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Economic Capsule - April 2013


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Economic Capsule - April 2013

Economic Capsule - April 2013

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  • 1. < Research & Development Unit >April 2013Economic Capsule
  • 2. FINANCIAL SECTOR NEWS  Banking Sector Performance - Highlights 2012ECONOMIC & BUSINESS NEWS  Fitch Affirms Sri Lanka at BB-; Stable Outlook External Trade Performance – February, 2013 Inflation- April, 2013 Sri Lanka Tourist Arrivals up 7.7 % in March China: World’s No. 1 Tourism Source Market News Snippets – Local News Snippets – InternationalAnalysis & Forecast Sri Lanka Inflation a Risk, Warns Against Policy Easing –IMF Easing Monetary Policy will not Bring Sustainable Growth - Dr. Saman Sri Lanka: Medium Term Macroeconomic Framework Latest IMF Projections< Research & Development Unit >C O N T E N T S
  • 3. < Research & Development Unit >
  • 4. < Research & Development Unit >Banking Sector Performance - Highlights 2012Cont…Source: CBSL Annual Report 2012
  • 5.  Despite the slower growth, the share of loans and advances of the banking sector increased marginally from61.2 % to 61.6 % by end 2012, while the share of investments declined from 24.9 % to 23.5 % by end 2012. The increase in lending during 2012 was concentrated in four major economic sectors, namely, trading (19%), agriculture (14 %), infrastructure (14 %) and construction (12 %). Liabilities: Deposits continued to be the main funding source in the banking sector, despite the marginaldecline from 72 % of total liabilities of the banking sector as at end 2011 to 71 % by end 2012 due to thelower growth in deposits. The resultant funding gap was bridged with borrowings which increased by 27 % during 2012 compared tothe growth of 25 % in 2011.< Research & Development Unit >Banking Sector Performance - Highlights 2012 (cont…) The banking sector continued to maintain its dominant role in the financial sector with its assets increasing from 55.1 % of the total assets of thefinancial sector in 2011 to 56.4 % by end 2012. Outreach: by end 2012, 33 banks, comprised of 21 domestic banks (including 09 licensed specialised banks) and 12 branches of foreign bankscontinued operations. The banking network expanded with 190 banking outlets and 153 automated teller machines (ATMs) being added to the networkduring 2012. Of these, 168 branches and 86 ATMs were established outside the Western Province. Accordingly, by end 2012, the banking sector wasoperating with 6,374 banking outlets and 2,390 ATMs. Assets: The growth in assets of the banking sector during 2012 remained unchanged at 20 %.Source: CBSL Annual Report 2012
  • 6. < Research & Development Unit >
  • 7. < Research & Development Unit >Fitch Affirms Sri Lanka at BB-; Stable Outlook Sri Lankas ratings balance the strength of the countrysresilient growth performance, healthy level of humandevelopment and strong payment record against theweaknesses of its fiscal and external balance sheets andmoderate domestic savings relative to investment needs. The Stable Outlooks acknowledge the stabilisation of theoverall economy over the past year, following theintroduction of a series of monetary, exchange rate andfiscal measures in early 2012, which helped to reverse thedeterioration in the balance of payments that took place in2011. Although the current account deficit fell short of theauthorities original target of 3.8% of GDP, it narrowed to6.6% in 2012 from 7.8% in 2011. Fitch projects that thecurrent account deficit should decline further to about5.2% in 2013 and 4.5% in 2014 due to a combination ofstronger global growth and lower oil imports.BB - Affirmed Persistence with tighter monetary and fiscal policiesshould help improve Sri Lankas external liquidityposition. Official foreign exchange reserves, excludinggold, rebounded to USD6.9bn (3.7 months of currentexternal payments) at end-January 2013. This is up froma recent low of USD5.5bn at end-February 2012. Sri Lankas external debt refinancing schedule, however,remains quite heavy as an average of USD1.9bn perannum in sovereign debt is projected to mature from2013 to 2015 (versus USD1.3bn in 2012). This may not only limit Sri Lankas ability to rebuildforeign exchange reserves to a much higher level, but italso means that the countrys external finances willremain vulnerable to any spike in global risk aversion.Key Rating DriversCont…
  • 8. < Research & Development Unit >Fitch Affirms Sri Lanka at BB-; Stable Outlook (cont…)Key Rating Drivers (cont…)Fitch projects real GDP growth to average 6.5%-7% in 2013 and 2014, compared with the governments forecasts of 7.5% and 8%in 2013 and 2014 respectively. Fitch believes the governments forecasted growth could once again lead to overheating risks.Following the successful completion of an IMF stand-by arrangement in July 2012, Sri Lanka has decided not to seek an extendedfund facility. A new IMF programme would have provided some comfort that Sri Lanka would stick with the reform measuresimplemented in early 2012. However, Fitch does not view a successor programme as essential, provided that the authorities remainvigilant and maintain appropriate policy settings to ensure overheating risks and renewed strains on the balance of payments donot re-emerge.Sri Lanka has continued to make limited progress on fiscal consolidation as the budget deficit fell to 6.4% of GDP in 2012 (versus6.9% in 2011). This was, however, partially achieved through an accumulation of arrears. Sri Lankas general government debt-to-GDP ratio remained elevated at 79.1% in 2012, which was significantly higher than the BB peer rating group median of 32.6%. Lowfiscal revenues weigh on the credit profile. The revenue take of 13.9% of GDP in 2012 was well below the BB range median of26.6% and was down from 16.7% in 2008.Source: Fitch Ratings
  • 9. < Research & Development Unit >External Trade Performance – February, 2013MonthCCPI (%) *CCPI Core (%)Year on Year(Y-o-Y)Annual Average(A.A)Year on Year(Y-o-Y)Annual Average(A.A)MAR 13 7.5 8.8 6.8 6.4APR 13  6.4 8.8  6.1  6.5*The price movement excluding Fresh Food, Energy, Transport, Rice and Coconut inthe CCPI basket.Inflation- April, 2013CategoryJan-Feb2012USD mnJan-Feb2013USD mnGrowthJan-Feb(%)Exports 1,709.2 1,526.2 -10.7Agricultural Products 366.8 341.5 -6.9Industrial Products 1,333.5 1,180.5 -11.5Mineral Products 6.7 2.4 -64.5Imports 3,495.7 2,950.5 -15.6Consumer Goods 538.7 455.5 -15.4Intermediate Goods 2,043.9 1,698.1 -16.9Investment Goods 903.0 795.8 -11.9Balance of Trade -1,786.5 -1,424.3 -20.3Workers’ Remittances 943.1 1,014.1 7.5Earnings from Tourism 173.8 209.7 20.6Source: CBSLSource: CBSL
  • 10. < Research & Development Unit > Sri Lankas touristarrivals rose 7.7 %to 98,155 in March2013 with stronggrowth from keyWestern marketsand China, butarrivals from Indiaplunged.Sri Lanka Tourist Arrivals up 7.7 % in March In February 2013, arrivals fromChina rose 57.9 % to 6,145compared to a growth of 12.2 %to 4,724 by Japan. Japan has been Sri Lankas topgenerating market in East Asia inthe past, but from aroundSeptember 2012 China hastended to generate more touriststhan Japan.China overtakes Japan as Sri Lankas top tourist market in East AsiaChina: World’s No. 1 Tourism Source Market Thanks to rapid urbanisation, rising disposable incomesand relaxation of restrictions on foreign travel, the volumeof international trips by Chinese travellers has grown from10 mn in 2000 to 83 mn in 2012. Expenditure by Chinese tourists abroad has also increasedalmost eightfold since 2000. Boosted by an appreciatingChinese currency, Chinese travellers spent a record US$102 bn in international tourism in 2012, a 40% jump from2011 when it amounted to US$ 73 bn.Source: LBOSource: UNWTOSource:
  • 11. < Research & Development Unit >News Snippets - LocalCeylon Chamber Fires Warning Over NewCEB TariffThe Ceylon Chamber of Commerce is up in arms over the steeprise in electricity profitability in addition to impacting exports andservices sectors.According to the Ceylon Chamber of Commerce, the new tariffs willentail a significant increase in electricity costs for all industry sectors.On average, the increase is estimated at around 20%-30%.Sri Lanka-China Conclude Fifth JointTalks on Trade, Economic CooperationThe fifth joint committee meeting on trade and economiccooperation between Sri Lanka and China was held in Colomborecently. The two parties conducted discussions on the promotion oftrade, tourism and investment between the two counties.An agreement on economic and technical cooperation for USD 16mn and a loan agreement on provision of a concessional loan of USD147 mn by China to Sri Lanka for Hambantota Port DevelopmentPhase I project for ancillary works and supply of equipment weresigned between the two countries.Sri Lanka Moves up Two Notches in Global Network Readiness IndexSri Lanka has improved its position by two places in the recently published GlobalNetwork Readiness Index (NRI) which measures a nation’s or community’s degreeof preparation, to participate in and benefit from ICT developments which happen tobe the driving force in today’s world.With the two-place improvement, Sri Lanka at 69th place out of 144 countriessurveyed trails its neighbor India by just one rank although the scoreremained the same as last year at 3.88. Sri Lanka and India are the onlytwo countries in the SAARC group to rank higher than the 100thmarkSri Lankas Northern Rail Rebuilding on TrackA 43 kilometre stretch of Sri Lankas Northern Railway line has been re-built toallow trains to be run up to a speed of 120 kilometres, according to Ircon, an Indianstate-run transport engineering firm.India is funding the rebuilding of 252 kilometres of rail track, which had beendestroyed during the 30-year war, through a USD 800 mn credit line.Laugfs Group Enters Financial Services IndustryThe Laugfs Group will be entering the financial services sector through itsnewest subsidiary, Laugfs Capital. Laugfs is to look into the fields of leasing,business loans, hire purchase, personal loans and factoring.Cont…
  • 12. < Research & Development Unit >News Snippets – Local (Cont…)SLs Royal Ceramics Gains Control of TileIndustrySri Lankas Royal Ceramics Plc, a unit of Sri LankasVallibel group has bought control of Lanka Ceramicsgroup for Rs. 2.9 bn, according to group chiefDhammika Perera.A controlling 79 % stake in Lanka Ceramic and foursubsidiaries (Lanka Walltiles, Lanka Tiles, Swisstek-analuminum company and Horana Plantations) wasbought for Rs. 2.9 bn.With these acquisitions the Royal Ceramics groupnow have a monopoly in the tile market.Dabur Lanka’s State-of-Art USD16 mn FruitBeverage Plant OpensDabur Lanka Ltd., a wholly-owned subsidiary of India’sleading consumer goods maker Dabur India Ltd., openedits state-of-the-art packaged fruit-based beveragemanufacturing facility at Meerigama. The country’s tea exports inthe 1Q saw an increasevalue wise though in termsof quantity shipped waslower. Total tea exports amountedto Rs. 42.28 bn in the firstthree months of this year,up by near 6% from Rs. 40bn a year earlier. Volume wise, exportsamounted to 71 mn kilos,down by 4.9 mn kilos or 6%in comparison to firstquarter of 2012.SL’s First Quarter Tea Exports Value up, Volume downSource: DailyFT
  • 13. < Research & Development Unit >News Snippets - InternationalGold Prices DropGold fell to a two-year low and took its biggest ever one-day drop on 15 April,2013, contributing to huge losses in gold reserves.Although it rallied slightly on 16 April, the recent struggles by commodities havebeen triggered by weak data from China and the US sparking fresh concernsabout the global economy’s recovery.According toa Reuterspoll, Goldprices areexpected toend 2013 atUSD 1,450-1,550 perounce, onlypartlyrecoveringfrom a recentbrutal selloffthat shookinvestorconfidenceafter 12unbrokenyears ofgains.Fitch Downgrades UK Credit Rating The Fitch credit ratings agency has downgraded the UK to AA+owing to a weakened economic outlook. The move, came afterMoodys downgrade in February. Fitch stated its downgrade "primarily reflects a weakereconomic and fiscal outlook" but returned its outlook to"stable", removing the threat of further rate action in the nearterm.Commodity pricesCont…Source: ReutersSource: The Economist
  • 14. < Research & Development Unit >News Snippets - InternationalSource: CNN Money
  • 15. < Research & Development Unit >
  • 16. < Research & Development Unit >Sri Lanka Inflation a Risk, Warns Against Policy EasingInternational Monetary Fund According to Sri Lanka’s Central Bank, the monetary policy stance for this year will be toward easing to help drive growth, and TreasurySecretary P. B. Jayasundera had stated that he expected interest rates to fall as early as May or June. But according to IMF inflationary pressures were building up as the impact of higher power tariffs feeds through the economy. “Inflation came down quite a bit. But IMF expect that inflation figure to rise once again as the impact of electricity tariff hike is fullyreflected,” Koshy Mathai, the IMF resident representative for Sri Lanka, stated. “As a result we think the monetary policy should remain on hold for now as it has for quite some time and shouldn’t be changedprematurely. It’s hard to say how long (the rates should be maintained).” The central bank cut both repurchase and reverse repurchase rate by 25 basis points in December but has since held steady.Inflation eased to 6.4 % in April compared to 7.5 % a month ago and it is likely to accelerate in May due to the electricity tariff hikes, theDepartment of Census and Statistics has stated.Sri Lanka must not loosen monetary conditions as inflation remains a concern, the InternationalMonetary Fund stated, even though prices had risen at a lower pace in April than the previous month.Source: Reuters
  • 17. < Research & Development Unit >Easing Monetary Policy will not Bring Sustainable GrowthDr. Saman KelegamaAccording to respected senior economist, Dr. Saman Kelegama easing monetary policy and bringing downinterest rates would not help the country sustain high economic growth unless measures were taken toaddress long-standing structural deficiencies in the economy. "The euphoria of the war victory and commencement of the USD 2.6 bn IMF standby facility arrangement prompted a relaxation of fiscal and monetary policyto stimulate economic growth which saw economic growth average 8 % in 2010/11, but could not be sustained due to structural problems in the economywhich saw growth slip to 6.4 % in 2012," Institute of Policy Studies Executive Director Dr. Saman Kelegama stated. A balance of payments problem emerged during the second half of 2011. In February 2012 a much delayed stabilisation package with a flexible exchange rate and higher interest rates capped by higher tariffs on a number consumerdurables came into effect. This managed to reduce the current account deficit of the balance of payments from 7.8 % of GDP in 2011 to 6.6 % in 2012. "But exports faired badly in 2012. While imports fell by 5.8 % in 2012, exports fell by 7.3 %, which could not reduce the current account deficit further despitethe remittances inflows of USD 6 bn and tourism earnings of USD 1 bn. Gross reserves, amounting to USD6.9 bn as at end 2012 was comprised of borrowed funds and not net earnings, he pointed out. "Given this scenario there is limited space for relaxing monetary policy in 2013. Easing monetary policy would bring down interest rates and boost economicgrowth, but growth will not be sustainable without structural macroeconomic reforms," Dr. Kelegama said. "We need to improve competitiveness of our exports and increase productivity in the agriculture and public sectors.“
  • 18. < Research & Development Unit >Sri Lanka: Medium Term Macroeconomic FrameworkIndicator Unit 2011(b) 2012 (c)Projections2013 2014 2015 2016Real SectorGDP @ Market Prices Rs. bn 6,544 7,582 8,722 9,985 11,356 12,939Real GDP Growth % 8.2 6.4 7.5 8.0 8.3 8.5GDP Deflator % 7.9 8.9 7.0 6.0 5.0 5.0Per Capita GDP USD 2,836 2,923 3,348 3,790 4,267 4,814Total Investment % of GDP 30.0 30.6 31.0 32.0 32.5 33.0Domestic Savings % of GDP 15.4 17.0 19.1 23.4 25.7 28.4National Savings % of GDP 22.0 24.0 26.9 30.1 32.0 34.2External SectorTrade Gap USD mn -9,710 -9,409 -9,813 -10,010 -10,384 -10,113Exports USD mn 10,559 9,774 10,799 12,890 15,210 17,605Textiles and Garments USD mn 4,191 3,991 4,010 4,530 5,180 5,955Gems, Diamonds and Jewellery USD mn 532 559 594 745 895 1,090Imports USD mn 20,269 19,183 20,612 22,900 25,595 27,718Textiles USD mn 2,321 2,266 2,547 2,929 3,368 3,671Project Related (Public and Private Sector) USD mn 3,821 4,300 4,743 5,237 5,876 6,550Services (net) USD mn 1,099 1,250 2,213 3,263 4,318 5,379Export of Goods and Services USD mn 13,643 13,562 15,949 19,558 23,696 28,093Export of Goods and Services % of GDP 23.1 22.8 23.2 24.9 26.5 27.6Workers Remittances USD mn 5,145 5,985 6,664 7,453 8,223 9,059Current Account Balance USD mn -4,615 -3,915 -2,766 -1,439 -411 1,277Current Account Balance % of GDP -7.8 -6.6 -4.0 -1.8 -0.5 1.3Overall Balance USD mn -1,061 151 725 2,063 3,235 6,110External Official Reserves (d) (e) USD mn 5,958 6,877 7,146 8,486 11,166 16,773Cont…
  • 19. < Research & Development Unit >Sri Lanka: Medium Term Macroeconomic Framework (cont…)Indicator Unit 2011(b) 2012 (c)Projections2013 2014 2015 2016Fiscal SectorTotal Revenue and Grants % of GDP 14.5 13.2 14.7 14.9 15.2 15.4Total Revenue % of GDP 14.3 13.0 14.5 14.8 15.1 15.3Grants % of GDP 0.2 0.2 0.2 0.1 0.1 0.1Expenditure and Net Lending % of GDP 21.4 19.7 20.5 20.0 19.8 19.9Current Account Balance % of GDP -1.1 -1.4 0.1 0.8 1.4 1.7Overall Budget Deficit % of GDP -6.9 -6.4 -5.8 -5.2 -4.7 -4.6Domestic Financing % of GDP 3.5 2.7 4.1 3.7 3.6 3.5Government Debt % of GDP 78.5 79.1 75.0 71.1 67.7 64.3Financial Sector (f)Reserve Money Growth % 21.9 10.2 16.5 15.0 14.0 14.0Broad Money Growth (M2b) % 19.1 17.6 15.0 15.0 14.0 14.0Change in Net Credit to the Government Rs. bn 206.4 211.6 70.0 55.0 20.0 15.0Change in Credit to the Private Sector Rs. bn 514.8 352.6 435.0 517.5 613.0 690.0Growth in Credit to the Private Sector % 34.5 17.6 18.5 18.5 18.5 17.6a. Based on information available by mid March 2013b. Revisedc. Provisionald. Excluding Asian Clearing Union balancese. Includes receipts under the Stand-by Arrangement facility of the International Monetary Fund obtained in 2009f. Year-on-Year growth in end year valuesSources: Department of Census and Statistics, Ministry of Finance and Planning - Central Bank of Sri Lanka
  • 20. < Research & Development Unit >Latest IMF ProjectionsSource: The EconomistSource: IMF
  • 21. The views expressed in Economic Capsule are not necessarily those of the Management of Commercial Bank of Ceylon PLCThe 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 theinformation, 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