economic capsule - april 2013

< Research & Development Unit > April 2013Economic Capsule

FINANCIAL SECTOR NEWS Banking Sector Performance - Highlights 2012

ECONOMIC & BUSINESS NEWS Fitch Affirms Sri Lanka at 'BB-'; Stable Outlook

External Trade Performance – February, 2013

Inflation- April, 2013

Sri Lanka Tourist Arrivals up 7.7 % in March

China: World’s No. 1 Tourism Source Market

News Snippets – Local

News Snippets – International

Analysis & Forecast

Sri Lanka Inflation a Risk, Warns Against Policy Easing – IMF

Easing Monetary Policy will not Bring Sustainable Growth - Dr. Saman Kelegama

Sri Lanka: Medium Term Macroeconomic Framework

Latest IMF Projections< Research & Development Unit >

C O N T E N T S

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Banking Sector Performance - Highlights 2012

Cont…Source: CBSL Annual Report 2012

Despite the slower growth, the share of loans and advances of the banking sector increased marginally from 61.2 % to 61.6 % by end 2012, while the share of investments declined from 24.9 % to 23.5 % by end 2012.

The increase in lending during 2012 was concentrated in four major economic sectors, namely, trading (19 %), agriculture (14 %), infrastructure (14 %) and construction (12 %).

Liabilities: Deposits continued to be the main funding source in the banking sector, despite the marginal decline from 72 % of total liabilities of the banking sector as at end 2011 to 71 % by end 2012 due to the lower growth in deposits.

The resultant funding gap was bridged with borrowings which increased by 27 % during 2012 compared to the growth of 25 % in 2011.


Banking Sector Performance - Highlights 2012 (cont…)

The banking sector continued to maintain its dominant role in the financial sector with its assets increasing from 55.1 % of the total assets of the financial sector in 2011 to 56.4 % by end 2012.

Outreach: by end 2012, 33 banks, comprised of 21 domestic banks (including 09 licensed specialised banks) and 12 branches of foreign banks continued operations. The banking network expanded with 190 banking outlets and 153 automated teller machines (ATMs) being added to the network during 2012. Of these, 168 branches and 86 ATMs were established outside the Western Province. Accordingly, by end 2012, the banking sector was operating with 6,374 banking outlets and 2,390 ATMs.

Assets: The growth in assets of the banking sector during 2012 remained unchanged at 20 %.

Source: CBSL Annual Report 2012


Fitch Affirms Sri Lanka at 'BB-'; Stable Outlook

Sri Lanka's ratings balance the strength of the country's resilient growth performance, healthy level of human development and strong payment record against the weaknesses of its fiscal and external balance sheets and moderate domestic savings relative to investment needs.

The Stable Outlooks acknowledge the stabilisation of the overall economy over the past year, following the introduction of a series of monetary, exchange rate and fiscal measures in early 2012, which helped to reverse the deterioration in the balance of payments that took place in 2011.

Although the current account deficit fell short of the authorities' original target of 3.8% of GDP, it narrowed to 6.6% in 2012 from 7.8% in 2011. Fitch projects that the current account deficit should decline further to about 5.2% in 2013 and 4.5% in 2014 due to a combination of stronger global growth and lower oil imports.

BB - Affirmed

Persistence with tighter monetary and fiscal policies should help improve Sri Lanka's external liquidity position. Official foreign exchange reserves, excluding gold, rebounded to USD6.9bn (3.7 months of current external payments) at end-January 2013. This is up from a recent low of USD5.5bn at end-February 2012.

Sri Lanka's external debt refinancing schedule, however, remains quite heavy as an average of USD1.9bn per annum in sovereign debt is projected to mature from 2013 to 2015 (versus USD1.3bn in 2012).

This may not only limit Sri Lanka's ability to rebuild foreign exchange reserves to a much higher level, but it also means that the country's external finances will remain vulnerable to any spike in global risk aversion.

Key Rating Drivers

Cont…


Fitch Affirms Sri Lanka at 'BB-'; Stable Outlook (cont…)

Key Rating Drivers (cont…)

Fitch projects real GDP growth to average 6.5%-7% in 2013 and 2014, compared with the government's forecasts of 7.5% and 8% in 2013 and 2014 respectively. Fitch believes the government's forecasted growth could once again lead to overheating risks.

Following the successful completion of an IMF stand-by arrangement in July 2012, Sri Lanka has decided not to seek an extended fund facility. A new IMF programme would have provided some comfort that Sri Lanka would stick with the reform measures implemented in early 2012. However, Fitch does not view a successor programme as essential, provided that the authorities remain vigilant and maintain appropriate policy settings to ensure overheating risks and renewed strains on the balance of payments do not re-emerge.

Sri Lanka has continued to make limited progress on fiscal consolidation as the budget deficit fell to 6.4% of GDP in 2012 (versus 6.9% in 2011). This was, however, partially achieved through an accumulation of arrears. Sri Lanka's general government debt-to-GDP ratio remained elevated at 79.1% in 2012, which was significantly higher than the 'BB' peer rating group median of 32.6%. Low fiscal revenues weigh on the credit profile. The revenue take of 13.9% of GDP in 2012 was well below the 'BB' range median of 26.6% and was down from 16.7% in 2008.

Source: Fitch Ratings


External Trade Performance – February, 2013

MonthCCPI (%) *CCPI Core (%)

Year on Year (Y-o-Y)

Annual Average (A.A)

Year on Year (Y-o-Y)

Annual Average (A.A)

MAR 13 7.5 8.8 6.8 6.4

APR 13 6.4 8.8 6.1 6.5

*The price movement excluding Fresh Food, Energy, Transport, Rice and Coconut in the CCPI basket.

Inflation- April, 2013

Category Jan-Feb

2012USD mn

Jan-Feb2013

USD mn

GrowthJan-Feb

(%)

Exports 1,709.2 1,526.2 -10.7

Agricultural Products 366.8 341.5 -6.9

Industrial Products 1,333.5 1,180.5 -11.5

Mineral Products 6.7 2.4 -64.5

Imports 3,495.7 2,950.5 -15.6

Consumer Goods 538.7 455.5 -15.4

Intermediate Goods 2,043.9 1,698.1 -16.9

Investment Goods 903.0 795.8 -11.9

Balance of Trade -1,786.5 -1,424.3 -20.3

Workers’ Remittances 943.1 1,014.1 7.5

Earnings from Tourism 173.8 209.7 20.6

Source: CBSL

Source: CBSL


Sri Lanka's tourist arrivals rose 7.7 % to 98,155 in March 2013 with strong growth from key Western markets and China, but arrivals from India plunged.

Sri Lanka Tourist Arrivals up 7.7 % in March

In February 2013, arrivals from China rose 57.9 % to 6,145 compared to a growth of 12.2 % to 4,724 by Japan.

Japan has been Sri Lanka's top generating market in East Asia in the past, but from around September 2012 China has tended to generate more tourists than Japan.

China overtakes Japan as Sri Lanka's top tourist market in East Asia

China: World’s No. 1 Tourism Source Market

Thanks to rapid urbanisation, rising disposable incomes and relaxation of restrictions on foreign travel, the volume of international trips by Chinese travellers has grown from 10 mn in 2000 to 83 mn in 2012.

Expenditure by Chinese tourists abroad has also increased almost eightfold since 2000. Boosted by an appreciating Chinese currency, Chinese travellers spent a record US$ 102 bn in international tourism in 2012, a 40% jump from 2011 when it amounted to US$ 73 bn.

Source: LBO

Source: UNWTO

Source: Chinanews.net


News Snippets - Local

Ceylon Chamber Fires Warning Over New CEB TariffThe Ceylon Chamber of Commerce is up in arms over the steep rise in electricity profitability in addition to impacting exports and services sectors.

According to the Ceylon Chamber of Commerce, the new tariffs will entail a significant increase in electricity costs for all industry sectors. On average, the increase is estimated at around 20%-30%.

Sri Lanka-China Conclude Fifth Joint Talks on Trade, Economic CooperationThe fifth joint committee meeting on trade and economic cooperation between Sri Lanka and China was held in Colombo recently. The two parties conducted discussions on the promotion of trade, tourism and investment between the two counties.

An agreement on economic and technical cooperation for USD 16 mn and a loan agreement on provision of a concessional loan of USD 147 mn by China to Sri Lanka for Hambantota Port Development Phase I project for ancillary works and supply of equipment were signed between the two countries.

Sri Lanka Moves up Two Notches in Global Network Readiness IndexSri Lanka has improved its position by two places in the recently published Global Network Readiness Index (NRI) which measures a nation’s or community’s degree of preparation, to participate in and benefit from ICT developments which happen to be the driving force in today’s world.

With the two-place improvement, Sri Lanka at 69th place out of 144 countries surveyed trails its neighbor India by just one rank although the score remained the same as last year at 3.88. Sri Lanka and India are the only two countries in the SAARC group to rank higher than the 100th mark

Sri Lanka's Northern Rail Rebuilding on Track A 43 kilometre stretch of Sri Lanka's Northern Railway line has been re-built to allow trains to be run up to a speed of 120 kilometres, according to Ircon, an Indian state-run transport engineering firm.

India is funding the rebuilding of 252 kilometres of rail track, which had been destroyed during the 30-year war, through a USD 800 mn credit line.

Laugfs Group Enters Financial Services IndustryThe Laugfs Group will be entering the financial services sector through its newest subsidiary, Laugfs Capital. Laugfs is to look into the fields of leasing, business loans, hire purchase, personal loans and factoring.

Cont…


News Snippets – Local (Cont…)

SL's Royal Ceramics Gains Control of Tile IndustrySri Lanka's Royal Ceramics Plc, a unit of Sri Lanka's Vallibel group has bought control of Lanka Ceramics group for Rs. 2.9 bn, according to group chief Dhammika Perera.

A controlling 79 % stake in Lanka Ceramic and four subsidiaries (Lanka Walltiles, Lanka Tiles, Swisstek-an aluminum company and Horana Plantations) was bought for Rs. 2.9 bn.

With these acquisitions the Royal Ceramics group now have a monopoly in the tile market.

Dabur Lanka’s State-of-Art USD16 mn Fruit Beverage Plant OpensDabur Lanka Ltd., a wholly-owned subsidiary of India’s leading consumer goods maker Dabur India Ltd., opened its state-of-the-art packaged fruit-based beverage manufacturing facility at Meerigama.

The country’s tea exports in the 1Q saw an increase value wise though in terms of quantity shipped was lower.

Total tea exports amounted to Rs. 42.28 bn in the first three months of this year, up by near 6% from Rs. 40 bn a year earlier.

Volume wise, exports amounted to 71 mn kilos, down by 4.9 mn kilos or 6% in comparison to first quarter of 2012.

SL’s First Quarter Tea Exports Value up, Volume down

Source: DailyFT

http://www.ft.lk/2013/04/29/1q-tea-exports-value-up-volume-down/print/


News Snippets - International

Gold Prices DropGold fell to a two-year low and took its biggest ever one-day drop on 15 April, 2013, contributing to huge losses in gold reserves.

Although it rallied slightly on 16 April, the recent struggles by commodities have been triggered by weak data from China and the US sparking fresh concerns about the global economy’s recovery.

According to a Reuters poll, Gold prices are expected to end 2013 at USD 1,450-1,550 per ounce, only partly recovering from a recent brutal selloff that shook investor confidence after 12 unbroken years of gains.

Fitch Downgrades UK Credit Rating The Fitch credit ratings agency has downgraded the UK to

AA+ owing to a weakened economic outlook. The move, came after Moody's downgrade in February.

Fitch stated its downgrade "primarily reflects a weaker economic and fiscal outlook" but returned its outlook to "stable", removing the threat of further rate action in the near term.

Commodity prices

Cont…Source: ReutersSource: The Economist


News Snippets - International

Source: CNN Money


Sri Lanka Inflation a Risk, Warns Against Policy EasingInternational Monetary Fund

According to Sri Lanka’s Central Bank, the monetary policy stance for this year will be toward easing to help drive growth, and Treasury Secretary P. B. Jayasundera had stated that he expected interest rates to fall as early as May or June.

But according to IMF inflationary pressures were building up as the impact of higher power tariffs feeds through the economy.

“Inflation came down quite a bit. But IMF expect that inflation figure to rise once again as the impact of electricity tariff hike is fully reflected,” Koshy Mathai, the IMF resident representative for Sri Lanka, stated.

“As a result we think the monetary policy should remain on hold for now as it has for quite some time and shouldn’t be changed prematurely. It’s hard to say how long (the rates should be maintained).”

The central bank cut both repurchase and reverse repurchase rate by 25 basis points in December but has since held steady.Inflation eased to 6.4 % in April compared to 7.5 % a month ago and it is likely to accelerate in May due to the electricity tariff hikes, the Department of Census and Statistics has stated.

Sri Lanka must not loosen monetary conditions as inflation remains a concern, the International Monetary Fund stated, even though prices had risen at a lower pace in April than the previous month.

Source: Reuters


Easing Monetary Policy will not Bring Sustainable GrowthDr. Saman Kelegama

According to respected senior economist, Dr. Saman Kelegama easing monetary policy and bringing down interest rates would not help the country sustain high economic growth unless measures were taken to address long-standing structural deficiencies in the economy.

"The euphoria of the war victory and commencement of the USD 2.6 bn IMF standby facility arrangement prompted a relaxation of fiscal and monetary policy to stimulate economic growth which saw economic growth average 8 % in 2010/11, but could not be sustained due to structural problems in the economy which saw growth slip to 6.4 % in 2012," Institute of Policy Studies Executive Director Dr. Saman Kelegama stated.

A balance of payments problem emerged during the second half of 2011.

In February 2012 a much delayed stabilisation package with a flexible exchange rate and higher interest rates capped by higher tariffs on a number consumer durables came into effect. This managed to reduce the current account deficit of the balance of payments from 7.8 % of GDP in 2011 to 6.6 % in 2012.

"But exports faired badly in 2012. While imports fell by 5.8 % in 2012, exports fell by 7.3 %, which could not reduce the current account deficit further despite the remittances inflows of USD 6 bn and tourism earnings of USD 1 bn.

Gross reserves, amounting to USD6.9 bn as at end 2012 was comprised of borrowed funds and not net earnings, he pointed out.

"Given this scenario there is limited space for relaxing monetary policy in 2013. Easing monetary policy would bring down interest rates and boost economic growth, but growth will not be sustainable without structural macroeconomic reforms," Dr. Kelegama said.

"We need to improve competitiveness of our exports and increase productivity in the agriculture and public sectors.“


Sri Lanka: Medium Term Macroeconomic Framework Indicator Unit 2011(b) 2012 (c) Projections

2013 2014 2015 2016Real Sector

GDP @ Market Prices Rs. bn 6,544 7,582 8,722 9,985 11,356 12,939 Real GDP Growth % 8.2 6.4 7.5 8.0 8.3 8.5 GDP Deflator % 7.9 8.9 7.0 6.0 5.0 5.0 Per Capita GDP USD 2,836 2,923 3,348 3,790 4,267 4,814 Total Investment % of GDP 30.0 30.6 31.0 32.0 32.5 33.0 Domestic Savings % of GDP 15.4 17.0 19.1 23.4 25.7 28.4 National Savings % of GDP 22.0 24.0 26.9 30.1 32.0 34.2

External Sector

Trade Gap USD mn -9,710 -9,409 -9,813 -10,010 -10,384 -10,113 Exports USD mn 10,559 9,774 10,799 12,890 15,210 17,605 Textiles and Garments USD mn 4,191 3,991 4,010 4,530 5,180 5,955 Gems, Diamonds and Jewellery USD mn 532 559 594 745 895 1,090 Imports USD mn 20,269 19,183 20,612 22,900 25,595 27,718 Textiles USD mn 2,321 2,266 2,547 2,929 3,368 3,671 Project Related (Public and Private Sector) USD mn 3,821 4,300 4,743 5,237 5,876 6,550 Services (net) USD mn 1,099 1,250 2,213 3,263 4,318 5,379 Export of Goods and Services USD mn 13,643 13,562 15,949 19,558 23,696 28,093 Export of Goods and Services % of GDP 23.1 22.8 23.2 24.9 26.5 27.6 Workers' Remittances USD mn 5,145 5,985 6,664 7,453 8,223 9,059 Current Account Balance USD mn -4,615 -3,915 -2,766 -1,439 -411 1,277 Current Account Balance % of GDP -7.8 -6.6 -4.0 -1.8 -0.5 1.3 Overall Balance USD mn -1,061 151 725 2,063 3,235 6,110 External Official Reserves (d) (e) USD mn 5,958 6,877 7,146 8,486 11,166 16,773

Cont…


Sri Lanka: Medium Term Macroeconomic Framework (cont…)

Indicator Unit 2011(b) 2012 (c)Projections

2013 2014 2015 2016Fiscal Sector

Total Revenue and Grants % of GDP 14.5 13.2 14.7 14.9 15.2 15.4 Total Revenue % of GDP 14.3 13.0 14.5 14.8 15.1 15.3 Grants % of GDP 0.2 0.2 0.2 0.1 0.1 0.1Expenditure and Net Lending % of GDP 21.4 19.7 20.5 20.0 19.8 19.9Current Account Balance % of GDP -1.1 -1.4 0.1 0.8 1.4 1.7Overall Budget Deficit % of GDP -6.9 -6.4 -5.8 -5.2 -4.7 -4.6Domestic Financing % of GDP 3.5 2.7 4.1 3.7 3.6 3.5Government Debt % of GDP 78.5 79.1 75.0 71.1 67.7 64.3

Financial Sector (f) Reserve Money Growth % 21.9 10.2 16.5 15.0 14.0 14.0Broad Money Growth (M2b) % 19.1 17.6 15.0 15.0 14.0 14.0Change in Net Credit to the Government Rs. bn 206.4 211.6 70.0 55.0 20.0 15.0Change in Credit to the Private Sector Rs. bn 514.8 352.6 435.0 517.5 613.0 690.0Growth in Credit to the Private Sector % 34.5 17.6 18.5 18.5 18.5 17.6

a. Based on information available by mid March 2013b. Revisedc. Provisionald. Excluding Asian Clearing Union balancese. Includes receipts under the Stand-by Arrangement facility of the International Monetary Fund obtained in 2009f. Year-on-Year growth in end year values

Sources: Department of Census and Statistics, Ministry of Finance and Planning - Central Bank of Sri Lanka


Latest IMF Projections

Source: The Economist

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

economic capsule - april 2013

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