Economic Capsule - JUNE 2013


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Economic Capsule - JUNE 2013

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Economic Capsule - JUNE 2013

  1. 1. < Research & Development Unit > June 2013 ECONOMIC CAPSULE
  2. 2. FINANCIAL SECTOR NEWS   Central Bank Reduces SRR by 2 Percentage Points  Further Relaxation of Foreign Exchange Regulations by the Central Bank  SME Lending: Private Sector Banks Account for Lion’s Share  Sri Lanka Imposes 10 % Tax on Gold Imports ECONOMIC & BUSINESS NEWS   Economic Growth Slumps in 1Q, 2013  Moody's Changes Outlook on Sri Lanka‘s Sovereign Rating to Stable  Recent Exchange Rate Behavior  External Sector Performance—April 2013  Japan Biggest Lender to Sri Lanka  Snippets  Analysis & Forecast - Views of Chief Economist for India and ASEAN H C O N T E N T S
  3. 3. Financial Sector News
  4. 4. < Research & Development Unit > Central Bank Reduces SRR by 2 Percentage Points Previous rate Current rate Effective date SRR 8.00  6.0 01.07.13 Repo 7.50  7.0 09.05.13 RRepo 9.50  9.0 09.05.13 SRR The Statutory Reserve Requirement (SRR) is the proportion of the deposit liabilities that commercial banks are required to keep as a cash deposit with the Central Bank. At present, demand, time and savings deposits of commercial banks, denominated in rupee terms, are subject to the SRR. At its meeting on 25th June 2013 the Monetary Board of the Central Bank of Sri Lanka (CBSL) decided to reduce the Statutory Reserve Requirement (SRR) by 2 percentage points to 6% from the prevailing rate of 8% with effect from 1st July, 2013.  The CBSL’s decision to reduce the SRR has been influenced by the fact that downward adjustment of general lending rates have been slower than the desired pace despite the reductions in the policy rates effected by the CBSL in December, 2012 and May, 2012 and the removal of the credit ceiling with effect from the end of 2012 by the CBSL.  The reduction in the SRR is expected to ease market lending rates considerably and it is also aimed at boosting credit to the private sector with a view to stimulating economic activity and thereby enhancing growth in the economy.  The 2 percentage point reduction in the SRR implies that an additional amount of around Rs. 35-40 bn will now be available to commercial banks for disbursement. This additional amount will help the banks to generate new loans of a much higher magnitude due to the multiplier effect, although with a lagged effect, and also depending on the market appetite for loans.
  5. 5. < Research & Development Unit > Further Relaxation of Foreign Exchange Regulations by the Central Bank New relaxation measures were implemented with effect from 12th June 2013. The highlights of these policy measures are as follows:  General permission to transfer funds in an NRFC/RFC account of one bank to another bank.  Holders of Foreign Exchange Earners Accounts (FEEA) to be eligible to obtain Foreign currency loans.  General Permission to repatriate capital gains from the sale of residential properties by non-residents.  Extension of migration allowance to each migrant of age 18 and above.  Permission for banks to open and maintain Nostro Accounts and invest Nostro balances abroad.  The quantum of foreign currency notes that may be issued for travel purposes by an authorized dealer will henceforth be increased from the current level of USD 2,500 to USD 5,000.  Introduction of standard criteria to permit non-bank financial institutions to accept foreign currency deposits: Licensed Finance Companies (LFCs) which are rated at a credit rating of A- or above by Central Bank specified credit rating agencies, will be permitted on application.  Repatriation of Pre-SIERA (Share Investment External Rupee Account) Foreign Investments in Sri Lanka.  Opening and maintaining of bank accounts abroad by dual citizens.  Amendments to the Securities Investments Account (SIA): As a measure of facilitating inward remittances into Sri Lanka for investment purposes, SIA holders will be granted more flexible avenues to receive and repatriate funds into and out of SIA. Source: CBSL
  6. 6. < Research & Development Unit > SME Lending: Private Sector Banks Account for Lion’s Share  Sri Lanka’s private commercial banks have significantly surpassed state-owned banks in funding Small and Medium Enterprises (SMEs) in 2012, a stark contrast to the situation in 2011, according to the latest annual report of the Ministry of Finance and Planning.  According to the data compiled by the Department of Development Finance of the Treasury, Seven private banks have provided a total of Rs. 230 bn worth of SME funding during 2012 as opposed to Rs.34 bn provided by four state banks.  Commercial Bank has been the single largest lender to SMEs during 2012, followed by Hatton National Bank. SME Loans Provided by Banks Name of bank Number of loans Amount (Rs. Mn) CBC 77,782 95,513.97 HNB 21,984 62,623.8 DFCC 4,457 20,480.1 NTB 11,998 16,544.53 NDB 4,665 11,953.7 Sampath 2,397 11,348.85 UBC 42,067 11,601.00 Four State owned Banks (BOC, PB, RDB & LDB) 10,289 34,091.14 Source: Ministry of Finance and Planning
  7. 7. < Research & Development Unit > Sri Lanka Imposes 10 % Tax on Gold Imports Sri Lanka has imposed a 10 % tax on gold imports with effect from 21.06.13. Sri Lanka's imports of the precious metal jumped 46.7 % from a year ago to USD 110 mn in the first four months of this year. It imported gold worth USD 50 mn in April alone, the central bank's provisional data showed. The value of gold imports sank to USD 170 mn in 2012, from a record USD 604 mn in 2011 after the central bank tightened monetary policy twice and adopted a flexible exchange rate.
  8. 8. Economic & Business News
  9. 9. < Research & Development Unit > Economic Growth Slumps in 1Q, 2013  GDP growth slowed down to 6 % during the first quarter of this year with growth in the agriculture sector falling sharply, the services sector recording a dip and industries stagnant.  The GDP growth rate recorded 8% for the first quarter of 2012. Sector 1Q, 2012 1Q, 2013 Agriculture Growth % 12.0 2.0 Share of GDP % 12.7 12.3 Industry Growth % 10.8 10.7 Share of GDP % 30.0 31.3 Services Growth % 5.8 4.3 Share of GDP % 57.3 56.4 GDP growth % 8.0 6.0
  10. 10. < Research & Development Unit > Moody's Changes Outlook on Sri Lanka‘s Sovereign Rating to Stable Moody's Investors Service changed the outlook on Sri Lanka's B1 foreign currency sovereign rating from positive to stable, and affirmed its B1 foreign currency government bond rating. The action was prompted by:  The stabilization in the external payments position, following the sizable loss of foreign reserves in 2011, but without enough improvement to support a positive rating action at this time; and  The pause in the decline in the government's very high debt burden, as ongoing large deficits impede a reduction that would be credit positive. Rating Agency Rating Outlook Fitch BB- Stable Rating/outlook affirmed in April 2013 S&P B+ Stable Rating/outlook affirmed in March2013 Moody’s B1 Stable Rating affirmed/outlook changed to stable
  11. 11. < Research & Development Unit > Moody's Changes Outlook on Sri Lanka‘s Sovereign Rating to Stable (cont…) The first driver underlying Moody's decision to affirm Sri Lanka's B1 rating and revise its outlook from positive to stable is a decline in the strength of the external payments position in the past two years. In defending the currency in the face of a sharply widening current account deficit, reserves fell from a high of USD 8.1 bn in July 2011 to a low of USD 5.5 bn in February 2012. In addition, the rapid rise in banks' net foreign liability position since July 2011 - involving an almost doubling to USD 3.4 bn as of February 2013 - could lead to pressure on the external payments position, if creditor sentiment deteriorates, or if the current account deficit widens. Nevertheless, since late last year there has been a stabilization of the external payments position. The government has taken remedial measures, including abandoning the de facto currency peg to the dollar, tightening monetary policy, and raising tariffs on imports. These measures have reduced the current account deficit somewhat, and official foreign exchange reserves have stabilized, standing at USD 6.9 bn as of April 2013. However, these reserves remain considerably below the peak achieved when the outlook was changed to positive in July 2011. Ratings Rationale
  12. 12. < Research & Development Unit > Moody's Changes Outlook on Sri Lanka‘s Sovereign Rating to Stable (cont…) The second driver behind the rating action is a slowdown in the pace of fiscal consolidation.  The fiscal deficit has narrowed from a peak of 9.9% of GDP in 2009 to 6.4% in 2012.  The debt/GDP ratio has also been on a generally declining trajectory, falling from 86% of GDP in 2009, the year the civil war ended, to 78% of GDP in 2011, although it edged higher to 79% of GDP in 2012 due to currency depreciation.  While progress has been made in reducing both debt and deficits, much of this consolidation took place between 2009 and 2011, and since then, the pace of improvement has slowed. As a result, Sri Lanka's debt burden remains considerably higher than the 44% of GDP median in 2012 for Sri Lanka's B-Caa rating peers. Source: Moody’s
  13. 13. < Research & Development Unit > Recent Exchange Rate Behavior  The Sri Lankan rupee extended its falls on 01.07.13 to trade around its near eight-month low on importer demand for the USD, with concerns over further foreign outflow from government securities also hurting the currency, according to dealers.  The currency was quoted at 130.60/70 per dollar on 01.07.13 , a level last seen on Nov. 9, 2012. Source: CBSL CBSL opinion ... The Central Bank will maintain flexibility in the rupee exchange rate despite the currency’s weakening trend this month (June) , according to Central Bank Deputy Governor Nandalal Weerasinghe . The Central Bank would make sure the monetary easing would mainly reduce lending rates and not result in a drop in the yield on government securities, which could prompt foreign bond holders to exit. “We will maintain stable rates in T-bills and T- bonds in the short term by absorbing more than what we want. That is the strategy,” Mr. Weerasinghe stated. Exchange Rate (Buying) Exchange Rate (Selling)
  14. 14. < Research & Development Unit > External Sector Performance—April 2013 Category Jan-Apr 2012 USD mn Jan- Apr 2013 USD mn Growth Jan- Apr (%) Exports 3,317.9 3,059.8 -7.8 Agricultural Products 752.6 726.8 -3.4 Tea 440.9 440.0 -0.2 Industrial Products 2,537.1 2,322.9 -8.4 Rubber products 295.5 260.1 -12.0 Mineral Products 24.3 6.0 -75.5 Imports 6,789.6 6,025.4 -11.3 Consumer Goods 1,124.1 983.9 -12.5 Intermediate Goods 3,985.4 3,517.9 -11.7 Fuel 1,915.0 1,434.0 -25.1 Textiles and textile articles 714.4 650.4 -9.0 Investment Goods 1,668.0 1,520.0 -8.9 Deficit in the Trade Account -3,471.7 -2,965.6 -14.6 Workers’ Remittances 1982.9 2,109.3 6.4 Portfolio Investments (Net) 171.5 69.4 Earnings from Tourism 339.8 407.2 19.8 Inflows to Commercial Banks 664 Inflows to the Govt. 1,538.0 2,134.8 38.8  By end April 2013, gross official reserves (GOR) amounted to USD 6,858 mn. In terms of months of imports, GOR were equivalent to 4.4 months of imports by end April 2013. Source: CBSL
  15. 15. Japan Biggest Lender to Sri Lanka Overtaking China, Japan became the single largest development finance provider to Sri Lanka during the first four months of 2013. The total financing commitment made by the bilateral development partner was USD 429 mn during the period, according to the Finance Ministry. Source: Source: Ministry of Finance and Planning
  16. 16. < Research & Development Unit > SNIPPETS—SNIPPETS—SNIPPETS—SNIPPETS—SNIPPETS—SNIPPETS—SNIPPETS—SNIPPETS—SNIPPETS—SNIPPETS—SNIPPETS—SNIPPETS—SNIPPETS JKH to Sign USD 640 mn Hotel Deal  John Keells Holdings (JKH), will sign a USD 640 mn deal to establish an integrated hotel complex in the capital of Colombo. This will be the biggest deal by a local company. USD 170 mn Maldives Mixed Development Project in Colombo Cabinet has approved another mixed development project worth USD 170 mn by EoN Resorts Group from the Maldives. They will be given land owned by the Cey-Nor Foundation down D.R. Wijewardena Mawatha SL-India to Review Negative Lists, Remove Barriers to Double Trade to USD 10bn Sri Lankan and India have agreed to double bilateral trade to USD 10 bn within the next three years, revise negative lists and remove trade barriers. The bilateral trade turnover between the two countries had crossed the USD 5 bn mark in 2011-12. India’s largest trade partner in South Asia is Sri Lanka. However, the trade turnover is not equally distributed and Sri Lanka has continued to experience a higher trade deficit with India. SL Sells USD 90 mn 3-yr and USD 164 mn 5-yr Development Bonds Sri Lanka sold USD 90 mn in dollar-denominated, 3-year development bonds and USD 164 mn in 5-year bonds. The government accepted USD 90 mn for 3-year bonds at 6-month LIBOR plus 400 basis points (bps), the central bank stated in a statement. It had offered USD 50 mn for the issue. The Bank also accepted USD 164 mn in 5-year development bonds at 6- month LIBOR plus 415 basis points, after offering USD 25 mn.
  17. 17. Analysis & Forecast
  18. 18. Analysis & Forecast GDP: The recent increase in electricity and fuel prices will adversely affect the manufacturing sector as well as corporate earnings with negative consequences for the GDP growth rate in 2Q, 2013. However, these negative features are expected to be mitigated by the reduction in interest rates and the resulting increase in the demand for goods and services and investments. The government is targeting to reduce its budget deficit to 5.8% GDP for 2013. However, for the first four months of 2013 alone the budget deficit had reached 3.9% of GDP. Summary of Fiscal Performance (Jan – Apr 2013) Rs. bn % Change As % of GDP Jan - Apr 2013 (Target) Jan - Apr 2013 (Actual) Jan-Apr 2012 Deviation of Actual from Target Deviation of Actual from corresponding period in 2012 Jan - Apr 2013 Jan-Apr 2012 Revenue and Grants 365.2 314.8 328.7 (13.8) (4.2) 3.6 4.3 Expenditure 642.1 658.4 614.3 2.5 7.2 7.5 8.1 Overall Budget Balance (276.9) (343.5) (285.5) (24.1) (20.3) 3.9 3.8
  19. 19. Analysis & Forecast (cont…) Emerging Inflationary Pressures: The price increases in electricity and fuel and possible increase in public transport fares are likely to increase pressures on inflation during the remaining period of 2013. Besides, anticipated increase in bank lending will also have inflationary consequences. As a result, the rate of inflation (yoy) is likely to exceed 8% from August, 2013 and reach double digit levels in 4Q, 2013. Exchange Rate : The recent movements in LKR/USD has been led by higher import demand and bond outflows, as has been the case in most emerging markets and seems to be temporary. The expected lower imports and continued strength in remittances and tourism earnings are likely to narrow the current account deficit to 4.5% of GDP in 2013 from 6.6% in 2012. The expected USD inflows for various projects will have a favorable impact on LKR. Further, the government imposed 10% tax on gold imports after observing the recent increasing trend in gold imports. This indicates the government’s desire to keep imports under control. Accordingly the LKR/USD rate is likely to remain between130-132 during the remainder of 2013.
  20. 20. Analysis & Forecast (cont…) Moody's Changes Outlook on Sri Lanka's Sovereign Rating from Positive to Stable mainly due decline in the strength of the external payments position in the past two years and slowdown in the pace of fiscal consolidation Upward Pressures on Rating would build up if : A strengthening of the external payments position, as reflected in a sustainable rise in official foreign exchange reserves and reduction in the external vulnerability indicator well below 100%. A shift away from external debt financing towards greater reliance on foreign direct investment (FDI) could be a key element of such improvement. The maintenance of relatively strong GDP growth -- coupled with a steady reduction in fiscal deficits -- to the extent that the government debt burden declines at a faster pace to narrow the wide divergence from its peers and, more importantly, to reduce the high government debt-service burden. Downward Pressures on Rating would build up if :  A reversal in progress on fiscal consolidation, A substantial worsening of the country's external balance and foreign currency liquidity position Interest Cost as a % of Government Revenue: Interest cost on government debt as a percentage of government revenue increased to 48.3% in 2012 from 43.9% in 2011 and further increased to 56.1% during Jan – Apr 2013, compared to 53.2% in the corresponding period of 2012. Continued increases in this ratio could have destabilizing macroeconomic consequences.
  21. 21. 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 “One who conquers the mind, conquers the world’’ The Buddha