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Economic Capsule
February 2015
Research & Development Unit
218th Issue
C O N T E N T S
BANKING SECTOR NEWS 
 Fitch: Challenges remain for under-capitalised Sri Lankan banks
 Commercial Bank - Branch Openings
 Commercial Bank posts strong all-round growth in challenging 2014
 Special interest scheme or senior citizens
ECONOMIC & BUSINESS NEWS 
 Sri Lanka Inflation slows in February 2015
 Credit Growth
 External Sector Developments – 2014
 Sri Lanka, hold discussions with IMF and World Bank
 Sri Lanka revised budget could stoke inflation, debt path uncertain: Moody's
 Leading Alcohol Manufacturer: Distilleries continues to be the market leader
 Sri Lanka’s Cargills gets USD 20 mn of IFC investment
 Sri Lanka to set up island-wide charging centers for electric cars
International News 
Condominium Industry
in Sri Lanka
October, 2014
Research & Development Unit
Banking News
< Research & Development Unit >
Fitch: Challenges remain for
under-capitalised Sri Lankan banks
 The operating environment for Sri Lankan banks is likely to improve in 2015 and 2016 with pressures
on asset quality and the loans/deposits ratio diminishing and the potential for loan growth to pick up.
 However, longer-term challenges for the banking sector remain. Foreign-currency borrowing has been
rising, and capital levels are low relative to many other banking systems in other peer emerging
markets.
 The reported capital adequacy ratios (CAR) for Sri Lankan banks exceed the regulatory minimums of 5%
and 10% set by the Central Bank of Sri Lanka (CBSL) for core CAR and total capital, respectively.
Furthermore, the capital quality of Sri Lankan banks is generally high, consisting mostly of core capital.
 Fitch highlights, though, that Sri Lankan bank CARs are boosted by the absence of a capital charge on
certain key asset exposures. The zero risk-weight attached to gold-backed loans and foreign currency-
denominated exposures to the sovereign, in particular, mischaracterises the risks associated with such
exposures. This was evident in the spike in NPLs from gold-backed advances in recent years due to
declining gold prices. Cont…
< Research & Development Unit >
Challenges remain for
under-capitalised Sri Lankan banks (cont…)
 By applying higher risk weights to these exposures, the banking sector's core CAR would be reduced by
about 300bp according to Fitch estimates. The reduction would be particularly significant in the case of
the large state banks.
 Residual provisioning risks, credit concentrations and a volatile operating environment remain as
significant challenges for Sri Lankan banks over the medium term, and highlight the risks associated
with relatively low capital buffers. These risks are reflected in the intrinsic financial profile or Viability
Ratings of the major Sri Lankan banks which are mostly in the single 'B' range.
 Sri Lanka has not yet moved toward the implementation of Basel III-recommended reforms, which
would act to improve capital ratios over the medium and long term. Under Basel III, the CBSL would be
likely to introduce additional capital requirements for banks deemed to be systemically important (D-
SIBs), in line with global trends.
Source: Fitch
< Research & Development Unit >
Commercial Bank - Branch Openings
240 Nochchiyagama
241 Chankanai
< Research & Development Unit >
Commercial Bank posts strong all-round
growth in challenging 2014
 Commercial Bank of Ceylon PLC has ended 2014 on a characteristically strong note, withstanding
challenging conditions in Sri Lanka and Bangladesh to post profit before tax of Rs 15.736 bn for the year,
an improvement of 8.45%.
 Retaining its position as the country’s largest private bank, Commercial Bank reported profit after tax of Rs
11.180 bn, which reflected a growth of 7.03%, despite marginally lower interest income due to a drop in
the rate of returns on interest earning assets.
 However, the strong performance of the Bank’s loan book, which grew by Rs 84.3 bn or 22.24% to Rs 463.6
bn, enabled the Bank to improve its net interest income by 5.2% to Rs 27.222 bn, buttressing profit
growth. Interest expenses reduced to Rs 34.610 bn due to an improvement in the Bank’s CASA ratio, as a
result of its success in mobilising low cost funds in the period reviewed.
 Deposits increased by a noteworthy Rs 78.3 bn or 17.34% to Rs 529.4 bn over the year, at an average of
Rs 6.5 bn per month.
 Gross Income improved marginally, due to the lower margins witnessed by the industry in 2014, to
Rs 74.442 bn. The Bank’s assets increased by a vigorous 31.29% to Rs 795.6 bn.
< Research & Development Unit >
Special interest scheme
for senior citizens
The Government of Sri Lanka has now finalised the procedure for
implementation of the Special Interest Scheme for Senior Citizens announced in
the Interim Budget 2015 with effect from 01.02.2015. Key features of the Scheme
are as follows:
• Senior Citizens eligible for the Scheme:
a. Senior citizens above 60 years of age who held rupee fixed deposits not exceeding Rupees one million in aggregate
in all banks as at 31.01.2015.
b. Senior citizens who reach 60 years of age after 31.01.2015 and hold rupee fixed deposits not exceeding Rupees one
million in aggregate in all banks.
c. Senior citizens who opened fixed deposits of up to Rupees 2.5 million, prior to 16.01.2015 under the previous
scheme.
• Interest rate payable in the Scheme:
a. 15% per annum for (a) and (b) above
b. 12% per annum for (c) above
Source: CBSL
Condominium Industry
in Sri Lanka
October, 2014
Research & Development Unit
Economic & Business
News
< Research & Development Unit >
Sri Lanka Inflation slows in
February 2015
Feb . M.A.
Year-on Year Change  0.6 3.2
Annual Average Change %  2.9 3.2
 Though an index can fall due to tax cuts analysts warn that credit pressure on the banking system has worsened as a
result of higher state spending, which can raise inflationary pressures. Additional cash would be given to state
workers from this month in the form of a salary hike which can increase demand.
 Sri Lanka's rupee has come under pressure from imports, indicating that pent up liquidity in the past is now moving
with stronger credit growth, demanding more goods than the economy is producing.
 At the moment global inflationary conditions are also benign with the US ending its deadly 'quantity easing' and
commodity prices also easing which allowed the cut in fuel prices. (economynext)
Source: CBSL
< Research & Development Unit >
Credit Growth
• In December 2014, credit extended to the private
sector by commercial banks grew by 8.8 % on a y-o-y
basis, maintaining its upward trend since August 2014.
• In absolute terms, credit obtained by the private
sector recorded a historic high of Rs. 76.5 bn during
the month of December, resulting in a cumulative
increase in private sector credit of Rs. 223.9 bn during
2014.
• The sector-wise classification of credit growth
indicates increased credit disbursements to the
Industry and Services sectors in the latter half of 2014,
which augurs well for economic growth prospects.
With low nominal interest rates and improving
business confidence, it is expected that credit
extended to the private Source: CBSL
< Research & Development Unit >
Category
Jan-Dec 13’
US$ mn
Jan- Dec 14 ‘
US$ mn
Growth
Jan-Nov (%)
Exports 10,394.3 11,117.6 7.0
Textiles and garments 4,508.3 4,929.9 9.4
Tea 1,542.2 1,628.3 5.6
Imports 18,002.8 19,416.8 7.9
Fuel 4,308.2 4,597.3 6.7
Machinery and Equipment 2,221.9 2,131.0 -4.1
Trade Balance -7,608.5 -8,299.1 9.1
Earnings from Tourism 1,715.5 2,206.4 28.6
Workers’ Remittances 6,407.0 7,017.8 9.5
 For the year 2014, the BOP is
estimated to have recorded a
surplus of USD 1,375.7 mn
compared to the surplus of
USD 985.4 mn in 2013.
 Sri Lanka’s gross official
reserves remained around
USD 8.2 bn as of end
December 2014. In terms of
months of imports, gross
official reserves were
equivalent to 5.1 months of
imports as at end December
2014.
External Sector Developments - 2014
Source: CBSL
< Research & Development Unit >
< Research & Development Unit >
 Sri Lanka’s Finance Minister Mr. Ravi Karunanayake has held discussions
with the Managing Director of the International Monetary Fund (IMF)
Christine Lagarde on the economic developments in the country and the
near- term outlook. Minister Karunanayake has also met the World Bank's
Managing Director Sri Mulyani Indrawati.
 IMF’s Post-Program Monitoring mission is expected to be followed by IMF
technical assistance missions focused on tax policy and administration,
public financial management, and financial sector supervision.
 Meanwhile World Bank Vice President for the South Asia Region Annette
Dixon has steted the Bank would partner with the government to help
shape and implement policies aimed at reducing poverty, improving
shared prosperity and promoting sustainable growth.
Sri Lanka, hold discussions with IMF
and World Bank
< Research & Development Unit >
 A revised budget with a "suggested" deficit of 4.4 % supports Sri Lanka's credit profile, but
higher current spending could stoke inflation and economic imbalances.
 Planned overall budget deficit of 4.4 % of gross domestic product, if achieved, would put Sri
Lanka in line with other countries with a 'B1' below investment grade rating.
 If revenue assumptions which includes a 'super gains tax' on large firms are not met, the budget
deficit could be at risk, the rating agency said.
 The budget has also hit several firms including casinos with billion rupee taxes, where there is
uncertainty whether they can pay.
 The revenue measures could dent investments and future growth.
 Given that public sector employees make up 15 % of the work force, the 47 % increase in
nominal wages will boost consumption, thus supporting growth.
Sri Lanka revised budget could stoke
inflation, debt path uncertain: Moody's
Cont…
< Research & Development Unit >
 However, it could also have the effect of reviving inflation which has historically been high in Sri
Lanka, but moderated to an average 3.3 % in 2014.
 Analysts have warned that higher state spending, in an environment of recovering credit would
hit the balance of payments first.
 The budget also revealed central government guaranteed contingent liabilities would add 14.5
% of gross domestic product to Sri Lanka's national debt of 74.4 %.
Sri Lanka revised budget could stoke inflation,
debt path uncertain: Moody's
Source: Moody’s
< Research & Development Unit >
Leading Alcohol Manufacturer: Distilleries
continues to be the market leader
• Distilleries continues to be the market leader in alcoholic beverage production in Sri Lanka
due to its strong brands, which drive demand and access to retail points across the island.
• Distilleries diversified product portfolio includes its mass market Extra Special Arrack brand,
which accounts for about 80% of sales, as well as licensed international brands channelled
through its subsidiary Periceyl (Pvt) Ltd.
• The government's plans to impose a minimum tax of LKR200m per month on liquor
manufacturers will deter new players and adversely impact the profitability of smaller
players. This is likely to allow the larger producers such as Distilleries to gain market share.
• As of the latest published statistics, Distilleries accounted for 53% of Sri Lanka's total
alcoholic beverage production and 79% of the country's total arrack production. Distilleries
arrack production accounts for over 95% of its volumes. Cont…
< Research & Development Unit >
Leading Alcohol Manufacturer: Distilleries
continues to be the market leader
• Positive Outlook for Demand: Government measures including increases in public-sector salaries and
allowances, and reductions in the prices of essential goods, fuel and electricity are likely to increase
real disposable income, which would lead to an uptick in spirit consumption.
• Increasing Preference for Beer: Beer demand continues to grow despite an overall decline in the
domestic alcoholic beverage industry. Latest statistics show domestic beer production rose 21% in
2013, compared with growth of 14% in 2012. This reflects increasing demand for strong beer (over 5%
alcohol content), which accounted for 89% of total beer production at end-2013. This compares with
declines in arrack production of 12% and 9% over 2013 and 2012, resulting in a market share
contraction for arrack.
• Regulatory Risk: The industry is highly regulated, with a complete ban on advertising and licensing
across the value chain acting as a barrier to entry. The industry is also characterised by high and
frequent tax revisions, putting increasing pressure on industry players; this risk is partially mitigated by
liquor's contribution to government coffers, with liquor taxes expected to account for an estimated
5.1% of total government revenue in 2014. Source: Fitch
< Research & Development Unit >
 Cargills (Ceylon) Plc is looking forward to its next wave of
expansion consequent to a capital infusion of Rs. 2.5 bn (USD 20
mn) by the International Finance Corporation (IFC) in exchange for
an 8% equity stake in the company’s retail subsidiary, Cargills
Foods Ltd.
 The investment from IFC – the private sector arm of the World
Bank Group – is to be directed towards strengthening the
company’s extensive supply chain network and expanding its retail
footprint through the opening of new Food City outlets while
further investments are expected through the partnership,
according to Cargills (Ceylon) Plc Deputy Chairman, Ranjit Page.
Sri Lanka’s Cargills gets USD 20 mn
of IFC investment
< Research & Development Unit >
Sri Lanka to set up island-wide charging
centers for electric cars
 Sri Lanka’s Power and Energy Ministry plans to set up an island-
wide network of charging centres for electric cars involving private
businesses and households.
 The Power and Energy Ministry plans to introduce a special tariff
between the hours of 2200 and 0400 for charging cars. Existing fuel
pumping stations, supermarkets and also households could be part
of the network.
 Acceding to JB Securities analysis of data from Sri Lanka's motor
vehicle registry data, 15 electric cars were registered in January
2015 up from 4 % a year earlier. According to the statement
attention will also be paid to electrify railways.
International News
< Research & Development Unit >
U.S. economy cools in 4Q
 U.S. economic growth
slowed sharply in the fourth
quarter as weak business
spending and a wider trade
deficit offset the fastest pace
of consumer spending since
2006.
 The slowdown followed two
back-to-back quarters of
bullish growth and is likely to
be short-lived given the
enormous tailwind from
lower gasoline prices.
 Gross domestic product
expanded at a 2.6 % annual
pace after the third quarter's
5 % rate. (Reuters)
Eurozone economy grew by 0.3% in the last quarter
 Euro zone economic growth accelerated unexpectedly in the final quarter of
2014 as the bloc's largest member, Germany, expanded at more than twice
the expected rate.
 A preliminary estimate showed the economy of the 18 countries sharing the
euro expanded by 0.3 % between October and December compared with the
previous three months, the European Union's statistics office Eurostat stated.
(BBC)
Japan Q4 GDP expands annualised 2.2 %, emerges from recession
 Japan came out of recession in the fourth quarter of last year, but the world's
third largest economy grew at a slower than expected pace.
 The economy expanded by an annualised 2.2% in the three months to
December in a preliminary reading, compared to forecasts for a 3.7% increase.
 Japan's growth in the fourth quarter comes after the economy contracted for
the two previous quarters. (Reuters)
< Research & Development Unit >
Deflation
• Falling prices sound like something to cheer. In 1950 talk was not cheap. It cost
$3.70 to place a five-minute call between New York and San Francisco—or $36.35
in today’s money. Now that same call costs you nothing.
• The emergence of the sharing economy is driving down the price of a taxi ride and
a bed for the night. More recently tumbling prices for natural resources, especially
oil, have boosted the spending power of consumers from Detroit to Delhi.
• The problem is that aggregate prices are dipping in so many places at once. Deflationary pressures are visible far
beyond food and energy, and in countries that cannot claim to be leading the charge towards the new economy. In
the euro zone, where deflation grips tightest, consumer prices fell by 0.6% in the year to January; Germany, Italy
and Spain all saw falls. Prices in Greece have been declining for 23 months. Ultra-low inflation is also widespread.
America, Britain and China each have inflation rates of less than 1%. This looks less like a welcome jolt to prices
than a sign of entrenched weak demand.
• Mark Carney, the governor of the Bank of England, reckons that falling energy prices are “unambiguously good”
for the British economy. Mr Carney is not wrong. Nonetheless, the world is grievously underestimating the danger
of deflation.
Cont…
< Research & Development Unit >
Deflation (cont…)
• Deflation poses several risks, one familiar danger is that consumers will put off spending in the expectation
that things will get even cheaper, further muting demand.
• Likewise, if prices fall across an economy but wages do not, then firms’ margins will be squeezed and
employment will stagnate or decline. (Neither of these dangers is yet visible; indeed, America and Britain are
seeing strong employment growth.)
• A third, well-known risk is debt deflation: debts become more onerous because the amount that is owed does
not fall, even as earnings do. This is a big worry in the euro zone, where many banks are already stuffed with
dud loans.
• The least-understood danger is also the most serious, because it is already here. Deflation makes it harder to
loosen monetary policy. When inflation is at 4%, the central bank can take real (ie, inflation-adjusted) rates well
below zero, to -4%, by keeping headline rates at zero. But as inflation falls and turns negative, low real rates get
harder and harder to achieve—just when you need them most. Most rich-world central banks have already cut
their main policy rates near to zero in order to pep up demand. A growing number of European economies are
using negative interest rates to encourage spending, although charging people to put money in the bank will
eventually prompt them to use the mattress instead. Cont…
< Research & Development Unit >
Deflation (cont…)
• All of which means that policymakers risk having precious little room for manoeuvre when the next recession hits.
And sooner or later it will—because of a sharp slowdown in China, say, or the effect of a rising greenback on dollar-
denominated corporate debt, or from some shock that comes out of the blue.
• The Federal Reserve has cut its policy rate by an average of 3.9 percentage points in the six recessions since 1971.
That would not be possible today. The break-glass-in-case-of-emergency option of depreciating the currency
massively against a fast-growing trading partner is of limited use when so few big economies are growing rapidly
and prices are falling, or close to it, in so many places.
• Policymakers should be more worried than they appear to be, and their actions to avert deflation should be bolder.
Governments need to boost demand by spending more on infrastructure; central banks should err on the side of
looseness. (Next month the ECB will start quantitative easing—and about time too.) Now is also the moment to
consider revising the monetary rule book—in particular, to switch the central bankers’ target from the inflation
rate that most now favour to a goal for the level of nominal GDP, the total value of spending in an economy before
adjusting for inflation. With such a target there is no need to distinguish between good and bad price shocks. And
the change in rules would itself send a signal that policymakers are serious about banishing the threat of deflation.
• Central bankers change course slowly, and their allegiance to inflation targets runs deep. Conservatism often
serves them well. But in this case it could cost the world economy dearly. 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.

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Economic Capsule - February 2015

  • 1. Economic Capsule February 2015 Research & Development Unit 218th Issue
  • 2. C O N T E N T S BANKING SECTOR NEWS   Fitch: Challenges remain for under-capitalised Sri Lankan banks  Commercial Bank - Branch Openings  Commercial Bank posts strong all-round growth in challenging 2014  Special interest scheme or senior citizens ECONOMIC & BUSINESS NEWS   Sri Lanka Inflation slows in February 2015  Credit Growth  External Sector Developments – 2014  Sri Lanka, hold discussions with IMF and World Bank  Sri Lanka revised budget could stoke inflation, debt path uncertain: Moody's  Leading Alcohol Manufacturer: Distilleries continues to be the market leader  Sri Lanka’s Cargills gets USD 20 mn of IFC investment  Sri Lanka to set up island-wide charging centers for electric cars International News 
  • 3. Condominium Industry in Sri Lanka October, 2014 Research & Development Unit Banking News
  • 4. < Research & Development Unit > Fitch: Challenges remain for under-capitalised Sri Lankan banks  The operating environment for Sri Lankan banks is likely to improve in 2015 and 2016 with pressures on asset quality and the loans/deposits ratio diminishing and the potential for loan growth to pick up.  However, longer-term challenges for the banking sector remain. Foreign-currency borrowing has been rising, and capital levels are low relative to many other banking systems in other peer emerging markets.  The reported capital adequacy ratios (CAR) for Sri Lankan banks exceed the regulatory minimums of 5% and 10% set by the Central Bank of Sri Lanka (CBSL) for core CAR and total capital, respectively. Furthermore, the capital quality of Sri Lankan banks is generally high, consisting mostly of core capital.  Fitch highlights, though, that Sri Lankan bank CARs are boosted by the absence of a capital charge on certain key asset exposures. The zero risk-weight attached to gold-backed loans and foreign currency- denominated exposures to the sovereign, in particular, mischaracterises the risks associated with such exposures. This was evident in the spike in NPLs from gold-backed advances in recent years due to declining gold prices. Cont…
  • 5. < Research & Development Unit > Challenges remain for under-capitalised Sri Lankan banks (cont…)  By applying higher risk weights to these exposures, the banking sector's core CAR would be reduced by about 300bp according to Fitch estimates. The reduction would be particularly significant in the case of the large state banks.  Residual provisioning risks, credit concentrations and a volatile operating environment remain as significant challenges for Sri Lankan banks over the medium term, and highlight the risks associated with relatively low capital buffers. These risks are reflected in the intrinsic financial profile or Viability Ratings of the major Sri Lankan banks which are mostly in the single 'B' range.  Sri Lanka has not yet moved toward the implementation of Basel III-recommended reforms, which would act to improve capital ratios over the medium and long term. Under Basel III, the CBSL would be likely to introduce additional capital requirements for banks deemed to be systemically important (D- SIBs), in line with global trends. Source: Fitch
  • 6. < Research & Development Unit > Commercial Bank - Branch Openings 240 Nochchiyagama 241 Chankanai
  • 7. < Research & Development Unit > Commercial Bank posts strong all-round growth in challenging 2014  Commercial Bank of Ceylon PLC has ended 2014 on a characteristically strong note, withstanding challenging conditions in Sri Lanka and Bangladesh to post profit before tax of Rs 15.736 bn for the year, an improvement of 8.45%.  Retaining its position as the country’s largest private bank, Commercial Bank reported profit after tax of Rs 11.180 bn, which reflected a growth of 7.03%, despite marginally lower interest income due to a drop in the rate of returns on interest earning assets.  However, the strong performance of the Bank’s loan book, which grew by Rs 84.3 bn or 22.24% to Rs 463.6 bn, enabled the Bank to improve its net interest income by 5.2% to Rs 27.222 bn, buttressing profit growth. Interest expenses reduced to Rs 34.610 bn due to an improvement in the Bank’s CASA ratio, as a result of its success in mobilising low cost funds in the period reviewed.  Deposits increased by a noteworthy Rs 78.3 bn or 17.34% to Rs 529.4 bn over the year, at an average of Rs 6.5 bn per month.  Gross Income improved marginally, due to the lower margins witnessed by the industry in 2014, to Rs 74.442 bn. The Bank’s assets increased by a vigorous 31.29% to Rs 795.6 bn.
  • 8. < Research & Development Unit > Special interest scheme for senior citizens The Government of Sri Lanka has now finalised the procedure for implementation of the Special Interest Scheme for Senior Citizens announced in the Interim Budget 2015 with effect from 01.02.2015. Key features of the Scheme are as follows: • Senior Citizens eligible for the Scheme: a. Senior citizens above 60 years of age who held rupee fixed deposits not exceeding Rupees one million in aggregate in all banks as at 31.01.2015. b. Senior citizens who reach 60 years of age after 31.01.2015 and hold rupee fixed deposits not exceeding Rupees one million in aggregate in all banks. c. Senior citizens who opened fixed deposits of up to Rupees 2.5 million, prior to 16.01.2015 under the previous scheme. • Interest rate payable in the Scheme: a. 15% per annum for (a) and (b) above b. 12% per annum for (c) above Source: CBSL
  • 9. Condominium Industry in Sri Lanka October, 2014 Research & Development Unit Economic & Business News
  • 10. < Research & Development Unit > Sri Lanka Inflation slows in February 2015 Feb . M.A. Year-on Year Change  0.6 3.2 Annual Average Change %  2.9 3.2  Though an index can fall due to tax cuts analysts warn that credit pressure on the banking system has worsened as a result of higher state spending, which can raise inflationary pressures. Additional cash would be given to state workers from this month in the form of a salary hike which can increase demand.  Sri Lanka's rupee has come under pressure from imports, indicating that pent up liquidity in the past is now moving with stronger credit growth, demanding more goods than the economy is producing.  At the moment global inflationary conditions are also benign with the US ending its deadly 'quantity easing' and commodity prices also easing which allowed the cut in fuel prices. (economynext) Source: CBSL < Research & Development Unit >
  • 11. Credit Growth • In December 2014, credit extended to the private sector by commercial banks grew by 8.8 % on a y-o-y basis, maintaining its upward trend since August 2014. • In absolute terms, credit obtained by the private sector recorded a historic high of Rs. 76.5 bn during the month of December, resulting in a cumulative increase in private sector credit of Rs. 223.9 bn during 2014. • The sector-wise classification of credit growth indicates increased credit disbursements to the Industry and Services sectors in the latter half of 2014, which augurs well for economic growth prospects. With low nominal interest rates and improving business confidence, it is expected that credit extended to the private Source: CBSL < Research & Development Unit >
  • 12. Category Jan-Dec 13’ US$ mn Jan- Dec 14 ‘ US$ mn Growth Jan-Nov (%) Exports 10,394.3 11,117.6 7.0 Textiles and garments 4,508.3 4,929.9 9.4 Tea 1,542.2 1,628.3 5.6 Imports 18,002.8 19,416.8 7.9 Fuel 4,308.2 4,597.3 6.7 Machinery and Equipment 2,221.9 2,131.0 -4.1 Trade Balance -7,608.5 -8,299.1 9.1 Earnings from Tourism 1,715.5 2,206.4 28.6 Workers’ Remittances 6,407.0 7,017.8 9.5  For the year 2014, the BOP is estimated to have recorded a surplus of USD 1,375.7 mn compared to the surplus of USD 985.4 mn in 2013.  Sri Lanka’s gross official reserves remained around USD 8.2 bn as of end December 2014. In terms of months of imports, gross official reserves were equivalent to 5.1 months of imports as at end December 2014. External Sector Developments - 2014 Source: CBSL < Research & Development Unit >
  • 13. < Research & Development Unit >  Sri Lanka’s Finance Minister Mr. Ravi Karunanayake has held discussions with the Managing Director of the International Monetary Fund (IMF) Christine Lagarde on the economic developments in the country and the near- term outlook. Minister Karunanayake has also met the World Bank's Managing Director Sri Mulyani Indrawati.  IMF’s Post-Program Monitoring mission is expected to be followed by IMF technical assistance missions focused on tax policy and administration, public financial management, and financial sector supervision.  Meanwhile World Bank Vice President for the South Asia Region Annette Dixon has steted the Bank would partner with the government to help shape and implement policies aimed at reducing poverty, improving shared prosperity and promoting sustainable growth. Sri Lanka, hold discussions with IMF and World Bank
  • 14. < Research & Development Unit >  A revised budget with a "suggested" deficit of 4.4 % supports Sri Lanka's credit profile, but higher current spending could stoke inflation and economic imbalances.  Planned overall budget deficit of 4.4 % of gross domestic product, if achieved, would put Sri Lanka in line with other countries with a 'B1' below investment grade rating.  If revenue assumptions which includes a 'super gains tax' on large firms are not met, the budget deficit could be at risk, the rating agency said.  The budget has also hit several firms including casinos with billion rupee taxes, where there is uncertainty whether they can pay.  The revenue measures could dent investments and future growth.  Given that public sector employees make up 15 % of the work force, the 47 % increase in nominal wages will boost consumption, thus supporting growth. Sri Lanka revised budget could stoke inflation, debt path uncertain: Moody's Cont…
  • 15. < Research & Development Unit >  However, it could also have the effect of reviving inflation which has historically been high in Sri Lanka, but moderated to an average 3.3 % in 2014.  Analysts have warned that higher state spending, in an environment of recovering credit would hit the balance of payments first.  The budget also revealed central government guaranteed contingent liabilities would add 14.5 % of gross domestic product to Sri Lanka's national debt of 74.4 %. Sri Lanka revised budget could stoke inflation, debt path uncertain: Moody's Source: Moody’s
  • 16. < Research & Development Unit > Leading Alcohol Manufacturer: Distilleries continues to be the market leader • Distilleries continues to be the market leader in alcoholic beverage production in Sri Lanka due to its strong brands, which drive demand and access to retail points across the island. • Distilleries diversified product portfolio includes its mass market Extra Special Arrack brand, which accounts for about 80% of sales, as well as licensed international brands channelled through its subsidiary Periceyl (Pvt) Ltd. • The government's plans to impose a minimum tax of LKR200m per month on liquor manufacturers will deter new players and adversely impact the profitability of smaller players. This is likely to allow the larger producers such as Distilleries to gain market share. • As of the latest published statistics, Distilleries accounted for 53% of Sri Lanka's total alcoholic beverage production and 79% of the country's total arrack production. Distilleries arrack production accounts for over 95% of its volumes. Cont…
  • 17. < Research & Development Unit > Leading Alcohol Manufacturer: Distilleries continues to be the market leader • Positive Outlook for Demand: Government measures including increases in public-sector salaries and allowances, and reductions in the prices of essential goods, fuel and electricity are likely to increase real disposable income, which would lead to an uptick in spirit consumption. • Increasing Preference for Beer: Beer demand continues to grow despite an overall decline in the domestic alcoholic beverage industry. Latest statistics show domestic beer production rose 21% in 2013, compared with growth of 14% in 2012. This reflects increasing demand for strong beer (over 5% alcohol content), which accounted for 89% of total beer production at end-2013. This compares with declines in arrack production of 12% and 9% over 2013 and 2012, resulting in a market share contraction for arrack. • Regulatory Risk: The industry is highly regulated, with a complete ban on advertising and licensing across the value chain acting as a barrier to entry. The industry is also characterised by high and frequent tax revisions, putting increasing pressure on industry players; this risk is partially mitigated by liquor's contribution to government coffers, with liquor taxes expected to account for an estimated 5.1% of total government revenue in 2014. Source: Fitch
  • 18. < Research & Development Unit >  Cargills (Ceylon) Plc is looking forward to its next wave of expansion consequent to a capital infusion of Rs. 2.5 bn (USD 20 mn) by the International Finance Corporation (IFC) in exchange for an 8% equity stake in the company’s retail subsidiary, Cargills Foods Ltd.  The investment from IFC – the private sector arm of the World Bank Group – is to be directed towards strengthening the company’s extensive supply chain network and expanding its retail footprint through the opening of new Food City outlets while further investments are expected through the partnership, according to Cargills (Ceylon) Plc Deputy Chairman, Ranjit Page. Sri Lanka’s Cargills gets USD 20 mn of IFC investment
  • 19. < Research & Development Unit > Sri Lanka to set up island-wide charging centers for electric cars  Sri Lanka’s Power and Energy Ministry plans to set up an island- wide network of charging centres for electric cars involving private businesses and households.  The Power and Energy Ministry plans to introduce a special tariff between the hours of 2200 and 0400 for charging cars. Existing fuel pumping stations, supermarkets and also households could be part of the network.  Acceding to JB Securities analysis of data from Sri Lanka's motor vehicle registry data, 15 electric cars were registered in January 2015 up from 4 % a year earlier. According to the statement attention will also be paid to electrify railways.
  • 21. < Research & Development Unit > U.S. economy cools in 4Q  U.S. economic growth slowed sharply in the fourth quarter as weak business spending and a wider trade deficit offset the fastest pace of consumer spending since 2006.  The slowdown followed two back-to-back quarters of bullish growth and is likely to be short-lived given the enormous tailwind from lower gasoline prices.  Gross domestic product expanded at a 2.6 % annual pace after the third quarter's 5 % rate. (Reuters) Eurozone economy grew by 0.3% in the last quarter  Euro zone economic growth accelerated unexpectedly in the final quarter of 2014 as the bloc's largest member, Germany, expanded at more than twice the expected rate.  A preliminary estimate showed the economy of the 18 countries sharing the euro expanded by 0.3 % between October and December compared with the previous three months, the European Union's statistics office Eurostat stated. (BBC) Japan Q4 GDP expands annualised 2.2 %, emerges from recession  Japan came out of recession in the fourth quarter of last year, but the world's third largest economy grew at a slower than expected pace.  The economy expanded by an annualised 2.2% in the three months to December in a preliminary reading, compared to forecasts for a 3.7% increase.  Japan's growth in the fourth quarter comes after the economy contracted for the two previous quarters. (Reuters)
  • 22. < Research & Development Unit > Deflation • Falling prices sound like something to cheer. In 1950 talk was not cheap. It cost $3.70 to place a five-minute call between New York and San Francisco—or $36.35 in today’s money. Now that same call costs you nothing. • The emergence of the sharing economy is driving down the price of a taxi ride and a bed for the night. More recently tumbling prices for natural resources, especially oil, have boosted the spending power of consumers from Detroit to Delhi. • The problem is that aggregate prices are dipping in so many places at once. Deflationary pressures are visible far beyond food and energy, and in countries that cannot claim to be leading the charge towards the new economy. In the euro zone, where deflation grips tightest, consumer prices fell by 0.6% in the year to January; Germany, Italy and Spain all saw falls. Prices in Greece have been declining for 23 months. Ultra-low inflation is also widespread. America, Britain and China each have inflation rates of less than 1%. This looks less like a welcome jolt to prices than a sign of entrenched weak demand. • Mark Carney, the governor of the Bank of England, reckons that falling energy prices are “unambiguously good” for the British economy. Mr Carney is not wrong. Nonetheless, the world is grievously underestimating the danger of deflation. Cont…
  • 23. < Research & Development Unit > Deflation (cont…) • Deflation poses several risks, one familiar danger is that consumers will put off spending in the expectation that things will get even cheaper, further muting demand. • Likewise, if prices fall across an economy but wages do not, then firms’ margins will be squeezed and employment will stagnate or decline. (Neither of these dangers is yet visible; indeed, America and Britain are seeing strong employment growth.) • A third, well-known risk is debt deflation: debts become more onerous because the amount that is owed does not fall, even as earnings do. This is a big worry in the euro zone, where many banks are already stuffed with dud loans. • The least-understood danger is also the most serious, because it is already here. Deflation makes it harder to loosen monetary policy. When inflation is at 4%, the central bank can take real (ie, inflation-adjusted) rates well below zero, to -4%, by keeping headline rates at zero. But as inflation falls and turns negative, low real rates get harder and harder to achieve—just when you need them most. Most rich-world central banks have already cut their main policy rates near to zero in order to pep up demand. A growing number of European economies are using negative interest rates to encourage spending, although charging people to put money in the bank will eventually prompt them to use the mattress instead. Cont…
  • 24. < Research & Development Unit > Deflation (cont…) • All of which means that policymakers risk having precious little room for manoeuvre when the next recession hits. And sooner or later it will—because of a sharp slowdown in China, say, or the effect of a rising greenback on dollar- denominated corporate debt, or from some shock that comes out of the blue. • The Federal Reserve has cut its policy rate by an average of 3.9 percentage points in the six recessions since 1971. That would not be possible today. The break-glass-in-case-of-emergency option of depreciating the currency massively against a fast-growing trading partner is of limited use when so few big economies are growing rapidly and prices are falling, or close to it, in so many places. • Policymakers should be more worried than they appear to be, and their actions to avert deflation should be bolder. Governments need to boost demand by spending more on infrastructure; central banks should err on the side of looseness. (Next month the ECB will start quantitative easing—and about time too.) Now is also the moment to consider revising the monetary rule book—in particular, to switch the central bankers’ target from the inflation rate that most now favour to a goal for the level of nominal GDP, the total value of spending in an economy before adjusting for inflation. With such a target there is no need to distinguish between good and bad price shocks. And the change in rules would itself send a signal that policymakers are serious about banishing the threat of deflation. • Central bankers change course slowly, and their allegiance to inflation targets runs deep. Conservatism often serves them well. But in this case it could cost the world economy dearly. Source: The Economist
  • 25. 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.