Economic Capsule -December 2016

Economic CapsuleDecember 2016

Research & Development Unit

240th Issue

C O N T E N T SBANKING AND FINANCE Commercial Bank declared Sri Lanka’s Bank of the Year by ‘The Banker’ Commercial Bank annual report wins six awards Commercial Bank affirmed Best SME Bank in Sri Lanka Fitch lowers Sri Lanka banking sector outlook to negative while Moody's maintains stable outlook Road Map 2017: Banking sector highlights

ECONOMY & BUSINESS Sri Lanka’s prosperity improves Sri Lankan economy grew by 4.1% in Q3-2016 Credit to the private sector by commercial banks continued to decelerate CCPI headline & core inflation increased Sri Lanka’s largest fully integrated tire plant to be built with Rs 11.25 bn GRI lays foundation for US$ 40 mn next-generation tyre factory in Badalgama US’ Carlson Rezidor Group enters Sri Lanka for 216-room city hotel Sri Lanka starts building automobile assembly plant MAS invest US$ 28 mn in Fabric Park Hayleys reveals plans to build ‘World Export Centre’ twin towers Ground broken for USD 166 mn Havelock City project Sri Lanka commissions 10MW solar power plant Bloomberg lists Sri Lanka among 20 hottest luxury travel destinations Sri Lanka gets USD 75mn World Bank credit line to streamline welfare system

INTERNATIONAL The World Economy in 2016

Condominium Industry in Sri Lanka

October, 2014


Banking & Finance

< Research & Development Unit >

Commercial Bank declared Sri Lanka’s Bank of the Year by ‘The Banker’

The celebrated award as Sri Lanka’s Bank of the Year 2016 assumes special significance as 2016 is the 90th anniversary year of ‘The Banker’, making it the longest-running international banking publication in the world.

This is the tenth occasion on which Commercial Bank has been adjudged Sri Lanka’s ‘Bank of the Year’ by ‘The Banker’, making it the only Sri Lankan bank to achieve this feat in the history of the awards.

Commercial Bank won the global banking fraternity’s most coveted award – the ‘Bank of the Year’ – presented by ‘The Banker’ of the UK, ending 2016 with the industry’s ‘Oscar’ in respect of Sri Lanka.


Commercial Bank annual report wins six awardsCommercial Bank won six awards, at the 52nd Annual Report Awards of the Institute of Chartered Accountants of Sri Lanka.

With these six awards, Commercial Bank became the most-awarded Corporate of the night.

Banking Sector - Gold Award Overall - Third Corporate Governance Disclosure - Silver

Award Corporate Social Responsibility Reporting - Silver Award Integrated Reporting: Best disclosure

on capital management - Silver Award Integrated Reporting - Bronze Award


Commercial Bank affirmed Best SME Bank in Sri Lanka

The award also recognises the bank’s contribution to raising the bar in the local finance industry, including in corporate social responsibility and better corporate governance, in IFM’s ‘Financial Awards’ category.

Commercial Bank of Ceylon PLC – Deputy General Manager – Personal Banking – Ms. Sandra Walgama (right) receives the IFM Best SME Bank award in Singapore.

The Commercial Bank of Ceylon PLC has been declared the ‘Best SME Bank’ in Sri Lanka in 2016 by ‘International Finance Magazine’ (IFM) of the UK, for ‘making a significant difference and adding value, and achieving the highest standards of innovation and performance’ for Small and Medium Enterprise clients.

Fitch lowers Sri Lanka banking sector outlook to negative while Moody's maintains stable outlook


Fitch has revised its sector outlook for Sri Lankan banks to negative from stable. Operating conditions have become more challenging, as signalled by the downgrade and revision of the outlook on the sovereign rating to 'B+'/Negative from 'BB-'/Stable in February 2016.

Fitch expects rising macroeconomic pressure to strain banks' credit metrics, in particular asset quality.

NPLs to Rise: Fitch expects a deterioration in asset quality to become more apparent in 2017 in the aftermath of lending to more susceptible segments, and for bank NPL ratios to rise amid a more challenging environment. The decrease in the sector NPLs throughout most of 2016 was largely the result of a reduction in NPLs from gold-backed lending, and this is not expected to continue to mask incremental NPL formation for the sector. Cont..

Fitch lowers Sri Lanka banking sector outlook to negative while Moody's maintains stable outlook (cont..)


Moderation in Loan Growth: The continued rise in credit demand throughout most of 2016 prompted a response from CBSL in the form of rate hikes and higher reserve requirements to curb credit expansion and inflation pressures. Fitch expects these actions to take effect and for lending to moderate in 2017 alongside higher interest rates and reduced consumption demand.

Pressure on Capital: Fitch sees capitalisation as a significant issue facing the sector, stemming from thin capitalisation across state banks and diminishing capitalisation across most non-state banks. The CBSL could impose higher capital requirements, including those via the implementation of Basel III capital standards.

Manageable Profit Pressure: A potential increase in credit costs could offset the benefit of a possible improvement in net interest margin and result in a slight decrease in profitability.

Stable Liquidity Profile: Funding-cost pressures have risen and competition for deposits has increased. Banks’ liquidity should continue to be supported through a stable deposit base. Customer deposits comprise the bulk of banks’ funding, at about 68% of assets. Cont..



Moody's Investors Service has maintained its stable outlook on Sri Lanka's banking system, as moderate economic growth and reduced external volatility should keep operating conditions for the country's banks stable.

“Continued strong loan growth may put downward pressure on asset quality and liquidity conditions, but non-performing loan (NPL) ratios will remain at low levels, we therefore expect a degree of asset quality deterioration consistent with the current credit profiles of Sri Lankan banks, according to Moody's”

The stable outlook on the banking system differs from the negative outlook on the B1 long-term foreign currency issuer rating assigned to the Government of Sri Lanka. Sri Lanka's B1 sovereign credit rating outlook was changed to negative from stable on June 20, 2016, driven primarily by the sovereign's high level of government debt and implementation risks surrounding planned fiscal reforms. Cont..



Moody's expects asset quality will deteriorate as a result of the relatively rapid 16% loan growth year-on-year at end-September 2016, a key driver of which has been growth of construction loans. The weakening in asset quality will come from a generally low 2.9% nonperforming loan ratio for the system at end-September 2016, which are close to the lowest level for the last decade.

Capital levels are also likely to remain largely stable as pressure on liquidity and funding cause loan growth to moderate. Loan-to-deposit ratios have increased to about 91%, close to the peak reached in 2012, driven by the strong loan growth over the last 18 months.

Positively, though, the banks' profitability will remain stable, with the firm interest rate environment supporting net interest margins.

Cost-to-income ratios may also continue to improve, although only marginally, driven by positive operating leverage.


Streamline and strengthen the regulatory and supervisory framework through the proposed Banking Act amendments.

Enhance the bank examination methodology - Bank Sustainability Risk Index (BSRI). Accordingly, amendments will be introduced to the existing risk-based supervision

framework based on a mix of quantitative and qualitative indicators to enhance focus on sustainability and operational efficiency of banks. CBSL will conduct the pilot run of the Risk Index on large banks during 1Q-2017 and subsequently, the index will be extended to the other segments of the banking sector.

In 2018, the Risk Index will be incorporated to all examination reports and we intend to assign a supervisory rating, based on this index. By 2019, a comprehensive pre-risk assessment will be conducted for all banks and a risk-based examination plan will be formulated. Cont..

CBSL Governor Dr. Indrajit Coomaraswamy presented the Road Map for 2017 themed “Monetary and Financial Sector Policies for 2017 and Beyond” on January 03, 2017, following are highlights in relation to banking sector.


Strengthen capital positions in line with minimum requirements and Basel III capital standards.

With a view to creating a more resilient banking sector, we expect banks to maintain a stable funding profile. Accordingly, we plan to introduce the Net Stable Funding Ratio (NSFR) and the Leverage Ratio for banks. − NSFR will be applicable by 01 January 2018 and the necessary Banking Act Directions on NSFR

will be issued in line with the international timeline.

− By implementing the Leverage Ratio, it is intended to restrict the build-up of excessive leverage in the banking sector. Accordingly, in 2017, we will begin to monitor the level of compliance under the leverage ratio.

Finalize the Crisis Preparedness Plan, and Recovery and Resolution Framework as a precondition for effective supervision.

Cont..


October, 2014


Economy & Business


Sri Lanka’s prosperity improves

The prosperity, measured by the Sri Lanka Prosperity Index (SLPI), which is a composite indicator that measures and compares the level of prosperity of the country and across its provinces, has improved to 0.864 in 2015 from 0.804 in the previous year.

Analyzing the movements in 2014-2015 period, the SLPI improved along with the improvements in Economy and Business Climate and Well-being of the People sub-indices, while there is a moderation in Socio-Economic Infrastructure sub-index.

Source: CBSL


Sri Lankan economy grew by 4.1% in Q3-2016 Sri Lanka GDP for the Q3-2016 at constant (2010) price

reached up to Rs. 2,270.17bn resulting in a positive growth rate of 4.1 %. Growth was led by growth in Services activities (4.7 %) and Industry activities (6.8 %) amidst a 1.9 % contraction in Agriculture activities.

The Department of Census and Statistics revised GDP growth for Q2-2016 upward to 2.7 % from the initially published 2.6 %.

Growth in the first 9 months of 2016 was 4.0 % compared to 5.7 % in the corresponding period of the previous year.

Agriculture

Growth rates by economic activity Q3 - 2016

Industry

Services

Source: The Department of Census and Statistics

GDP Growth

GDP Growth

GDP Growth

According to CBSL Governor Dr. Indrajit Coomaraswamy, Sri Lanka’s economy is expected to expand 5.5-6.0% in 2017, up from an estimated 4.5-5.0% last year, as growth momentum picks up but downside risks remain, particularly from the drought.


Credit to the private sector by commercial banks continued to decelerate Credit extended to the private sector by

commercial banks further decelerated to 22.0 % in October 2016 compared to 25.6 % in the previous month. Accordingly, broad money (M2b) growth decelerated to 17.8 %, on a year-on-year basis, in October from 18.4 % in September 2016.

However, the net increase in credit extended to the private sector, in absolute terms, remained high at Rs. 79.0 bn during October 2016.

Rupee liquidity in the domestic money market returned to surplus levels in December, while market interest rates, which increased in response to monetary tightening measures adopted by the Central Bank, appear to have broadly stabilised during the month.


CCPI headline & core inflation increased Headline inflation, as measured by the Colombo

Consumers’ Price Index (CCPI), increased to 4.1% (y-o-y), in December 2016 from 3.4 % in November 2016.

In the month of November, headline inflation as measured by the National Consumer Price Index (NCPI), declined to 4.1 % (y-o-y), compared to 5.0 % in October 2016.

Core inflation increased noticeably during December 2016 mainly reflecting the effect of government tax changes. According to CBSL, despite these transitory movements, inflation is likely to remain at mid-single digits in the period ahead, on average.

4.14.1

6.36.8

According to CBSL Governor Dr. Indrajit Coomaraswamy, Inflation will remain in the mid-single digits, around 4-6%, in 2017. “In particular, if current drought conditions prevail, there could be adverse implications on price levels, while impacting economic activities, notably agriculture and power generation”.

Sri Lanka’s largest fully integrated tire plant to be built with Rs 11.25 bnThe foundation laying of Rigid Tyre Corporation (Pvt.) Ltd., which is tipped to become Sri Lanka’s largest fully integrated tyre manufacturing facility with an investment of Rs. 11.25 bn, is set to take place on Thursday (January 5, 2017).The facility, which will be located at Board of Investments (BOI) industrial zone in Wagawatta, Horana, is a venture by UAE-based Sri Lankan businessman Nanda Lokuwithana, who is the Chairman of Ceylon Steel Corporation and its member company MA Steel Lanka (Pvt.) Ltd. He is also the Chairman of UAE-based Onyx Group and the owner of Marriot Al Jadaf Hotel, Dubai.

According to a company statement Italy’s Marangoni, a leading tyre manufacturing related technology provider, would be the technology partner in the project. It also noted that Rigid tyre products would take on the tag, ‘Licenced by Marangoni.’

Meanwhile, the venture is expected to generate over 3,000 job opportunities, both direct and indirect and the tyre plant will manufacture a whole gamut of products from radials for light and heavy vehicles to off-the-road (OTH) tyres. In addition to tyre manufacturing, the venture expects to manufacture high density conveyor belts, targeting the global mining industry. Similarly, high pressure hydraulic pipes will also be manufactured to cater to the demand originating from the oil industry.

Apart from the tyre manufacturing plant, the project, which will be located on a 100-acre land, will also have a four-storeyed ultra-modern research lab to advance research and development.


GRI lays foundation for US$ 40 mn next-generation tyre factory in Badalgama

Global Rubber Industries (GRI) laid the foundation for the construction of its latest specialised tire factory in Badalgama with an investment of over US$ 40 mn.

This factory will be focused on producing pneumatic tires for agriculture, industrial, off the road and construction vehicles. All the products are destined for the export market.


US’ Carlson Rezidor Group enters Sri Lanka for 216-room city hotel

The US-based hospitality chain Carlson Rezidor Hotel Group will be entering Sri Lanka, for a 216-room hotel in Colombo 3.

The world-renowned hospitality chain has signed a management agreement with Sofia Hospitality Ltd., for a hotel under the Park Inn by Radisson at No. 295, Galle Road, Colombo 3. Sofia Hospitality will be investing Rs. 2.5 bn on the venture.

http://static.ft.lk/ftadmin/wp-content/uploads/2017/01/05005049/Untitled-123.jpg

Work on the much-awaited automobile assembly plant in Labuyaya, Kuliyapitiya kicked off with an investment of US$ 26.5 mn to propel the automobile industry to an innovative era.

The facility, Western Automobile Assembly, once completed by 2019 would have the capacity to assemble vehicles in the 1000 cc to 2000 cc category, including passenger cars, sport utility vehicles (SUV) and multi utility vehicles (MUVs) or commercial vehicles.

Sri Lanka starts building automobile assembly plant


The Government handed over the former Kabool Lace Giriulla facility, which remained shut down for 12 years, to MAS Holdings to boost jobs and exports.

According to MAS Holdings Chairman Mahesh Amalean they expected to invest over USD$ 28 mn in export-oriented projects in the facility, creating over 3,000 direct jobs within the first three years of operations and export revenue of around US$ 65-$ 70 mn.

The Giriulla facility will become the second privately-owned industrial park in the country following the MAS Fabric Park in Thulhiriya which houses over 8,200 employees.

MAS invests US$ 28 mn in Fabric Park


Hayleys group revealed its latest venture, the ‘World Export Centre,’ a state-of-the-art ‘A’ grade office twin towers, with 55 floors each, having 3.8 mn square feet of commercial office space.

The towers will provide working space for 20,000 employees, with ample parking for over 2,000 vehicles, 3 floors of retail and office amenities.

The towers will come at the Hayleys head office premises at No. 400, Deans Road, Colombo 10.

Hayleys reveals plans to build ‘World Export Centre’ twin towers


Ground broken for USD 166 mn Havelock City project

The ground breaking ceremony to commence the construction for USD 166 mn Havelock City Commercial Development project got off the ground under the auspices of Overseas Realty Ceylon Chairman S.P Tao.

Havelock City commercial development project will boast an iconic 46 storied 600,000 square feet grade A premium office building and a 200,000 square feet shopping mall upon completion in 2020.


Sri Lanka commissions 10MW solar power plant

Sri Lanka has commissioned a 10 MW solar power plant to the national grid which utilizes photovoltaic technology to convert sunlight to electricity. It is expected to add 19GWh of clean green energy to the national grid each year for upwards of 25 years.

The project was promoted by Sagasolar Power (Pvt) Ltd, and located at Buruthankanda, Hambantota.

In financing this project, DFCC Bank partnered with Commercial Bank of Ceylon and Hatton National Bank as co-financiers, and with the European Investment Bank to source green funding.

Govt to build 100 MW Solar ParkA feasibility study is to be carried out for the construction of a 100 MW Solar Park in Siyambalanduwa, Monaragala, according to government sources.

Already Sri Lanka has solar power plants generating 11.3 MW connected to the national grid and about 30 MW are being generated by households and commercial users under net metering.


Bloomberg lists Sri Lanka among 20 hottest luxury travel destinations

Sri Lanka gets USD 75mn World Bank credit line to streamline welfare system

The credit will come from the International Development Association (IDA), the World Bank’s concessionary lending arm, through the IDA Scale-Up facility. It has a final maturity of 24 years, including a grace period of five years.

The Social Safety Nets Project, to be implemented by the Ministry of Finance, will assist the government to develop a single registry of citizens containing information on family structure and economic characteristics. The Welfare Benefits Board, set up to manage the selection and payment of welfare beneficiaries, will develop and apply new selection criteria based on data in the registry.

Sri Lanka has signed an agreement to obtain a US$ 75 million World Bank credit line to support Sri Lanka’s main welfare programs by developing an integrated system to better manage the selection, administration, and payments to beneficiaries of the programs.



October, 2014


International

The World Economy in 2016


Source: The Economist

The World Economy in 2016 (cont…)


Source: The Economist

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 >

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Economic Capsule -December 2016

Economy & Finance

Transcript of Economic Capsule -December 2016