

Nov Dec Jan Feb

Mar

Apr

May Jun Jul Aug

Sep

Oct

Nov Dec

2015 2016

5.3 5.5 5.35.9 5.9 6.1 5.9 5.9 5.6 5.5 5.2 5.1

4.5 4.5 4.2 4.6 4.2 4.5 4.2 4 4.2 44.6 4.6

4 4.2 4 3.9 3.6 3.44.2

-1

1

3

5

7

9

11

13

15

0

2,000

4,000

6,000

8,000

10,000

12,000

J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J

2014 2015 2016

Mon

ths o

f Im

ports

USD MnSri Lanka International Reserves

Central Bank Government CommercialBanks

Months ofImports • Precarious external position

amidst declining exports, pull out of foreign funds from LK treasuries, remittances growing at a slower pace

• Reserves are currently roughly 3.5 months of import cover

Recent external trade performance

Source: EIU calculations based on CBSL

-0.2

0

0.2

0.4

0.6

0.8

2011 2012 2013 2014 2015 2016*

External Trade Performance Growth Y-o-Y

Exports Imports Earnings from Tourism Worker's Remittances

First Nine months

*first nine months data only

600800

1,0001,2001,4001,6001,8002,000

Jan-1

3M

ar-13

May

-13

Jul-1

3Se

p-13

Nov

-13

Feb-

14Ap

r-14

Jun-1

4Au

g-14

Oct-

14Jan

-15

Mar-

15M

ay-1

5Jul

-15

Sep-

15N

ov-1

5Jan

-16

Mar-

16M

ay-1

6Jul

-16

Sep-

16

USD

Mn

Total Exports vs. Total Imports- Jan.2013 to Sep.2016

Exports Imports

• Weak export performance continues to characterise the external sector

• Exports indicated a bright spark in August 2016 reversing an 18 month decline, which continued in September, but then declined again.

• Heavy reliance on a handful of products and the dynamics in those products that are beyond our control

• e.g. Tea exports (3rd highest export) vulnerable to adverse weather (like drought in 2016 and continuing) and demand conditions in Middle East and Russia

• e.g. Rubber - gains when oil prices are high, loses when low, and benefits from adverse conditions in competitor markets (e.g. now with Thai floods)

• The privilege of a low import bill enjoyed during 2015/2016 period is unlikely to cushion Sri Lanka’s low export performance during 2017.

Export concentration • USA + UK = nearly 1/3rd of our exports • Ten countries account for 2/3rd of all exports

Source: EIU calculations based on Sri Lanka Customs

Country Export Value (Rs.Bn)

% of Total Exports

U.S.A 408.8 27.5

U.K. 151.9 10.2

India 80.3 5.4

Germany 73.6 4.9

Italy 62.3 4.2

Belgium 49.2 3.3

U.A.E. 40.0 2.7

Netherland 30.3 2.0

Japan 29.1 2.0

China 29.0 1.9

Total Exports to the World 1487.7

Description FOB Value (Rs.) % of Total Exports

Articles of Apparel and clothing 393.7 26.5Articles of Apparel and clothing 276.0 18.6

Coffee, tea, mate and spices 222.1 14.9Rubber and articles thereof. 116.5 7.8

Electrical machinery and equipment and 32.0 2.1Natural or cultured pearls, precious or 31.3 2.1

Edible fruits and nuts; peel of citrus fruit or 28.1 1.9Fish and crustaceans,molluscs 26.5 1.8

Miscellaneous edible Preparations 25.3 1.7Mineral fuels, mineral oils and products of 23.8 1.6

Other Exports 312.3 21.0

Product Concentration Market Concentration

Only apparel exports showing growth

• Among the top ten exports, only the apparels sector has shown steady growth - roughly around 8-9% on average during this period

• So even within the concentrated export basket, it is just a handful of categories that are really performing well

050100150200250300350400450

2011 2012 2013 2014 2015 2016

Rs.Bn

Trends of Top Ten Exports of Sri Lanka, 2011-2016

61 62 09 40 85 71 08 03 21 27

Source: EIU calculations based on Sri Lanka Customs

Apparel industry further insights

• Exports to US have been in decline but forecast is for strong uptick in 2017 and beyond (US economic recovery, Trump’s expansionary fiscal policy)

• Exports to EU recovered to mild positive territory but forecast to remain soft demand due to continued uncertainty and weak consumer demand. Regaining GSP Plus will give a short-term boost

11.51% 11.00%

-1.32%

1.61%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

2012 2013 2014 2015

Growth in Cumulative Apparel Exports (Jan-Nov: 2012 to 2016)

Total Exports US EU

• Sri Lankan apparel firms have moved up the value chain - engaging in higher productivity, higher skilled, and higher technology activities.

• Innovation and strong retailer relationships is driving the top tier apparel firms• SL apparel firms catering to shorter lead times, collaboration on designs, new trends like ‘ath-leisure’,

Source: Joint Apparel Association Forum

Some recent issues facing exports

Source: CBSL Weekly Economic Indicators

• Anti-export bias• Artificially overvalued exchange rate; high interest rate to finance government debt;

high border tax protection for domestic/import-substituting industries

• Adverse policy stances that are not conducive to exporters• e.g. Introducing archaic restrictions on export proceeds - exporters must repatriate

export proceeds within 90 days “of the date of exportation” (Later revised to 120 days)

• e.g. Abolishing of SVAT by 1st January (now 1st April) and reintroducing VAT refunds - highly problematic, refunds mechanism not working, large pending refunds

• Shortages in labour in key growing sectors like apparel

FDI inflows have been disappointing

• FDI inflows during first 9 months of 2016 are 37% lower than same period 2015• LK FDI inflows less than 1.5% of GDP and in declineTechnical note: If a foreign investor owns over 10% or more voting shares in a Sri Lankan company, any such foreign investment is categorized as direct investment as per the BPM6. Further, foreign loans received by Direct Investment Enterprises (DIEs) from any non-related source are excluded from FDI and recorded under loans.

941 933 894

681

534

336

0100200300400500600700800900

1000

2012 2013 2014 2015 2015* 2016*

USD MnForeign direct investment Inflows (2012-2016)

Full Year First 9 months

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FDI high in real estate & property development

• A defining feature of post-war FDI has been the concentration in domestic non-tradable sectors - real estate, property development, condominiums, retail and office space, etc.

• This trend continues, as the majority of forthcoming projects are in these sectors; in addition to power and energy and leisure

• Encouragingly, new apparel FDI are in the pipeline. This can be further catalysed with the SL-China FTA and the halting of TPP

Source: EIU calculations based on BOI Data

0

2

4

6

8

10

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Real estate, property

development

Apparels Leisure Misc. Manufacturing

Power & energy Logistics services

Primary industries (agri,

seafood)

BOI Projects Approved/Awaiting Agreements

0

20

40

60

80

100

120

Real estate, property

development

Power & energy Apparels Misc. Manufacturing

Agri, Seafood Leisure Logistics services

BOI Projects Awaiting Implementation/Commercial Operation

Recent issues in FDI

• Sri Lanka has had a history of promoting FDI, dating back to 1977 when first wave of liberalisation occurred

• Japanese ‘flying geese’ FDI showed interest - including IBM, Sony, Sanyo, Matsushita Corp• But full benefits could not be reaped due to outbreak of war in 1983

• Institutional mechanisms like GCEC and FIAC• Establishing EPZs and fostering apparel manufacturing with FDI

• Next wave of reforms in 1990s - setting up of BOI and new incentives regimes• Steady uptick in FDI, but hampered due to war

• Investment promotion, industrial strategy and overall macroeconomic policy have not worked together for some time

• Policy instability and lack of clear promotion strategy with sectoral focus

• Halting of incentives regime in April 2016, and taking a while to establish new regime• Shift of strategy from tax holidays to capital allowances

Towards an FDI push

• Need to make clear what Sri Lanka’s value proposition is, what sectors show promise, and demonstrate policy consistency

• Institutional reforms need to take root - for instance, establishment of Agency for Development and Development Special Provisions Act; and/or reform of EDB and BOI

• Accelerate new efforts that identify new growth sectors, new export competencies, and new FDI opportunities• e.g. Harvard’s Centre for International Development, World Bank, International Trade

Centre, Commonwealth Secretariat

• Push through reforms to outdated legislation and regulations• Exchange Control Act — Exchange Management Act• Customs Ordinance — Customs Act• Implementing E-signatures, E-documentation hub, digital payments• Full and early implementation of commitments under Trade Facilitation Agreement

• Large development projects • Megapolis and Western Region Development + other Urbanisation

projects• Hambantota Port-Airport-Industrial Zone - China project• Colombo-Trincomalee Economic Corridor Project (ADB funded)

• Sectors • Freight and logistics industry (including regional e-commerce)• Renewable energy, climate-friendly technologies• Food processing - Budget 2016 and 2017 + projects by WB and ITC

supporting agri modernisation, investing in equipment and technology,• and Tourism, of course

Emerging FDI Opportunities

Positive prospects for FDI and Exports (1)Leveraging on Sri Lanka’s strategic location

• Investors are very keen to use Sri Lanka as a regional base - springboard to India and the rest of South Asia + link between Asia and Africa

• At recent Sri Lanka Investment Summit in Hong Kong - “A Sri Lanka play is essentially a regional play”

• Investors like Sri Lanka’s:

• geographical location

• compliance standards

• trainable workforce

• laws written in English

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ntsWhat is the most important factor in deciding to invest here?

Why are you interested in investing in Sri Lanka? (Rank 1 to 5)

Positive prospects for FDI and Exports (2)

Leveraging on trade-investment nexus • Several investors have told us - “Do your FTAs soon, and we can convince manufacturing

investments in Sri Lanka”

• 2016 Investor Conclave - interest from countries ranging from Chile, China, Jordan, Bahrain, Korea, Norway, South Africa, Japan

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21% were interested in

‘export manufacturing’

• Mainly in medium- to large-scale (around 300-700 workers) niche manufacturing but high value capture in SL• Many in parts and components manufacture, plugging in to global

production networks (a.k.a. global supply chains)

• Vehicle impact sensors for air bags and seat belts (Lanka Harness)• Smart weighing solutions (Rinstrum)• Patented shoe ‘upper’ (Nike-MAS ‘Flyknit’)• Patented elastics for apparels (Stretchline)• Precision electronics (Vario Systems)• Electrical panels (KIK Lanka)

Prospects for export-oriented FDI

Anushka WijesinhaChief EconomistThe Ceylon Chamber of Commerceanushka@chamber.lk

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