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Economic Capsule April 2012
Economic Capsule April 2012
Economic Capsule April 2012
Economic Capsule April 2012
Economic Capsule April 2012
Economic Capsule April 2012
Economic Capsule April 2012
Economic Capsule April 2012
Economic Capsule April 2012
Economic Capsule April 2012
Economic Capsule April 2012
Economic Capsule April 2012
Economic Capsule April 2012
Economic Capsule April 2012
Economic Capsule April 2012
Economic Capsule April 2012
Economic Capsule April 2012
Economic Capsule April 2012
Economic Capsule April 2012
Economic Capsule April 2012
Economic Capsule April 2012
Economic Capsule April 2012
Economic Capsule April 2012
Economic Capsule April 2012
Economic Capsule April 2012
Economic Capsule April 2012
Economic Capsule April 2012
Economic Capsule April 2012
Economic Capsule April 2012
Economic Capsule April 2012
Economic Capsule April 2012
Economic Capsule April 2012
Economic Capsule April 2012
Economic Capsule April 2012
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Economic Capsule April 2012

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  • 1. ECONOMIC CAPSULEApril 2012 < Research & Development Unit >
  • 2. CONTENTSFINANCIAL SECTOR NEWS   Sri Lanka # 71 in the Networked Readiness Index Commercial Bank Joins Central Bank to Promote Financial Literacy Among SMEs Sri Lanka # 22 in the Change Readiness Index  Commercial Bank Service Points Openings  Process Changes at BOI Bank of Ceylon Raises USD 500 mn Through Bonds HNB Raises 8-year Tier II Funding from Germany GLOBAL UPDATE  Eurozone Unemployment Hits Record HighECONOMIC & BUSINESS NEWS  Euro-Region Debt Rises to Highest in Currencys History Fitch Affirms Sri Lanka at BB-; Outlook Stable  S&P Downgrades Spain Sri Lanka and India Ratings Could be Hurt by Oil Subsidies: S&P IMF Releases the Eighth Tranche of USD 427 mn Under the SBA Facility  S&P Cuts India Outlook CBSL Raises Interest Rates Tax Hikes ANALYSIS & FORECAST Price Hikes  Sri Lanka: Medium Term Macroeconomic Framework Inflation – April 2012  Sri Lanka Outlook and Risks – IMF Sri Lanka Revise Tourism Targets  World GDP Forecasts Real Estate in Sri Lanka – Prospects and Potential  Asia Faces Stronger Growth: IMF  The not-for-profit sector < Research & Development Unit >
  • 3. FINANCIAL SECTOR NEWS
  • 4. Commercial Bank Joins Central Bank to Promote Financial Literacy Among SMEsCommercial Bank has conducted a seminar in Thambuththegama for entrepreneurs who operate in the SME and Micro Enterprise sectors under a series of such events organised by the Bank in collaboration with the Central Bank. Officials from the Central Bank Regional Office - North Central Region, representatives from Commercial Bank and around 60 entrepreneurs were present at this event. Presentations were made by representatives from the Development Credit Department of Commercial Bank and the Central Bank on aspects pertaining to banking services, savings and debt management, at this seminar. In addition to the presentations, participants were also educated on these subjects through group discussions and individual activities. The inaugural seminar under this programme took place at Wennappuwa. Similar seminars have also been conducted in Jaffna, Kilinochchi and Vavuniya by the two organisations and have benefited more than 300 entrepreneurs to date. Arrangements have been made to conduct further programs for the benefit of entrepreneurs operating in other parts of the country during this year. Commercial bank is one the first private sector banks in the country to join forces with Central Bank in an initiative to enhance financial literacy among Small and Medium Scale Enterprises (SMEs).< Research & Development Unit >
  • 5. Commercial Bank Service Points Openings  215 Pelawatte 216 Talawakelle< Research & Development Unit >
  • 6. Bank of Ceylon Raises USD 500 mn Through Bonds  The Bank of Ceylon’s USD 500 mn international five-year bond issue was over-subscribed 7.7 times with a total order value of USD 3.86 bn. According to the bank, the issue was priced at a yield of 6.875% with the money to be used for general corporate purposes.  Bank of America, Merrill Lynch, Citi and HSBC were the Joint Lead Managers and book runners for the issue.  The investment have come from global hedge funds with a wide spread in Asia, Europe and the USA.  The bond was rated B1 with a stable outlook by Moody’s and BB- with a stable outlook by Fitch in line with the country’s sovereign rating.HNB Raises 8-year Tier II Funding from Germany  HNB entered into an agreement with the German Development Finance Institution, to raise USD 25 mn through a 8-year subordinated loan which forms part of tier II capital of the bank. According to the bank, the funds would be utilised to finance the growth in small and medium enterprises.The Central Bank recently issued guidelines enabling commercial banks to independently seek foreign funds from outside sources,particularly for tier II capital.< Research & Development Unit >
  • 7. ECONOMIC & BUSINESS NEWS
  • 8. Fitch Affirms Sri Lanka at BB- ; Outlook Stable Fitch Ratings has affirmed Sri Lankas Foreign and Rating Outlook Last Change Local Currency Issuer Default Ratings at BB-. Feb12 – Downgraded outlook from The Outlook for both ratings is Stable. S&P B+ Stable Positive to Stable The Country Ceiling has also been affirmed at BB-. Fitch BB - Stable May12 – Affirmed the rating & outlook July11 – Upgraded outlook from Stable Moody’s B1 Positive to Positive Fitch Ratings Views: According to Fitch, the ratings reflect the authorities have taken the appropriate action to correct recent pressure on the balance of payments and place it on a more sustainable trajectory. Given the weakened state of Sri Lankas external finances and a heavy external debt refinancing schedule through to 2013, the authorities ability to persist with policies that address existing macroeconomic imbalances and improving external liquidity is crucial. Although Sri Lanka was able to record real GDP growth over 8% for the second consecutive year in 2011, such economic performance, coupled with policy missteps, resulted in the current account deficit rapidly widening to 7.8% of GDP from 2.2% in 2010. This, in conjunction with deterioration in the external economic environment and limited currency flexibility, led to balance of payment pressures and in turn a sharp depletion of foreign exchange (FX) reserves to USD5.8bn (3.4 months of imports) in January 2012 from USD8.1bn (equivalent to 5.7 months of imports) in July 2011. The pace of deterioration in external buffers, rather than their level, is Fitchs main focus. The level of FX reserves meets with international conventions and does not indicate an immediate risk of substantial balance of payments stress. Cont…< Research & Development Unit >
  • 9. Fitch Affirms Sri Lanka at BB-; Outlook Stable (cont…) Fitch Ratings Views: (cont…) However, Fitch believes the rapid depletion of FX reserves in 2H,11 has heightened the vulnerability of the Sri Lankan sovereign credit profile to a spike in global risk aversion. Therefore, the resumption of IMF tranche disbursements following the implementation of policy measures aimed at macroeconomic rebalancing is a positive development. More importantly, measures implemented by the Central Bank of Sri Lanka and the government since February 2012 have tightened monetary conditions and could help Sri Lanka to return to a more sustainable GDP growth trajectory over the long-term. In the near-term, certain policy measures have resulted in adverse risks to both growth and inflation that have the potential to impact policy consistency. Due to the authorities progrowth bias and the fragile balance of payments, Fitch believes developments in the coming months warrant close monitoring. Fitch notes that the government has been able to rationalise expenditure and continue consolidation efforts despite lower-than-expected fiscal revenues. As a result, the fiscal deficit (including grants) narrowed to 6.9% of GDP in 2011 from 8% in 2010 and public debt declined to 78.5% of GDP from 81.9%. Further simplification of the tax system could bolster measures announced in previous budgets and aid in the attraction of greater foreign direct investment inflows. Successful implementation and persistent application of policies aimed at improving external liquidity, including further monetary tightening if required, would support the ratings. Concerted efforts to persist with fiscal consolidation, by both enhancing the tax revenue base and rationalising expenditure, in tandem with lowering public debt would be supportive of Sri Lankas ratings. Source: Fitch Ratings< Research & Development Unit >
  • 10. Sri Lanka and India Ratings Could be Hurt by Oil Subsidies: S&P  According to Standards & Poor’s (S&P), a further large increase in crude oil prices would adversely affect most Asia-Pacific economies. The region is a large net importer of oil, much of which comes from the Middle East . If average oil prices stay above USD 150 per barrel for more than a year, an event S&P consider to have a modest likelihood at this time, it could trigger negative credit rating actions for some Asia-Pacific sovereigns.  Sovereigns that subsidize oil consumption are the most vulnerable to downgrades.  In India and Sri Lanka, S&P expect fuel and related subsidies to markedly worsen fiscal and external deficits unless subsidy levels fall.  In the absence of offsetting positive developments, these sovereigns could see negative rating actions as a result. (S&P base average oil prices on the equal-weighted average price of U.K. Brent, Dubai medium and Texas heavy blends, as computed by the U.N. Conference on Trade and Development.) Cont…< Research & Development Unit >
  • 11. Sri Lanka and India Ratings Could be Hurt by Oil Subsidies: S&P (cont…)  Growth Of Energy-Intensive Economies Will Be Hit  High oil prices are a bigger drag on growth in economies that rely heavily on the commodity as an energy source.  Car ownership is often prevalent in such economies, reflecting oils importance as a fuel for motor vehicles. Cont…< Research & Development Unit >
  • 12. Sri Lanka and India Ratings Could be Hurt by Oil Subsidies: S&P (cont…)   Surging oil prices could damage external indicators that underpin sovereign credit ratings. The external trade balance, for instance, could weaken significantly.  The external balances of India and Sri Lanka are likely to markedly deteriorate if oil prices exceed USD 150 per barrel without a significant reduction in oil subsidies.  Their net oil trade deficits could rise to 6%-7% of GDP in this scenario, up from about 4%-5% in recent years. Both economies had current account deficits above 2% of GDP in 2011.  These levels could worsen to more than 4% of GDP if oil prices are sustained at above USD150. Such developments undermine their Source: The Asia-Pacific Sovereign Seesaw: If Oil Prices Soar, Some Ratings Could Fall – Standard & Poor’s – April 26 2012 sovereign creditworthiness.< Research & Development Unit >
  • 13. IMF Releases the Eighth Tranche of USD 427 mn Under the SBA Facility   Received on Tranche USD mn The Executive Board of the IMF on 02.04.12 July, 2009 1st 322.0 completed the seventh review of Sri Lankas economic performance under a program Nov, 2009 2nd 329.0 supported by a Stand-By Arrangement (SBA). According to CBSL, with June, 2010 3 &4 rd th 407.8 the IMF disbursement, The completion of the review enables the as well as other inflows, Sep, 2010 5th 212.5 the gross official immediate disbursement of an amount equivalent to SDR 275.6 mn (about USD 426.8 reserves as at 04 April, Feb, 2011 6th 216.6 mn), bringing total disbursements under the 2012 recorded USD 6.1 arrangement to an amount equivalent to SDR April, 2011 7th 218.3 bn, which was 1.378 bn (about USD 2.13 bn). equivalent to 3.6 April, 2012 8th 426.8 months of imports. In addition, the Executive Board approved an extension of the arrangement period to July Total Funds Received up to now 2,133.0 23, 2012, to allow time for the completion of Funds to be Received 466.4 the eighth and final review. Full Amount of the IMF SBA 2,599.4< Research & Development Unit >
  • 14. CBSL Raises Interest Rates   Policy Rate Changes 2007-2012 According to Central Bank of Sri Lanka; Date of Change Repo (%) RRepo (%) Credit extended to the private Notwithstanding the increase in the 23.02.2007 10.50 12.00 sector increased, year-on-year, Central Bank policy interest rates in by 35.0 % in March, 2012 February 2012 (by 50 basis points) and the 11.02.2009 10.25 1 1.75 following a 34.4% increase in Direction issued to restrain the growth of February, 2012. 22.04.2009 9.00 - credit extended by licensed banks, there are still some signs that credit growth is 21.05.2009 - 11.50 continuing at an undesired pace. 16.06.2009 8.50 11.00 Therefore, the Monetary Board was of the view that a further adjustment of policy 11.09.2009 8 .00 10.50 rates of the Central Bank was warranted to 18.11.2009 7.50 9.75 ensure a smooth deceleration of credit growth through the year in order to achieve 12.07.2010 7.25 9.50 the target set for end year, and to anchor inflation expectations. 20.08.2010 - 9.00 Accordingly, on 5th April 2012, CBSL 11.01.2011 7.00 8.50 increased the policy rates. (last row of 03.02.2012 7.50 9.00 table). 05.04.2012 7.75 9.75< Research & Development Unit >
  • 15. CBSL Raises Interest Rates (cont…) Other market interest rates have also shown some upward adjustment from the latter part of 2011with a marked increase so far in 2012, in response to the policy rate increases as well as the tightliquidity conditions.< Research & Development Unit >
  • 16. Tax Hikes – w.e.f. 31 March 2012   With a view to reducing import expenditure, and fuel consumption, the Government has raised taxes on motor vehicles, three wheelers and motorcycles. Motor Vehicle Imports 2009-2011 2009 2010 2011 % Cha. 09/10 % Cha. 10/11 Motor Cars 3,421 37,134 54,285 985 46 Vans & Cabs 170 9,504 12,838 5,491 35 Three Wheeler 34,563 91,230 137,816 164 51 Motor Cycles 139,000 224,998 252,318 62 12 Others (Bus, trucks…) 34,525 106,341 66,706 208 (37) Total 211,679 469,207 523,963 122 12 Source: Ministry of Finance< Research & Development Unit >
  • 17. Motor vehicle category New TaxHybrid vehicles Old Tax Tax Hikes – w.e.f. 31 March 2012 (Cont…)Below 2000 cc 51 % 60 %2000 cc and above 75 % 100 %    Price Hikes3000 cc above 100 % 125 %Petrol carsBelow 1000 cc 120 % 200 %   Increased Effective1000 cc to 1600 cc 129 % 200 % Item Unit by (Rs.) Date1600 cc to 2000 cc 136 % 200 %2000 cc and above 154 % 250 % All brands of cigarettes per cigar 1.003000 cc and above 189 % 275 %Diesel cars Imported beer per Liter 50.00Below 1600 cc 180 % 250 % 31.03.121600 cc to 2000 cc 250 % 275 % Local beer (per Liter ) per Liter 5.002000 cc to 2500 cc 267 % 300 %2500 cc and above 291 % 350 % Hard liquor (per Liter ) per Liter 60.00Petrol vans13-20 seats 103 % 125 % Wheat flour 1 Kg 8.50 27.04.12Below 13 seats 172 % 200 %Diesel vans Loaf of bread 450 g 3.00 30.04.1213-20 seats 112 % 125 %Below 13 seats 230 % 250 % Imported milk powder (except infant milk 400 g pack 61.00Reconditioned vehicles powder) (A 15% tax or a maximum of Rs. 92Petrol 189 % 300 % per Kg, which ever is higher) 1 Kg pack 161.00Diesel 291 % 350 % 05.05.12Motor tricycles LP gas cylinder (both Litro and Laugfs) 12.5 Kg 350.00Petrol, Gas 51 % 100 %Diesel 61 % 100 % Bag of cement 50 Kg 70.00Electric 27 % 50 %Double cabsBelow 1500 Kg 93 % 150 %1500 Kg above 110 % 150 %Motor cycles 61 % 100 % Source: Ministry of Finance < Research & Development Unit >
  • 18. Inflation – April 2012   CCPI (%) CCPI Core* (%) Period Y-o-Y A.A. Y-o-Y A.A. March 12 5.5 5.9 4.9 6.5 April 12  6.1  5.7  5.2  6.3* The price movement excluding Fresh Food, Energy, Transport, Rice and Coconut in the CCPI basket. Source: CBSL< Research & Development Unit >
  • 19. Sri Lanka Revise Tourism Targets   Sri Lankas tourist arrivals rose 21.3 % to 91,102 in March, 2012 from a year earlier with arrivals in the first three months up 21.1 % to 260,525. Tourism earnings for the Jan-Mar 2012 period recorded an increase of 28.6% to USD 268.3 mn compared to USD 208.7 mn in the corresponding period of 2011. Sri Lanka revised up its targets for tourist arrivals and leisure industry revenue after the sector outperformed targets for the first quarter with a more than 20 % rise in arrivals. Going by data up to March 2012, 1 million tourist arrivals are expected for 2012, higher than the earlier target of 950,000. Earnings from tourism are expected to be well over USD 1 bn for 2012.< Research & Development Unit >
  • 20. Real Estate in Sri Lanka – Prospects and Potential   According to a report compiled by Jones Lang LaSalle, an international property services company, Colombo’s demand for office space is primarily driven by growth in the banking, financial services, IT/ITES and tourism sectors. Apart from the iconic World Trade Centre (WTC), which offers office space at LKR 260 per sq ft per month, the majority of office space in the CBD and SBD (central and secondary business districts of Colombo) is available on a rental range of LKR 100 – 150 per sq ft per month. Office space in WTC was being leased at LKR 135 - 150 per sq ft per month during 2009, which indicates the rapid appreciation in rents witnessed by Colombo CBD during the last three years. Occupancy of office space in Colombo had increased from a low 60 % in 2009 to 90 % in 2011. Land prices in Colombo have appreciated rapidly in the last four years. With prime land parcels in the CBD (Colombo 01 and 02) being offered at LKR 8-9 mn per perch (USD 268-301 per sq ft), construction of offices in the core of the city will imply a high rental expectation. Land in SBD locations is also expensive, and is available at LKR 4-5 mn per perch (USD 134–167 per sq ft).Source: Real Estate in Sri Lanka – Prospects and Potential: Transforming Economic Growth into Real Developments in Colombo - Jones Lang LaSalle< Research & Development Unit >
  • 21. Sri Lanka # 71 in the Networked Readiness Index   Sri Lanka was ranked at # 71 (out of 142 countries) in the Networked Readiness Index 2012 compiled by the World Economic Forum and the global business school INSEAD. (2011 ranking – # 66)The Networked Readiness Index has been measuring the degree to which economies across the world leverage ICT for enhanced competitiveness.Source: The Global Information Technology Report - April 2012 - World Economic ForumSri Lanka # 22 in the Change Readiness Index Sri Lanka was ranked 22 in the recently published Change Readiness index based on Some Selected Country research by KPMG and the Overseas Development Institute which offers a new and unique Rankings perspective on the ‘change readiness’ of 60 developing and emerging economies. China 13 India 23The Change Readiness Index captures government capability and the capability of a country as a whole - including the private sector and civil society - to manage and respond effectively to Indonesia 30 change. Brazil 31 Thailand 32 Vietnam 49 Source: Change Readiness Index 2012 - KPMG< Research & Development Unit >
  • 22. Process Changes at BOI    In line with the automation process taking place at Sri Lanka Customs and the Sri Lanka Ports Authority, the Board of Investment (BOI) too will implement new systems to clients to work online, in respect of operations, documents and payments for shipments.  The BOI will start the trade facilitation process changes from 15 May, 2012 once the customs export process is tested. The Customs will work hand in hand to facilitate BOI clients with the ASYCUDA World online documentation system.  According to the CEO of the Shippers’ Academy Mr. Rohan Masakorala, these new processes will reduce the transaction cost of exporters and streamline the process of clearing exports and imports with less work for companies.< Research & Development Unit >
  • 23. GLOBAL UPDATE
  • 24. Eurozone Unemployment Hits Record High   The 17 countries that use the euro are facing the highest unemployment rates in the history of the currency as recession once again spreads across Europe, pressuring leaders to focus less on austerity and more on stimulating growth. Unemployment in the eurozone rose by 169,000 in March 2012, taking the rate up to 10.9 % its highest level since the euro was launched in 1999. Austerity has been the main prescription across Europe for dealing with a debt crisis thats afflicted the continent for nearly three years and has raised the specter of the breakup of the single currency. Three countries Greece, Ireland and Portugal have already required bailouts because of unsustainable levels of debt.Eight eurozone countries, including Greece, Spain and the Netherlands, have seen their economies shrink for two straight quarters or more, the Source: The Economist common definition of a recession.Source: The Associated PressEuro-Region Debt Rises to Highest in Currencys History   The debt of the euro region rose in 2011 to the highest since the start of the single currency as governments increased borrowing to plug budget deficits and fund bailouts of fellow nations crippled by the fiscal crisis. The debt of the 17 euro nations climbed to 87.2 % of GDP in 2011 from 85.3 % the previous year. This is the highest since the euro was introduced in 1999. Greece topped the list with debt at 165.3 % of GDP, while Estonia had the least at 6 % of GDP.Source: Bloomberg < Research & Development Unit >
  • 25. S&P Downgrades Spain   A Stable Standard & Poors cut its credit rating on Spain by two notches, citing expectations the government finances will deteriorate even more than previously thought as a result of a contracting economy and an ailing banking sector. The ratings agency, which downgraded Spain to BBB + from A, also put a negative outlook on the credit and said Spains situation could deteriorate further unless BBB+ Negative ambitious measures were taken at European level. Source: ReutersS&P Cuts India Outlook   Stable Standard & Poors cut Indias credit rating outlook to negative from stable, reflecting the toll that hefty fiscal and current account deficits and political paralysis are exacting on Asias third-largest economy. The negative outlook will also jeopardises Indias long-term rating of BBB-, the lowest investment grade rating. Negative Source: Reuters< Research & Development Unit >
  • 26. ANALYSIS & FORECAST
  • 27. Sri Lanka: Medium Term Macroeconomic Framework (a)   Projections Indicator Unit 2010 (b) 2011 (c) 2012 2013 2014 2015 Real Sector GDP @ Market Price Rs.bn 5,604 6,543 7,504 8,631 9,909 11,290 Real GDP Growth % 8.0 8.3 7.2 8.0 8.3 8.5Analysis & Forecast Per Capita GDP USD 2,400 2,836 2,939 3,435 3,969 4,574 Total Investment % of GDP 27.6 29.9 30.5 31.6 32.0 32.3 Domestic Savings % of GDP 19.3 15.4 18.3 21.9 23.8 25.0 National Savings % of GDP 25.4 22.1 26.7 30.2 31.6 32.5 External Sector Trade Gap USD mn -4,825 -9,710 -9,183 -9,110 -9,433 -9,994 Exports USD mn 8,626 10,559 11,703 13,030 14,557 16,302 Imports USD mn 13,451 20,269 20,885 22,139 23,990 26,296 Workers Remittances USD mn 4,116 5,145 6,481 7,341 8,079 8,876 Current Account Balance % of GDP -2.2 -7.8 -3.8 -1.4 -0.4 0.2 • Based on the information available by mid March 2012 Overall Balance USD mn 921 -1,061 1,250 1,700 2,400 2,500 • Revised External Official Reserves (d) (e) USD mn 6,610 5,958 7,945 9,157 10,776 12,823 • Provisional Debt Service Ratio (f ) % 15.9 12.6 16.1 15.7 16.8 16.6 • Excluding receipts of Asian Clearing Union, Fiscal Sector • External official reserves include the proceeds from the IMF Stand-by Arrangement facility-2009. Total Revenue and Grants % of GDP 14.9 14.5 15.0 15.1 15.6 15.7 • Total debt service payments as a percentage of earnings Expenditure and Net Lending % of GDP 22.9 21.4 21.2 20.9 20.8 20.7 from exports of goods and services • Year-on-year growth in end year values Current Account Balance % of GDP -2.1 -1.1 0.0 0.5 1.0 1.0 Overall Budget Deficit % of GDP -8.0 -6.9 -6.2 -5.8 -5.2 -5.0 Source: CBSL Annual Report 2011 Government Debt % of GDP 81.9 78.5 77.7 73.2 69.0 65.4 Financial Sector (g) Reserve Money Growth % 18.8 21.9 15.0 15.0 15.0 14.0 Broad Money Growth (M2b) % 15.8 19.1 15.0 15.0 15.0 14.0 Growth in Credit to Private Sector % 24.9 34.5 19.0 14.0 15.9 14.5 < Research & Development Unit >
  • 28. Sri Lanka Outlook and Risks - IMF   Growth  Growth is expected to moderate to around 7–7.5 % in 2012, as activity slows in response to the tightening of monetary and fiscal policy.Analysis & Forecast  Nevertheless, growth is expected to remain reasonably healthy, supported by the continued expansion of agriculture in the northern and eastern provinces, a boost to construction from major infrastructure projects, and the continued expansion of tourism. The depreciation of the rupee should also, over time, help boost exports. Inflation  The rupee depreciation and the sizeable increases in petroleum and electricity prices will lead to an increase in consumer prices.  The annual average inflation rate should still remain in single digits and food price inflation is expected to remain benign.  Limited public sector wage increases so far should also help. Nevertheless, the Central Bank will need to stand ready to respond to rising inflation risks especially if higher international oil prices persist. Cont… < Research & Development Unit >
  • 29. Sri Lanka Outlook and Risks – IMF (Cont…)   Balance of Payments  The recent steps taken by the authorities will reduce the external current account deficit to a more sustainable level.Analysis & Forecast  A continued pick up in long term capital flows, including foreign direct investment, and a turnaround in short-term capital flows should help bring the balance of payments for the year into broad balance.  However, this outlook is subject to a number of risks. Higher oil prices and any weakening of external demand for Sri Lanka’s exports would put pressures on the balance of payments, as would any slippages in the authorities’ efforts to rein in credit growth and maintain two-way flexibility of the exchange rate. Reserves  Recent developments suggest that the pace of intervention, and associated loss of reserves, has moderated significantly, and that the authorities are on track to stabilize net international reserves by the end of the second quarter.  The authorities will need to continue to manage the exchange rate flexibly and maintain a tight monetary stance over the coming months to achieve the IMF’s external reserve objectives.  Even then, Sri Lanka’s reserve buffers will remain relatively low at around 2.7 months of imports and 75 % of short Cont… term debt in 2012. < Research & Development Unit >
  • 30. Sri Lanka Outlook and Risks – IMF (Cont…)   Iran Embargo  It is possible that the embargo may disrupt Sri Lanka’s ability to continue to import oil from Iran (which currently covers over 90 % of crude oil imports of Sri Lanka).Analysis & Forecast  Furthermore, Sri Lanka has received “positive responses” from Saudi Arabian Oil Co. and Oman Oil Co. for supplies as the country seeks to reduce its dependence on Iranian crude.  Sri Lanka, which imports 13 of its 14 annual crude cargoes from Iran, plans to cut shipments from Iran to 10 cargoes a year to comply with U.S. sanctions. It would like to double purchases from Saudi Arabia to 2 lots, and obtain 2 consignments from Oman. Debt Sustainability  Public debt is projected to fall to around 65 % of GDP by 2015 and external debt to just over 40 % of GDP. Source: IMF Sri Lanka Country Report - April 2012 < Research & Development Unit >
  • 31. World GDP Forecasts    The world economy will grow by 3.5% in 2012, as predicted by the International Monetary Fund (IMF) in April 2012.Analysis & Forecast  The IMF expects most of the world’s growth to come from emerging markets, with China alone accounting for more than a third.  China’s growth rate will slow somewhat in 2012, but not alarmingly: its economy will expand by 8% or so, faster than all but a dozen countries.  Rich countries will do better than previously expected, thanks to a brisk recovery in America and exceptional funding measures by the European Central Bank.  But the euro area will suffer a mild recession in 2012, as austerity bites, according to the IMF. Source: The Economist < Research & Development Unit >
  • 32. Asia Faces Stronger Growth: IMF   Growth in Asia is expected to pick up this year, after slowing in the last quarter of 2011, but Asian leaders now face the difficult task of adjusting policies to support stable, non-inflationary growth, say IMF economists.Analysis & Forecast Threats to growth Despite brighter prospects for the region, IMF warns that financial turmoil in Europe could yet escalate and spread to Asia. In particular, a sharp fall in exports to advanced economies and a reversal of foreign capital flows would severely impact activity in the region. IMF also cites higher energy prices as a risk to activity, and a source of difficult trade-offs between inflationary pressures and budgetary risks from energy and food subsidies. So far, stronger economic and policy fundamentals have helped buffer Asian economies against adverse financial market spillovers from the euro crisis, but the IMF believes that the best way for Asia to protect itself against external shocks is by strengthening domestic sources of growth. Source: IMF < Research & Development Unit >
  • 33. The not-for-profit sector  Analysis & Forecast  Between 2007 and the end of last year shareholders in banks globally have lost almost 10% of their investment each year, according to the Boston Consulting Group (see chart 1).  Behind this international average lie some truly horrible losses. Investors who stuck it out in Dutch banks saw the value of their holdings fall by almost 28% a year. Holders of French, German and Swiss banks suffered average annual losses of close to 20%. Those in American and British banks lost 14% and 16% a year respectively. Source: The Economist < Research & Development Unit >
  • 34. “Several of the countries where I have worked have been in conflict, or have recently emerged from conflict of one kind or  another. These are often determining moments in the life of a nation – good times for a change of direction and a change of heart, and good times also for the world to be prepared to change its mind about that country.” Simon Anholt* •Simon Anholt is one of the world’s most sought after independent policy advisors, who has worked with over 50 heads of state, heads of government and administrations of nations.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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