Economic Capsule - September 2012


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Economic Capsule - September 2012

  1. 1. ECONOMIC CAPSULE September 2012 < Research & Development Unit >
  2. 2. CONTENTS FINANCIAL SECTOR NEWS  ECONOMIC & BUSINESS NEWS    Commercial Bank of Ceylon and Dialog partner for Managed Services  SL Bank Credit Volumes Fall to 18-month Low in July  Etisalat and Commercial Bank gives a Mini-ATM Facility to Phones…  Credit Expansion Falls by Half in 2Q 2012 : CBSL  Sri Lankan Economy – Key Figures and Forecasts  Service Points Openings  Global Economic Prospects - World Economic Outlook  Macro Trends< Research & Development Unit >
  4. 4. Commercial Bank of Ceylon and Dialog partner for Managed Services  Dialog Enterprise, the corporate solutions arm of Dialog Axiata PLC has partnered with Sri Lanka’s largest listed bank, Commercial Bank of Ceylon PLC to provide integrated enterprise communication solutions, which would ensure uninterrupted and highly secure connectivity leading to smooth banking services for Commercial Bank customers.  The new data centre hosted at the Dialog Axiata Internet Data Centre (IDC) provides a secure data communication solution providing connectivity between Commercial Bank branches, Head Office and Dialog IDC.  The Dialog Axiata IDC also serves the banking community at large by hosting the country’s Society for Worldwide Interbank Financial Telecommunication Bureau (SWIFT Bureau), and has undergone and passed audits by SWIFT Internal Audit.< Research & Development Unit >
  5. 5. Etisalat and Commercial Bank gives a CBC Share Price Mini-ATM Facility to Phones… Movement  Etisalat Sri Lanka has partnered with Commercial Bank to introduce mobile banking via USSD (Unstructured Supplementary Service Data) technology, a global system for mobile communication used to send a text between a mobile phone and an application program in a network.  Etisalat users can now enjoy the convenience of conducting their banking activities with Commercial Bank through their mobile phones while accessing the menu driven USSD portal.  The USSD portal can be accessed by simply dialling #8823#. Once a customer who is registered with the Bank for this service, dials into the USSD portal, they simply have to select the required function and enter a Personal Identification Number (PIN) provided by the bank for authentication and the system makes the desired transaction.  Through this service, Etisalat users who have accounts at Commercial Bank can make balance and credit card inquiries, bill payments, fund transfers, PIN changes, top up credit on prepaid connections and obtain micro statements.  This also offers SMS Banking, ReLoad and Tri-lingual Mobile Banking facilities to mutual clients. It’s like having a mini-ATM facility in your phone.< Research & Development Unit >
  6. 6. Service Points Openings Commercial Bank 222 Maskeliya Branch 223 Wellawatte CSP 224 Makola CSP 225 Hendala CSP< Research & Development Unit >
  8. 8. SL Bank Credit Volumes Fall to 18-month Low in July  Loans from Sri Lankas commercial banks to state and private borrowers fell to 10.1 billion rupees in July 2012, down from 13.5 billion rupees in June, the lowest since January 2011, partly helped by a sovereign bond sale.  Loans to private borrowers rose 35.7 billion rupees to 2,270.6 billion rupees in July up 31.6% from a year earlier, according to the data released by the CBSL.  Credit to state enterprises fell in absolute terms to 261.5 billion rupees in July from 275.6 billion rupees a month earlier, though up 82.4% from 2011 July.  Total credit to state declined by 25.6 billion rupees, with rupee loans from commercial banks to the central government steady at 559 billion rupees in July from 560.3 billion rupees a month earlier (June).  Loans from foreign currency banking units rose to 144.4 billion rupees from 125.7 billion rupees.  The foreign exchange purchase drove up excess liquidity in the banking system (the clearing balance) as high as 58 billion rupees on July 26.< Research & Development Unit >
  9. 9. Credit Expansion Falls by Half in 2Q 2012 : CBSL  Efforts by the CBSL and the Government earlier this year to rein in high demand for imports and credit are yielding results.  Reflecting the impact of the policy measures taken, credit obtained by the private sector has decelerated since the second quarter of 2012, and the policy measures in place are expected to help ensure that the growth of credit will be within the desired level at year end according to the CBSL.  Average monthly credit decelerated to around Rs.27 bn during the period from April-July compared to the average monthly credit expansion of about Rs.52 bn in the first three months. The growth of broad money (M2b) also eased to below 20% in July for the first time in 2012.  According to CBSL, the amount of credit available has been sufficient to facilitate reasonably robust economic activity, and as per estimates of the Department of Census and Statistics, the economy recorded a growth rate of 7.2% during the first half of 2012.< Research & Development Unit >
  10. 10. Sri Lankan Economy – Key Figures and Forecasts Gross Domestic Product - GDP  The GDP growth is expected to recorded 6.5% in 2012 (according to the Treasury Secretary) mainly due to the impact of the drought, and depressed global economic conditions.  The economy is poised to achieve 6.8% GDP growth in 2012 according to CBSL, Standard Chartered Bank (SCB) and IMF.  Downside risks: 1. The euro area, which accounts for 30 % of Sri Lanka’s exports, remains vulnerable to event risk and is expected to stay weak. 2. With reduced hydropower supply due to a drought, Sri Lanka has had to shift to higher-cost thermal power generation. 3. The drought has had a significant impact on agricultural output, destroying close to 50,000 hectares of rice, according to the Finance Ministry. This has resulted in increased subsidies, with LKR 10bn allocated to drought relief for farmers. 4. The SCB does not expect the 18% credit ceiling on banks’ lending, which has considerably slowed domestic consumption, to be lifted in the near term, as the central bank’s tight monetary policy stance is likely to prevail until inflation moderates.< Research & Development Unit >
  11. 11. Sri Lankan Economy – Key Figures and Forecasts (Cont…) Gross Domestic Product - GDP (Cont…)  According to SCB, the GDP growth rate is expected to moderate to around 6.3% in H2-2012 from 7.1% in H1, and inflation is also expected to moderate. GDP growth is expected to pick up to 7.5% in 2013 since domestic activities are expected to compensate for lower export growth in 2013. Fiscal Sector  Rising costs of imported fuel and higher interest rates applied pressure on finances at the start of the year.  Policy adjustments implemented in H1-2012 (including an increase in import duties to curb demand for imported consumer goods and a reduction in fuel subsidies) helped to reduce this pressure. An increase in revenue is expected in 2H, 2012.  Besides, according to the Treasury Secretary, P.B. Jayasundera, non-essential expenditure would be rolled over to the next fiscal year (2013).< Research & Development Unit >
  12. 12. Sri Lankan Economy – Key Figures and Forecasts (Cont…) Fiscal Sector (Cont…)  Additionally, since the government is keen on achieving the 2012 fiscal deficit target of 6.2% of GDP, a re- prioritization of capital expenditure of the government is expected to take place during the remainder of 2012.  The above measures are expected to reduce pressure on interest rates, liquidity position and inflation.  The SCB expects the budget deficit to be around 7.0% in 2012 due to losses at state owned enterprises (SOEs), electricity subsidies, and the impact of the drought.  Fiscal consolidation may prove challenging in the near term given that growth is expected to slow in H2, 2012 and tax collection on external trade has fallen short of targets. Higher interest payments and the increase in non-interest expenditure on wages and welfare spending this year have also contributed to fiscal slippage.  In 2013, steps to reduce current expenditure, broaden the revenue base and improve the efficiency of SOEs will be needed to keep the fiscal deficit within the forecast (SCB) of 6.5% of GDP and reduce public debt.< Research & Development Unit >
  13. 13. Sri Lankan Economy – Key Figures and Forecasts (Cont…) Government Debt — External Debt Short-Term Foreign Debt End June 2012  The key challenge is to manage the rollover risk overhang. SL should be content as long as there is sufficient confidence to roll As % of Foreign Debt 14.2% over the USD 3bn or so of the short-term foreign debt. As % of Total Debt 6.6%  SL is probably near the upper limit unless the country can expand repayment capacity by improving export performance and remittances.  Continued relationship with the IMF and maintaining SL’s credit ratings would be important. Government Debt — Domestic Debt  A large portion of current outstanding domestic gov. debt (40.71 %) is due to mature within 1–3 years. If this is left unattended, it would increase the rollover risk.  Key Risks are interest rates, the impact of slower GDP growth on revenue and additional pressures on expenditure due to drought relief, salaries etc.  SL faces difficulties in maintaining the momentum of capital expenditure without recourse to PPPs. Therefore, incremental investment has to come from the private sector.< Research & Development Unit >
  14. 14. Sri Lankan Economy – Key Figures and Forecasts (Cont…) Inflation  Demand driven inflationary pressures are expected to be reduced during the remainder of 2012 due to slowdown in economic activities and lower credit growth.  Although the Central Bank of Sri Lanka (CBSL) is mindful of higher inflation risks arising from domestic supply- side constraints and external factors, it is likely to keep policy rates on hold in the near term to avoid jeopardising growth.  A rate cut is likely in Q1-2013 as inflation moderates. The SCB expects a cumulative 50bps of rate cuts in 2013, taking the repo rate to 7.25% by end-2013. Interest Rates  Given the upward revision of SCBs inflation forecasts for the remainder of 2012, SCB expects the CBSL to maintain its anti-inflation stance via stable policy rates and tight banking system liquidity.  The SCB forecasts 1Y T-bill rates for Q3-2012 to be 13.50 % and for Q4-2012 to be 13.25%.  In 2013 SCB expects slowing growth, to prompt a shift in the Central Bank’s focus from containing inflation to supporting growth, paving the way for mild monetary easing in H1-2013.< Research & Development Unit >
  15. 15. Sri Lankan Economy – Key Figures and Forecasts (Cont…) Interest Rates (Cont…)  SCB forecast that the fiscal deficit will narrow to 6.5% of GDP in 2013 from an expected 7.0% in 2012. This should trigger a reversal of the upward movement in long end bond yields. Inflows Jan—July (in USD mn) 2011 2012 Growth (%) Workers’ Remittances 2,922.0 3,417.4 17.0  Robust remittance inflows and tourism receipts are FDI 394.1 451.7 14.6 likely to continue and should help to narrow the Portfolio Investments (Net) -74.0 205.1 377.2 current account deficit to 4.0% of GDP in 2013 from 6.1% in 2012. Commercial Banks’ Long-term - 927.5 - Foreign Currency Borrowings  Steady capital inflows, government bond issuance, Earnings from Tourism 451.4 560.4 24.2 and further IMF support in the form of an Extended Inflows to the Government 2,812.7 3,958.4 40.7 Fund Facility (still under negotiation) should help to of which, T’Bills and T’Bonds 595.4 1,725.0 189.7 finance the current account deficit and push the BoP further into surplus in 2013 (from an expected USD 2011 Mar ‘12 Jun ‘12 Jul ‘12 End ‘12 (SCB) 0.9bn surplus in 2012). BOP (in USD mn) (1061) (251) (320) 330.6 900 Source: Standard Chartered Asia Focus, 24 September 2012 “The Resurgence”< Research & Development Unit >
  16. 16. Sri Lankan Economy – Key Figures and Forecasts (Cont…) Exchange Rate Forecasts - Full Year 2011 2012 F 2013 F 2014 F  1Q 2013, USD/LKR - 125.00 (Frontier Research Forecast) GDP (Real % YoY) 8.3 6.8 7.5 7.7 - The improved Balance of Payments CCPI (Annual Avg - Increased foreign inflows 6.7 7.7 7.5 7.2 Change %)  End 2013, USD/LKR – 126.50 (SCB forecast) Policy Rate 7.00 7.75 7.25 7.00 - Debt inflows USD-LKR (End Period) 113.9 130.0 126.5 124.0 - Improvement in BoP Current A/c Balance - Revival of Risk appetite as global growth starts to pick up -7.6 -6.1 -4.0 -3.5 (GDP %) - Prolonged weakness in USD Fiscal Balance (GDP %) -6.9 -7.0 -6.5 -6.0 Source: Standard Chartered Asia Focus, 24 September 2012 “The Resurgence” Forecasts - Quarterly 1Q 2Q 3Q F 4Q F 2012 F 1Q F 2Q F 3Q F 4Q F 2013 F GDP 7.9 6.4 6.4 6.7 6.8 7.4 7.3 7.5 7.8 7.5 Inflation (YoY) 4.0 7.5 9.6 9.8 9.8 8.3 7.5 6.6 7.3 7.3 1 Year T-bill rates 11.32 12.88 13.50 13.25 13.25 - - - - N/A Exchange Rate 128.2 133.3 132.0 130.0 130.0 128.5 128.0 127.0 126.5 126.5 Source: Standard Chartered Asia Focus, 24 September 2012 “The Resurgence”< Research & Development Unit >
  17. 17. Global Economic Prospects - World Economic Outlook World Economic Outlook  Global output is expected to remain sluggish in advanced Projections 2011 2012 2013 economies but still relatively solid in many emerging markets World Output 3.8 3.3 3.6 and developing economies. Unemployment is likely to stay Advanced Economies 1.6 1.3 1.5 United States 1.8 2.2 2.1 elevated in many parts of the world. Euro Area 1.4 -0.4 0.2  In many advanced economies, injections of liquidity are Germany 3.1 0.9 0.9 France 1.7 0.1 0.4 having a positive impact on financial stability and output and Italy 0.4 -2.3 -0.7 employment, but the impact may be diminishing. Spain 0.4 -1.5 -1.3 Japan -0.8 2.2 1.2  In emerging markets and developing economies, activity has United Kingdom 0.8 -0.4 1.1 Emerging & Developing Economies 6.2 5.3 5.6 been slowed by policy tightening in response to capacity Russia 4.3 3.7 3.8 constraints, weaker demand from advanced economies, and Developing Asia 7.8 6.7 7.2 China 9.2 7.8 8.2 country-specific factors. India 6.8 4.9 6.0 ASEAN-5 1 4.5 5.4 5.8  The crisis in the euro area remains the most obvious threat to Brazil 2.7 1.5 4.0 the global outlook. U.S. legislators must soon remove the Consumer Prices Advanced Economies 2.7 1.9 1.6 threat of the fiscal cliff and raise the debt ceiling––if they fail Emerging & Developing Economies 7.2 6.1 5.8 to do so, the U.S. economy could fall back into recession, with London Interbank Offered Rate (%)2 deleterious spillovers to the rest of the world. On US Dollar Deposits 0.5 0.7 0.6 On Euro Deposits 1.4 0.6 0.2< Research & Development Unit >
  18. 18. Global Economic Prospects - World Economic Outlook (Cont…) Downside Risks:  Delayed or insufficient policy action in the euro area.  The looming U.S. “fiscal cliff” and delay in raising the U.S. debt ceiling. ISI Group projects USD 220 bn of fiscal tightening in the USA in 2013, or 1.4% of GDP. JPMorgan projects a slightly higher figure of USD 266 bn, or 1.7% of GDP. The IMF reckons fiscal policy will tighten more in America in 2013 than in Spain, Italy or Portugal. This fiscal tightening could push the US economy back into recession.  The risk of core inflation undershooting targets, especially in other advanced Europe.  Ongoing geopolitical risks and concern about associated potential disruption of oil supply.< Research & Development Unit >
  19. 19. Macro Trends< Research & Development Unit >
  20. 20. “Enthusiasm is the mother of effort, and without it nothing great was ever achieved” - Ralph Waldo EmersonThe 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