Economic Capsule - December 2014

Economic CapsuleDecember 2014

Research & Development Unit

216th Issue

C O N T E N T S

BANKING SECTOR NEWS Commercial Bank Adjudged Sri Lanka’s ‘Bank of the Year’ in 2014

Commercial Bank’s Annual Report Best among private banks in South Asia

Commercial Bank, Adjudged Runner-Up at Best Corporate Citizen Awards

Commercial Bank Receives License from Central Bank of Myanmar

ECONOMIC & BUSINESS NEWS Sri Lanka tops South East Asia region for business-Forbes

External Sector Performance – Oct. 2014

Financial Sector Consolidation Update

Sri Lanka’s Unemployment – 2Q, 2014

Colombo Refurbishment Plan Reaches Halfway Mark

News Snippets

International News

Analysis & Forecast

Condominium Industry in Sri Lanka

October, 2014


Banking News

< Research & Development Unit >

Commercial Bank Adjudged Sri Lanka’s ‘Bank of the Year’ in 2014

• As its financial year draws to a close, the Commercial Bank of Ceylon has achieved yet another milestone, being declared Sri Lanka’s ‘Bank of the Year’ by the respected UK-based ‘The Banker’ Magazine.

• This is the ninth Bank of the Year award presented to Commercial Bank by ‘The Banker’ – the magazine that is also responsible for the annual ranking of the Top 1000 Banks of the World.

• The Bank of the Year award also referred to as a ‘Bracken’ is considered the ‘Oscar’ of the international banking industry, and is decided on performance across diverse key indicators.


Commercial Bank’s Annual Report Best Among Private Banks in South Asia

• The 2013 Annual Report of the Commercial Bank of Ceylon PLC has won two key awards at the Best Presented Annual Report Awards presented by the South Asian Federation of Accountants (SAFA), reaffirming the high quality of the Bank’s financial reporting standards.

• Sri Lanka’s benchmark private bank was adjudged the winner in the ‘Private Sector Banks’ category and was the first runner-up for the SAARC Anniversary Award for Corporate Governance Disclosures, at this prestigious event in Bhubaneshwar, India.

• In second and third place among private sector banks in the South Asian region were MCB Bank Limited of Pakistan and Prime Bank Limited of Bangladesh.


The Commercial Bank’s status as one of Sri Lanka’s leading corporate citizens was emphatically reaffirmed this week when the Ceylon Chamber of Commerce presented the country’s largest private bank with the Runner-Up award at the 2014 Best Corporate Citizen Sustainability Awards, along with seven more accolades.

While retaining its position as one of the Top 10 Best Corporate Citizens in Sri Lanka, the Bank emerged the winner in the category award for ‘Economic Contribution,’ took the award for ‘Economic Sustainability’ in the Triple Bottom Line category and was awarded as the winner in ‘Financial Services’ in the sector awards. Under the project category the Bank was recognised with a special Long Term Project Award for its efforts to support the national healthcare system. This was the only award that was presented in this category and was a special honour for the Bank’s consistent and ongoing efforts to support the national healthcare system. Commercial Bank also received a Merit Award for its coral replanting project in

Hikkaduwa.

Commercial Bank, Adjudged Runner-Up at Best Corporate Citizen Awards


Commercial Bank Receives License from Central Bank of Myanmar

• The Commercial Bank has become the first Sri Lankan bank to be granted a licence by the Central Bank of Myanmar to operate a Representative Office in the South East Asian republic of more than 50 million people.

• According to Commercial Bank’s Chairman Mr Dharma Dheerasinghe, there is further potential to increase bi-Iateral trade between Myanmar and Sri Lanka, and there is a likelihood of some of Sri Lanka's leading apparel exporters and other industries setting up operations in Myanmar and the presence of a Representative Office of Sri Lanka’s largest private bank would facilitate this process, and be mutually beneficial to the two countries.


October, 2014


Economic & Business News


Sri Lanka Tops South East Asia Region for Business - Forbes

• Sri Lanka is placed 89th out of 146 nations in the Forbes’ Best Countries for Business 2014 ranking, Forbes announced.

• The best country for business this year is Denmark, which ranked No. 1 three straight years between 2008 and 2010. The top 10 also include Hong Kong, New Zealand, Ireland, Sweden, Canada, Norway, Singapore and Switzerland.

• India has been placed 93rd, behind countries like Mexico, Kazakhstan

• The Forbes stated “…however, low tax revenues are a major concern. A large trade deficit remains a concern, but strong remittances from Sri Lankan workers abroad help offset the trade deficit.”

• Forbes’ annual ranking of the Best Countries for Business, grades countries on 11 different metrics, including property rights, innovation, taxes, technology, corruption, freedom (personal, trade and monetary), red tape, investor protection and stock market performance.

• Sri Lanka tops the list from the South Asia region.

Source: Daily Mirror


External Sector Performance – Oct. 2014

• Earnings from exports declined by 13.7 per cent, year-on-year, in October 2014 to US dollars 899 million, after recording continuous monthly increases since June 2013, while cumulative earnings increased by 9.7% to US dollars 9,187 million during the first ten months of 2014.

• Expenditure on imports increased by a higher rate of 25.6 per cent to US dollars 1,750 million in October 2014, while on a cumulative basis, imports grew by 7.3 per cent to US dollars 15,972 million during the first ten months of 2014.

• Trade deficit during the first ten months of 2014 widened by 4.3% over the corresponding period in 2013.

Jan-Oct2013

US$ mn

Jan- Oct2014

US$ mn

GrowthJan- Oct

(%)

Exports 8,374.7 9,186.7 9.7

Imports 14,882.0 15,972.5 7.3

Trade Balance -6,507.3 -6,785.8 4.3

Earnings from Tourism 1,361.0 1,775.3 30.4

Inflows to Other Trade in Services 1,469.6 1,670.5 13.7

Workers’ Remittances 5,236.3 5,689.7 8.7

Inflows to the CSE (Net) 187.4 106.9

Inflows to the Government 3,807.3 4,590.6 20.6

of which,

Treasury Bills and Bonds 2,328.9 1,637.1 -29.7

International Sovereign Bonds 1,500.0

Long term Loans 1,452.6 1,410.8 -2.9

Foreign Direct Investment (1H) 549.1 850.0 54.8

Source: CBSL


Financial Sector Consolidation Update

Consolidation process of 7 NBFIs has been completed and another 22 NBFIs and 4 banks are in progress for completion in due course. The names of such entities and the consolidation strategy are as follows:

Source: CBSL


Sri Lanka’s Unemployment – 2Q, 2014

• Sri Lanka’s number of unemployed persons is estimated at about 398,665 during the Second quarter, 2014. The unemployment rate for the second quarter 2014 is 4.5 %.

• Over-all unemployment rate reported for female is 6.7 % and 3.4 % for male. Youth unemployment rate 15-24 years reported for second quarter 2014 is 19.5 % and that reported the highest unemployment rate among all other age groups. These rates for both males and females are 15.8% and 26.3% respectively.

Unemployment rate by age group and gender 2Q, 2014 – Sri Lanka (in %)

Age Group (Years)

Total

Gender

Male Female

For all age groups

4.5 3.4 6.7

15 – 24 19.5 15.8 26.3

25 – 29 9.4 6.9 13.9

Over 30 1.6 1.0 2.6

Source: Daily News, Department of Census & Statistics of Sri Lanka


Colombo Refurbishment Plan Reaches Halfway Mark

• The World Bank has revealed that the Metro Colombo Urban Development Project has now reached its halfway mark, with 75% of the loan still available to be utilised for development in the next two and a half years.

• The plans have been carried forward with a loan of USD 213 mn which was granted to the Sri Lankan Government by the World Bank in 2012 for a five-year plan aimed at complementing ‘the urban regeneration program’ of the Sri Lankan Government.

• The project was designed to reduce flooding and to help the Government increase the capacity of the agencies that manage the canals and the floods and also the local authorities that are in charge of some of the maintenance of the smaller canals and some of the recreational areas created around the canals

• Projects that have been completed thus far include the building of public toilets, carpeting of roads, refurbishment of Town Hall and Vihara Maha Devi Park, creation of pedestrian crossings, installation of LED lights, wide sidewalks and seating arrangements as well as a removable center lane that can be used to further widen the road.

• In addition to this, work is nearing completion for two more parks being built in Baddegana and around the Beira Lake while a third park on Crow Beach is seeing its initial stages.

Source: Daily FT

News Snippets Insurance industry performance in 1H

The insurance industry continued its growth during the first half of year 2014. Gross Written Premium (GWP) grew by 3.07% and total assets increased by 13.0% when compared to the first half of year 2013 according to the Insurance Board of Sri Lanka (IBSL).

Total Assets of insurance companies had increased to Rs. 390,918 million as at 30 June 2014 when compared to Rs. 345,942 million recorded as at 30 June 2013, reflecting a growth of 13.0%.

Belarus removes Tax of Lankan exporters

Department of Commerce of Sri Lanka says that the Government of Belarus has removed Sri Lanka from the list of its off-shore countries with effect from November 26, 2014.

The direct benefit of this delisting is that Lankan exporters will no longer be subject to the payment of 15% tax on remittance of their export earnings back to Sri Lanka. As for Lanka's bilateral trade, total trade reported at $14.24 Mn in 2013. 94% of Sri Lanka's exports to Belarus are tea. Less than 1% (0.05%) of SL’s total exports are taken by Belarus.

Changes to S&P Sri Lanka 20 Index

Colombo Stock Exchange (CSE) announced changes in S&P Sri Lanka 20 index constituents made by S&P Dow Jones Indices at the 2014 annual index rebalance as follows.

S&P Dow Jones Indices announced that effective from December 22, 2014 (after the market close of December 19, 2014), Asian Hotels & Properties (AHPL), C T Holdings (CTHR) and Hayleys (HAYL) will be removed from the S&P Sri Lanka 20 index as they no longer qualify for index inclusion.

Replacements will be Access Engineering (AEL), People’s Leasing & Finance (PLC) and Sri Lanka Telecom (SLT).

JKH secures $ 445 m funding for Waterfront

John Keells Holdings Plc stated that it has secured US$ 445 million funding for its and country’s biggest private sector project “Waterfront”. In a short filing to the CSE, JKH said its subsidiary Waterfront Properties Ltd., has entered into a US$ 445 million syndicated project development facility with Standard Chartered Bank.

“The Waterfront” is a US$ 650 million integrated resort which is scheduled to be completed by early 2018. Korea’s largest builder Hyundai Engineering & Construction Co Ltd. won the contract worth US$ 339.30 million for Waterfront.


International News


Why the Oil Price is Falling

The oil price has fallen by more than 52% since June, when it was $115 a barrel and it is now $60.34 (Brent) (26 Dec. 2014).

OPEC, which controls nearly 40% of the world market, failed to reach agreement on production curbs, sending the price tumbling.

The oil price is partly determined by actual supply and demand, and partly by expectation.

Four things are now affecting the picture. Demand is low because of weak economic activity, increased efficiency, and a growing switch away from oil to other

fuels.

Turmoil in Iraq and Libya—two big oil producers with nearly 4m barrels a day combined—has not affected their output. The market is more sanguine about geopolitical risk.

America has become the world’s largest oil producer. Though it does not export crude oil, it now imports much less, creating a lot of spare supply.

The Saudis and their Gulf allies have decided not to sacrifice their own market share to restore the price. They could curb production sharply, but the main benefits would go to countries they detest such as Iran and Russia. Saudi Arabia can tolerate lower oil prices quite easily. It has $900 billion in reserves. Its own oil costs very little (around $5-6 per barrel) to get out of the ground.

Source: The Economist


Impact of Oil Price Reduction

Cheaper oil should act like a shot of adrenalin to global growth. A $40 price cut shifts some $1.3 trillion from producers to consumers.

The typical American motorist, who spent $3,000 in 2013 at the pumps, might be $800 a year better off—equivalent to a 2% pay rise.

Big importing countries such as the euro area, India, Japan and Turkey are enjoying especially big windfalls.

Since this money is likely to be spent rather than stashed in a sovereign-wealth fund, global GDP should rise.

The falling oil price will reduce already-low inflation still further, and so may encourage central bankers towards looser monetary policy.

The Federal Reserve will put off raising interest rates for longer; the European Central Bank will act more boldly to ward off deflation by buying sovereign bonds.



Impact of Oil Price Reduction (Cont…)

Oil-producing countries whose budgets depend on high prices are particularly in trouble.

Nigeria has been forced to raise interest rates and devalue the naira. Venezuela looks ever closer to defaulting on its debt.

The spectre of defaults and the speed and scale of the price plunge have unnerved financial markets. But the overall economic effect of cheaper oil is clearly positive.

Just how positive will depend on how long the price stays low.



October, 2014


Analysis & Forecast


Global Economic Outlook - SCB

Growth in the US since mid-2009 has averaged only 2.3% – too low, given that the economy was emerging from a financial crisis and a recession that started at end-2007.

The US is expected to finally break out in 2015, growing by 2.8%. Although not spectacular, this would be a notable improvement.

Higher growth and falling unemployment should allow the Fed to proceed with its first interest rate hike in September 2015.

This should be seen as a ‘normalisation’ of interest rates and policy, rather than a hawkish stance by a Fed concerned about inflation.

This hiking cycle is expected to be slow and the peak in interest rates to be low. SCB forecasts a total of 50bps of hikes in 2015, starting in September.

SCB sees rates rising further to 1.75% in 2016, with the Fed pausing its hiking cycle at 2.0%.

SCB maintains the view that rates will stay lower for longer, as a peak of 2.0% is much lower than in previous hiking cycles.


Global Economic Outlook – SCB (Cont…)

However, monetary policy sometimes reaches a point where it loses its desired effect on economic activity.

Japan is an example – interest rates have been low for years, yet the economy has faced the constant threat of deflation and low growth rates.

Another example is Europe, where interest rates have been kept close to zero and the ECB has taken the first steps toward quantitative easing (more is expected to come in 2015), yet the region risks a decade of lost growth and a generation lost to unemployment. While we expect the euro-area economy to improve in 2015 compared with 2014, this needs to be put into context.

The 11 largest euro-area economies grew an average of 0.3% during the Great Depression between 1929 and 1936 – better than the 0.2% contraction they averaged between 2007 and 2014. Real GDP per capita in the euro area is now at 2006 levels.

In such situations, fiscal policy needs to play a bigger role. If animal spirits are absent, businesses are not investing, and households are not spending (despite low interest rates), the onus should shift to governments to purchase goods and services.


Sri Lanka: Tea Outlook

The Russian ruble depreciation by over 40% against the USD so far in 2014 could affect the export value of the Sri Lankan tea industry.

Reduction in buying power of the Russian tea importer Delayed payments SL tea prices will see a further steep decline

The prices have been in decline since August which has traditionally been the peak buying season of Russia ahead of their harsh winters

According to Ceylon Tea Board, export volumes to Russia have been down only 0.3 % for the first 10 months of 2014 (YoY).

The Sri Lankan national average per kilogram of tea for November 2014 was down by 11.4 %(YoY). The biggest losses came from the Low Grown and Medium Grown teas demanded by 1) Russia , and 2) Eastern Europe and the Middle East, with declines of 13.1 % and 9.7 % respectively.

Exports to Ukraine, Syria, Libya, Iraq and Iran have seen declines in 2014 due to regional instabilities, sentiments.

Source: Daily FT

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.


Economic Capsule - December 2014

Economy & Finance

Transcript of Economic Capsule - December 2014