economic capsule - june 2016

Economic CapsuleJune 2016

Research & Development Unit

234th Issue

C O N T E N T SBANKING AND FINANCE Dr. Indrajit Coomaraswamy new Central Bank Governor Commercial Bank Joins Technology Initiative for Tea Leaf Suppliers in Sri Lanka Commercial Bank Launches Sri Lanka’s First Remittance Card Commercial Bank adds Crosscurrency Transactions to Online Banking

ECONOMY & BUSINESS Moody's Changes Outlook on Sri Lanka's Rating to Negative IMF Approves Three-Year US$ 1.5 Bn Extended Arrangement under EFF for Sri Lanka Sri Lanka Economy Grows at 5.5% in 1Q Fiscal Sector Developments, Jan-April 2016 External Sector - March 2016 Sri Lanka’s PMIs for Manufacturing and Services Recent Announcements by the PM Other News BREXIT

Condominium Industry in Sri Lanka

October, 2014


Banking & Finance

4< Research & Development Unit >

Dr. Indrajit Coomaraswamy new Central Bank Governor

Dr. Indrajit Coomaraswamy has been appointed the new Governor of the Central Bank of Sri Lanka. Dr Indrajit Coomaraswamy was an official in the Central Bank of Sri Lanka

from 1974-1989. He worked in the Economic Research, Statistics and Bank Supervision Departments. During this time he was seconded to the Ministry of Finance and Planning (1981-89).

Dr Coomaraswamy was thereafter employed by the Commonwealth Secretariat from 1990-2008. During that time he held the positions, inter alia, of Director, Economic Affairs Division and Deputy-Director, Secretary-General's Office. He was subsequently Interim Director, Social Transformation Programme Division, Commonwealth Secretariat (Jan-July 2010).

Dr. Coomaraswamy was a member of the Monetary Policy Consultative Committee of the Central Bank of Sri Lanka during the period January 2013 – January 2015.

Dr. Coomaraswamy was the Advisor to the Ministry of Development Strategies and International Trade until recently.

Dr Coomaraswamy completed his undergraduate degree at Cambridge University and obtained his Doctorate at the University of Sussex, United Kingdom.


Commercial Bank Joins Technology Initiative for Tea Leaf Suppliers in Sri LankaCommercial Bank has been designated the Preferred Bank for the issue of the first Hybrid Debit Card coupled with Sony ‘FeliCa’ Near Field Communication (NFC) technology in the market, enabling its promoter Smart Metro (Pvt) Ltd. to deploy a Debit Card cum Identification Card for tea leaf suppliers.

Armed with these personalised cards linked to savings accounts at Commercial Bank, tea leaf suppliers can simply tap their cards on the data acquisition device to promptly identify each supplier through NFC technology and to obtain a detailed receipt for the weight of the leaves supplied. All data required for automatic calculation of the payments to leaf suppliers are instantly transmitted to a central server by the data acquisition device.

The server generates a file with fund transfer instructions, which will be forwarded to Commercial Bank to credit monies earned, to the accounts of the cardholders. The account holders may thereafter withdraw the money they require from the ATMs of the Bank or at branch counters. Alternatively they can also use the card to pay for purchase of goods and services.

Commercial Bank Managing Director/CEO Mr Jegan Durairatnam (left) makes a symbolic presentation of a hybrid debit card to the owner of a tea factory in the presence of representatives of Smart Metro.


Commercial Bank Launches Sri Lanka’s First Remittance CardSri Lanka’s first Remittance Card has been launched by Commercial Bank . A branded Debit cum ATM Card licensed by Visa Inc. and issued locally by Commercial Bank to recipients of remittances, the new Remittance Card eliminates the need to visit a branch of the bank to collect remitted funds.

The card permits an overseas sender to deposit funds directly into a beneficiary’s account via Commercial Bank’s e Exchange platform. The funds may be withdrawn from any ATM across Sri Lanka at the recipient’s convenience.

The Remittance Card also enables the recipient of the funds to retain all or a portion of the funds in his or her account and use the card to make purchases.


Commercial Bank adds Crosscurrency Transactions to Online Banking

Commercial Bank has added a new dimension to its Online Banking platform by enabling foreign currency account holders to carry out fund transfers between accounts maintained in different currencies other than Sri Lankan rupees.

These transactions can be carried out between accounts maintained under a customers own name in eight major currencies including the US Dollar, British Pound, Euro, Australian Dollar and Japanese Yen, the Bank said. This facility would be available 24/7, 365 days of the year.

Condominium Industry in Sri Lanka

October, 2014


Economy & Business


Moody's Changes Outlook on Sri Lanka's Rating to Negative

Two key drivers underpin the change in outlook to negative from stable:

1. Further weakening in some of Sri Lanka's fiscal metrics in an environment of subdued GDP growth which could lead to renewed balance of payments pressure.

2. The possibility that the effectiveness of the fiscal reforms envisaged by the government may be lower than we currently expect, which could further weaken fiscal and economic performance.

Rating Affirmed (B1)

Outlook to Negative (from Stable)

Moody’s Press Release - Moody's changes outlook on Sri Lanka's rating to negative from stable; affirms government bond rating at B1

Moody's Investors Service has affirmed Sri Lanka's foreign currency issuer and senior unsecured sovereign ratings at B1 and changed the outlook to negative from stable.

https://www.moodys.com/research/Moodys-changes-outlook-on-Sri-Lankas-rating-to-negative-from--PR_348945


IMF Approves Three-Year US$ 1.5 Bn Extended Arrangement under EFF for Sri Lanka

It is also expected to catalyze an additional US$650 mn in other multilateral and bilateral loans, bringing total support to about US$2.2 bn (over and above existing financing arrangements).

The Executive Board’s decision will enable an immediate disbursement of SDR 119.894 mn (about US$ 168.1 mn), and the remainder will be available in 6 installments subject to quarterly reviews.

Cont..

The Executive Board of the IMF has approved a 36-month extended arrangement under the Extended Fund Facility (EFF) with Sri Lanka for an amount equivalent to SDR 1.1 bn (about US$1.5 bn, or 185 % of quota) .

This type of facility is designed to meet balance of payments needs arising from a deteriorating external environment and pressures that may persist until macroeconomic policies can be adjusted.


Extended Arrangement under the EFF ‒ Policy Pillars and Key Measures

Cont..

# 1: Fiscal consolidationRebuilding tax revenues through a comprehensive reform of both tax policy and administration will be key in this regard, supplemented by steps toward more effective control over expenditures and putting state enterprise operations on a more commercial footing.

# 2: Revenue MobilizationRevenue mobilization is envisioned as the linchpin of programmed fiscal adjustment, and would be achieved by base-broadening tax policy measures as well as reforms toward efficient & risk-based tax administration. These will be complemented by efforts to simplify the tax system.

# 3: Public Financial Management ReformThe program aims to improve expenditure management and fiscal risk monitoring Cont..


# 4: State Enterprise ReformLoss-making enterprises such as Sri Lankan Airlines need to be restructured or resolved to stop the hemorrhage of public finances. Other enterprises need to operate on a commercial footing with the essential first step being market-based pricing of fuel, electricity, and other utilities.

# 5: Enhancing monetary policy effectivenessThe focus of monetary policy will be to keep inflation in the low single digits, while allowing for a durable transition to a more flexible exchange rate regime.

# 6: Supporting Trade and Investment to Strengthen External Sustainability

Achieving medium-term growth and reserve objectives will require a renewed effort toward greater integration into regional and global supply chains, higher levels of FDI, and enhancing prospects for private sector investment.

Extended Arrangement under the EFF ‒ Policy Pillars and Key Measures (cont…)

IMF Full Report - Sri Lanka IMF Staff Report for the 2016 Article IV Consultation

http://www.imf.org/external/pubs/ft/scr/2016/cr16150.pdf


Sri Lanka Economy Grows at 5.5% in 1Q

Rs. 2,088,024 MnRs. 1,978,609 Mn 5.5 %

1Q, 20161Q, 2015

At constant (2010) price

1Q, 2016

Sri Lanka's economy grew 5.5 % in the first quarter of 2016 from a year ago, led by industrial activity, especially construction, according to the Department of Census and Statistics.

The industrial sector, which contributed 31 % to GDP, grew 8.3 % in the first quarter of 2016 from year before. Construction activity, which has a high share of GDP (7.8 %), increased by 12 % during the first quarter of 2016 compared to first quarter of 2015.

Cont..


Sri Lanka Economy Grows at 5.5% in 1Q (cont..)

1.9 %

Agriculture

8.3 %

Industry

4.9 %

Services

7.98 % 31.01 % 56.39 %

Growth

Shareto GDP

Department of Census and Statistics Press Note - National Accounts Estimates of Sri Lanka - 1st Quarter of 2016

http://www.statistics.gov.lk/national_accounts/dcsna_r2/reports/press_note_2016q1_english.pdf

Fiscal Sector Developments, Jan-April 2016

Jan-Apr 2015 Jan-Apr 2016

Revenue 395,117 472,689 Expenditure 666,728 706,133 Budget Deficit 271,517 233,444

Summary of the Budget: January - April 2016 (Rs. Mn) Composition of Government Revenue (Jan-Apr, 2016)

Composition of Government Expenditure (Jan-Apr, 2016)

Government Borrowing: January - April 2016 (Rs. Bn)

Jan-Apr 2016

Domestic borrowings 403.4

Foreign borrowings 50.0

Total gross borrowings 453.4

* Rs. 218.0 bn of the domestic borrowings was utilized for debt repayments and balance for interest payments. The net borrowing was Rs. 235.4 bn during this period. Cont..

15

16

Fiscal Sector Developments, Jan-April 2016 (cont..)

Foreign Financing Disbursements

The total disbursements from commitments already made by various bilateral and multilateral development partners during first four months of 2016 was US$ 311.7 mn

Foreign Financing Disbursements by Development Partners, Jan-Apr 2016

Debt Service Payments

The total debt service payments from January to April 2016 amounted to US$ 546.8 mn. Of which, US$ 309.7 mn was for principal payment and the balance US$ 237.1 mn was for interest payment.

Total estimated debt service payment for 2016 is US$ 1,638.7 mn, of which 33.5 % has already been made by 30th April 2016.

Full Report: Mid-Year Fiscal Position Report 2016, Ministry of Finance, Sri Lanka

http://www.treasury.gov.lk/documents/10181/12882/2016/3002d03c-c3d6-4ed7-b906-d27151207a73


External Sector March 2016

Exports Exports earnings during the first

three months of 2016 declined by 5.4 %, y-o-y, to USD 2,728 mn reflecting a lower performance in exports of transport equipment and petroleum products.

Expenditure on imports during the first three months of 2016 decreased by 4.1 % to USD 4,594 mn, mainly driven by the decline recorded in fuel imports. Cont..

Jan-Mar 2015 (US$ mn)

Jan-Mar 2016 (US$ mn)

Change (%)

Total exports 2,884.4 2,728.0 (5.4) Textiles and garments 1,258.0 1,369.3 8.9 Tea 335.3 313.1 (6.6) Transport equipment 165.4 47.0 (71.6) Petroleum products 127.9 74.2 (42.0)Total imports 4,792.1 4,594.5 (4.1) Fuel 709.1 485.7 (31.5) Vehicles 290.5 231.6 (20.3) Trade Balance (surplus(+)/deficit(-)) -1,907.7 -1,866.5 2.2

Earnings from Tourism 793.6(b) 969.3 22.1 Workers’ Remittances 1,679.4 1,793.4 6.8 Inflows to the CSE (Net) (c) 38.6 -12.5 -132.4 Inflows to the Government (d) 612.1 253.6 -58.6 Of which, Treasury Bills and Bonds 348.7 43.3 -87.6 Long term Loans 238.2 205.0 -14.0 Foreign Direct Investment (e) 346.4 164.5 -52.5

(c) Includes secondary and primary market transactions (d) Inflows to the government include capital and current transfers to the government, inflows from the investments in Treasury bills and Treasury bonds by foreign investors, International Sovereign Bonds and long-term loans of the government. (e) Data available for the first three months of each period and includes foreign loans to Direct Investment Enterprises as recorded by the Board of Investment of Sri Lanka.


External Sector – March 2016 (cont..)

Trade Deficit during the first three months of 2016 contracted by 2.2 % to USD 1,867 mn from USD 1,908 mn recorded during the same period of 2015.

During the first quarter of 2016, the overall BOP is estimated to have recorded a deficit of USD 720.2 mn, compared to a deficit of USD 1,016.8 mn recorded during the corresponding period of 2015.

Export Performance Import Performance

Central Bank of Sri Lanka Press Release - External Sector Performance – March 2016

http://www.cbsl.gov.lk/pics_n_docs/latest_news/press_20160701e.pdf


Sri Lanka’s PMIs for Manufacturing and Services The Manufacturing PMI fell below 50 threshold

for the second consecutive month in May 2016 recording 47.9 index points a slight improvement when compared to 41.6 index points registered in April 2016. The contraction was mainly due to adverse weather conditions .

The Services Sector PMI for May 2016 was 58.1 index points, which is a recovery from 54.7 index points recorded in April 2016. The increase was underpinned by increases in new businesses, employment, backlogs of work and expectations for activity sub-indices.

A PMI index points below 50 indicates a drop in activity. Source: CBSL


Recent Announcements by the PM

The Council of the European Union had approved lifting a ban on fisheries exports from Sri Lanka and the country is now working on getting GSP+ trade benefits

EU lifts fishing ban

Cont..

Sri Lanka’s port city construction will be converted to a financial city with a new agreement which is expected to be signed by August with the China Harbour Engineering Company.

According to the PM “we will convert the port city to a financial city filling the gap between Singapore and Dubai”.

Sri Lanka to sign formal deal for port city in August


Announcements by the PM (cont..)

Sri Lanka's main prison in the capital Colombo dating back to the British colonial era will be shifted releasing around 50 acres of land for a 'commercial city’. Plans have been made to shift the prison to Kaluthara district.

According to the PM, a 40-50 acre commercial city will come up in this area.

Welikdada prison transformed into commercial city


Mobitel, Dialog Axiata trial 1Gbps+ 4.5G

• Dialog Axiata and Mobitel have each announced successful trials of 4.5G technology, demonstrating download speeds in excess of 1Gbps. Sri Lanka is South Asia's first and one of just 20 countries where 4.5G capabilities have been demonstrated. Source: www.telegeography.com

Other News

• Cabinet has given the green light for the Megapolis authority to go ahead with a feasibility study for a Light Rail Transit (LRT) system, which is estimated to cost USD 3 bn, despite local transport experts supporting a much cheaper Bus Rapid Transport (BRT) system.

• The LRT will be on the Borella – Malabe route and also connect Colombo Fort, Kollupitiya, Bambalapitiya, Union Place and Maradana.

Sri Lanka Light Rail Transit


• What has happened?A referendum - a vote in which everyone (or nearly everyone) of voting age can take part - was held on 23 June, 2016 to decide whether the UK should leave or remain in the European Union. Leave won by 52% to 48%.

• What is the European Union?The European Union - often known as the EU - is an economic and political partnership involving 28 European countries. It began after World War Two to foster economic co-operation, with the idea that countries which trade together are more likely to avoid going to war with each other. It has since grown to become a "single market" allowing goods and people to move around, basically as if the member states were one country.

• What happens now?For the UK to leave the EU it has to invoke an agreement called Article 50 of the Lisbon Treaty.Cameron or his successor needs to decide when to invoke this - that will then set in motion the formal legal process of withdrawing from the EU, and give the UK two years to negotiate its withdrawal.The article has only been in force since late 2009 and it hasn't been tested yet, so no-one really knows how the Brexit process will work, according to BBC legal correspondent Clive Coleman.Mr Cameron, who has said he would be stepping down as PM by October, said he will go to the European Council to "explain the decision the British people have taken".EU law still stands in the UK until it ceases being a member - and that process could take some time. The UK will continue to abide by EU treaties and laws, but not take part in any decision-making, as it negotiates a withdrawal agreement and the terms of its relationship with the now 27 nation bloc. Cont..

Background


• Who wanted the UK to leave the EU?The UK Independence Party, which won the last European elections, and received nearly four million votes - 13% of those cast - in May's general election, campaigned for Britain's exit from the EU. About half of Conservative MPs, including five cabinet ministers, several Labour MPs and the DUP were also in favour of leaving.

• What were their reasons for wanting the UK to leave?They said Britain was being held back by the EU, which they said imposed too many rules on business and charged billions of pounds a year in membership fees for little in return. They also wanted Britain to take back full control of its borders and reduce the number of people coming here to live and/or work. One of the main principles of EU membership is "free movement", which means you don't need to get a visa to go and live in another EU country. The Leave campaign also objected to the idea of "ever closer union" and what they see as moves towards the creation of a "United States of Europe".

• Who wanted the UK to stay in the EU?Prime Minister David Cameron wanted Britain to stay in the EU. He sought an agreement with other European Union leaders to change the terms of Britain's membership. He said the deal would give Britain "special" status and help sort out some of the things British people said they didn't like about the EU, like high levels of immigration - but critics said the deal would make little difference.

• What were their reasons for wanting the UK to stay?Those campaigning for Britain to stay in the EU said it gets a big boost from membership - it makes selling things to other EU countries easier and, they argued, the flow of immigrants, most of whom are young and keen to work, fuels economic growth and helps pay for public services. They also said Britain's status in the world would be damaged by leaving and that we are more secure as part of the 28 nation club, rather than going it alone. Cont..

Background


Global Economic Impacto The referendum wiped a record $3 trillion off the value of global shares and sterling fell to its lowest

level in 31 years against the U.S. dollar.

o The Governor of the Bank of England has announced that BOE will be making available around GBP 345 bn in funding lines to the financial system, to ward off effects.

o Effects were felt across currencies, in Asia and Europe. Yen and Dollar saw gains, along with Gold and US Treasuries, as investors flocked to ‘safe haven’ assets amidst the volatility.

o Sterling and world stock markets have recovered slightly but investor confidence remains fragile.

o According to British Finance Minister George Osborne, the government would have to cut spending and raise taxes to stabilize the economy after credit rating agency Fitch became the third agency to downgrade UK debt.

o European Central Bank President Mario Draghi has announced that central banks around the world should aim to align monetary policies to mitigate "destabilizing spillovers" between economies.

o Policymakers and companies around the world are scrambling to assess the impact Brexit will have.

o Federal Reserve governor Jerome Powell has said the decision had shifted global risks "to the downside", while Japanese Prime Minister Shinzo Abe has said “sense of uncertainty and worry about risks remain in the markets”. Cont..


View’s on Brexit Impact on Sri Lanka

o Ceylon Chamber of Commerce: Sri Lanka exports 10% of her exports to the UK (around USD 1 bn) and 28.8% of her exports to the EU (around USD 3 bn).

o The impact on economic activity and dynamism in Britain and Europe would impact on the markets for our exports there. Britain is a substantial market for other EU countries, and any reduction in their export earnings and overall incomes would affect their demand for imports.

o Anushka Wijesinha – Economist: We are seeing the strengthening of the USD against many currencies, especially emerging market currencies. This will put depreciation pressure on the LKR.

o The volatility and serious damper on risk sentiment will likely be felt for the next days and weeks to come. This will of course affect Sri Lanka, as capital flows to emerging and frontier markets slowdown.

o There can be implications for Sri Lanka’s borrowing costs in international capital markets, including implications for the proposed sovereign bond issue.

Cont..


View’s on Brexit Impact on Sri Lanka (cont…)CBSL: Sri Lanka’s balance of trade, tourism & foreign reserves could be adversly affected.o GSP: There is a possibility that the UK would introduce a preferential tariff system like GSP on its own. When

considering the impact, it appears that only the impact on Sri Lanka’s garments and textiles is significant, since out of the total exports to Britain, garments and textile exports averages to 83% over the last three years.

o Possible slowdown in the UK economic growth: • Reduction in imports by UK thereby affecting exports of Sri Lanka.• Risk of increase in cost of borrowing in any form, and a decline of capital inflows to the country if volatility

in financial markets persist and growth in the UK slows down.

o If the Sterling Pound depreciation trend persists, it will lead to a reduction in Sri Lanka’s export competitiveness resulting in an adverse impact on the trade balance.

o When it comes to foreign reserve compilation, all foreign exchange assets are valued at mark-to-market basis in US dollar terms. Accordingly a sharp depreciation of Sterling Pound against the USD is likely to result in some valuation losses, which in turn, would lead to a decline in external reserves of the country. However, the increase in gold prices could mitigate this impact to a certain extent.

o Any postponement of any monetary policy tightening by the US Federal Reserve will ease pressure on global interest rates applicable to emerging market economies like Sri Lanka.

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 >

Good Economics is Good Politics

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economic capsule - june 2016

Economy & Finance