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Economic Capsule - February 2018

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Economic Capsule - February 2018

  1. 1. Economic Capsule February 2018 254th Issue Research & Development Unit Economic Capsule is now on
  2. 2. C O N T E N T S BANKING & FINANCE  Commercial Bank ends 2017 on exceptionally strong footing  Commercial Bank Performance for the year ended 31st December 2017  Commercial Bank receives Best Green Bank & Best Private Bank awards from International Finance  Commercial Bank sets new digital banking record ECONOMY & BUSINESS  Fitch Affirms Sri Lanka at 'B+'; Outlook Stable  Economic Update  Biz confidence rises for fourth consecutive month  Construction sector challenged by continued labor shortage – RIU  Sri Lanka real estate market 2018 –JLL  USD 75mn more from ADB to boost SMEs  Tariffs, not a revenue raising device- Harvard economist Robert Lawrence INTERNATIONAL  Asia Debt Binge to Dampen Growth But Not Derail It  Japan posts longest growth streak since 1980s bubble economy  German economy books strong finish to 2017
  3. 3. Condominium Industry in Sri Lanka October, 2014 Research & Development Unit Banking and Finance
  4. 4. < Research & Development Unit > Commercial Bank ends 2017 on exceptionally strong footing • Commercial Bank posted profit before VAT and NBT of Rs 28.064 bn for the year ending 31st December 2017 reflecting growth of 18.14%, a performance the Bank attributes to substantial core business growth through adherence to the fundamentals of ‘pure banking.’ • Gross income increased by a healthy 24.10% to Rs 115.594 bn, bolstered by interest income of Rs 103.034 bn, up Rs 22.296 bn or 27.62% primarily due to a significant growth in the Bank’s loan book over the 12 months. • CBC paid approximately 41% of its profit to the government as taxes in a year of volatility and headwinds, but posted typically robust growth in all key performance indicators to end 2017 on steadfast note. • Profit before income tax grew by 15.62% to Rs 23.183 bn, the lower rate due to the impact on the full year of the November 2016 increase in the VAT rate from 11% to 15%. • Profit after tax for the year improved by 14.25% to Rs 16.581 bn.
  5. 5. < Research & Development Unit > Commercial Bank Performance for the year ended 31st December 2017
  6. 6. < Research & Development Unit > Commercial Bank receives Best Green Bank & Best Private Bank awards from International Finance • Commercial Bank received the awards for ‘Best Green Bank’ and ‘Best Private Bank’ in Sri Lanka presented by International Finance Magazine (IFM) of the UK. • The Best Green Bank award recognizes the catalytic role Commercial Bank has played in promoting environmental sustainability through its lending for renewable energy projects and other initiatives that help reduce the environmental footprint of its clients, as well as the Bank’s own efforts to make its operations eco-friendly. • The Best Private Bank award is presented to banks that have introduced innovative banking products and offer a wide range of services to customers, regardless of size, public or private status.
  7. 7. < Research & Development Unit > Commercial Bank sets new digital banking record • A whopping Rs 662.95 bn was transacted through digital banking channels alone, by customers of the Commercial Bank in 2017. • This is the highest value the Bank has handled digitally in a single year since the launch of its Mobile and Online Banking platforms, which make up its ‘anytime, anywhere’ digital banking offering. • The remarkable growth in the use of these channels was reflected in an increase of 31.31% in digital transaction values, and a 16.45% increase in the number of digital transactions conducted in 2017 over the previous year.
  8. 8. Condominium Industry in Sri Lanka October, 2014 Research & Development Unit Economy & Business
  9. 9. < Research & Development Unit > Fitch Affirms Sri Lanka at 'B+'; Outlook Stable • According to Fitch, Sri Lanka's revised policy framework supports macroeconomic stability. In Fitch's view, policies aimed at fiscal consolidation and maintenance of a disciplined monetary stance under the framework of the three-year IMF-supported programme have improved Sri Lanka's policy coherence and credibility. • Fitch's outlook for the banking sector is negative, based on Fitch assessment of a difficult operating environment. This is reflected in an increase in NPLs following a period of rapid credit growth and some capitalisation pressures. • Fitch Ratings has affirmed Sri Lanka's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B+' with a Stable Outlook. Cont..
  10. 10. < Research & Development Unit > Fitch Affirms Sri Lanka at 'B+'; Outlook Stable RATING SENSITIVITIES The main factors that, individually or collectively, might lead to positive rating action are: • A further improvement in external finances supported by higher non-debt creating inflows or a reduction in external sovereign refinancing risks from improved liability management. • Continued improvement in public finances underpinned by a credible medium-term fiscal strategy, including a further broadening of the government revenue base. • Continued implementation of economic policies that support underlying macro stability. The main factors that could lead to negative rating action, individually or collectively, are: • Deterioration in policy coherence and credibility, leading to a loss of investor confidence, or a derailment of the IMF supported programme that leads to external funding stress. •Reversal of fiscal improvements that leads to a failure to stabilise government debt ratios.
  11. 11. < Research & Development Unit > Economic Update Nationwide Inflation Slows Down •Inflation, as measured by the change in the National Consumer Price Index (NCPI) (2013=100), Decreased to 5.4% in January 2018 from 7.3% in December 2017, on year- on-year basis. This decline is due to the high base prevailed in January 2017 as well as the monthly decline in Food prices in January 2018. •The NCPI Core inflation, which reflects the underlying inflation in the economy, decreased to 2.1 % in January 2018 from 2.7 % in December 2017 on year-on-year basis. Credit to Private Sector Decline Further •Growth of credit to the private sector decelerated to 14.7% (YoY) in December 2017 from 21.9% at end 2016 (Average growth was 18.3% in 2017 compared to 25.9% in 2016) •The cumulative expansion in credit during 2017 was Rs. 617.4 bn in comparison to Rs. 754.9 bn in 2016. External Trade Performance – December 2017 •Export earnings: On a cumulative basis, export earnings recorded the historically highest value of USD 11.4 bn in 2017 (10.2% YoY growth) mainly due to the notable increase in tea, textiles and garments, and petroleum products exports. The leading markets for merchandise exports of Sri Lanka during 2017 were the USA (25.6%), the UK (9.1%), India (6.1%), Germany (4.7%) and Italy (4.7%) accounting for about 50% of total exports. Cont..
  12. 12. < Research & Development Unit > Economic Update (cont…) External Trade Performance – December 2017 (cont…) •Import expenditure: On a cumulative basis, import expenditure recorded the historically highest value of USD 21 bn in 2017 (9.4% YoY growth). •This was largely led by higher imports of fuel and rice. However, import expenditure on machinery and equipment, sugar, spices and fertilizer declined during the year. India (21.4%), China (18.8%), UAE (7.5%), Singapore (6.2%) and Japan (5.0%) were the main import origins accounting for about 59 % of total imports during 2017. • Cumulative trade deficit increased to USD 9,620 mn in 2017 from USD 8,873 mn in 2016.
  13. 13. < Research & Development Unit > Biz confidence rises for fourth consecutive month • The latest edition of business magazine LMD reports an increase of five basis points in the LMD-Nielsen Business Confidence Index (BCI), from 122 in December to 127 in January 2018. • LMD notes that this is the first time since June 2016 that the BCI has improved over four consecutive months with the index standing nine basis points above its 12 month average. • Nielsen’s Managing Director notes that “apart from visible activity in the construction or infrastructure space, business leaders say the Government’s efforts to improve the investment climate are bearing fruit and foreign direct investment (FDI) in specific sectors is increasing.”
  14. 14. < Research & Development Unit > Construction sector challenged by continued labour shortage – RIU • The Sri Lankan construction industry is worth approximately USD 8Bn and is already under strain owing to rising construction costs. • According to a report done by the Real Estate Intelligence Unit (RIU), the industry is challenged by a shortage in skilled construction workers due to two factors;  firstly, there is a large number of potential labour who seek employment as trishaw drivers.  secondly, due to worker migration to the Middle East where there is a much higher earning potential. • The industry is plagued with a high labour turnover and increasing labour demand has resulted in long delays for work to be completed. • Further, there is an upward pressure on overall payments to labours fuelled by the shortage. • According to RIU, the increase in wages can cause the cost of construction to go up by at least 7%.
  15. 15. • According to Jones Lang LaSalle (JLL) a global real estate services firm, in 2017, about 95% of Sri Lanka’s ‘Grade A’ office space of about a million square feet was occupied, and a larger proportion of the demand was driven from Domestic firms. 2018 indicates positive signs towards the commercial property sector and the overall economic growth of the country. Positive signs towards Sri Lanka’s commercial property • Due to continuous economic growth as well as many private sector businesses and startups springing in the country, the need for physical workspace has increased. • This has resulted in an increase in demand towards commercial properties in the recent years. Cont.. Sri Lanka real estate market 2018 –JLL
  16. 16. < Research & Development Unit > < Research & Development Unit > Port City will become a reality during 2018 Sri Lanka real estate market 2018 –JLL (cont…) Investors sitting on land banked plots which have traditionally commanded premium prices, by virtue of sea view and CBD location, might discover weakened buyer sentiment in the face of competition from clean title, serviced development plots with sea front location, being released into the market by Port City during 2018. • Port City will become a reality during 2018 with the launch of serviced development plot sales to second-tier investors/developers and the commencement of a mixed use pilot project to showcase the master planned mega project to a global audience. Cont..
  17. 17. < Research & Development Unit > < Research & Development Unit > Residential & Apartments • With significant unsold inventory remaining at many high profile Colombo projects, new supply entering the market with ITC, The One and One Colombo (Tata), the luxury residential sector already looked set for another challenging year, but suffered another body blow in the 2018 budget, with the reintroduction of 15% VAT on new condominium sales. January has seen brisk sales for some projects and disappointment for others, so the picture remains unclear, but with over-supply concerns and increased buyer costs to contend with, developers will have to discount/incentivize and up their marketing game, if sales volumes are to be maintained. Sri Lanka real estate market 2018 –JLL (cont…) • Despite a slowdown in construction as a response to lacklustre sales, increased supply, especially in the luxury sector, at projects such as Astoria and Shangri La will feed into the market during 2018, as buy-to-let investors receive their apartments. Cont..
  18. 18. < Research & Development Unit > < Research & Development Unit > Sri Lanka real estate market 2018 –JLL (cont…) • While there is still sufficient demand in the market to absorb the majority of this new inventory, older apartment blocks which might be displaying signs of age or lacking in amenities, will come under increased pressure to secure tenants unless asking rents reflect the disparity in appeal. Residential & Apartments
  19. 19. USD 75mn more from ADB to boost SMEs < Research & Development Unit > • The Government signed a loan agreement with Asian Development Bank (ADB) to obtain additional funding for a Small and Medium Enterprise (SME) Line of Credit Project. • The Finance Ministry said in a statement the Government had obtained ADB Financial assistance of USD 100mn in 2016 to finance the SME Line of Credit Project. The objective of the project was to strengthen the SME sector in Sri Lanka by facilitating access to finance and expand the employment opportunities in the sector.
  20. 20. < Research & Development Unit > Tariffs, not a revenue raising device - Harvard economist Robert Lawrence • The decline of exports as a percentage of GDP since the early 2000’s, correlates with the increase of import tariffs. • According to him, Sri Lanka should instead move towards a simpler tariff structure, and implement direct taxes on things like income and property to maintain revenue. “90% of the country’s tariffs should be in the simple schedule, and then there may be some exceptions,” he said noting that those exceptions should be for firms that actually had long-run growth potential. • Sri Lanka must reform its imports tariffs in order to increase exports, according to Harvard economist Robert Lawrence. • Tariffs are the wrong way to raise revenue,” he said. Lawrence is the Faculty Chair of the Practice of Trade Policy Executive Program at the Harvard Kennedy School.
  21. 21. Condominium Industry in Sri Lanka October, 2014 Research & Development Unit International
  22. 22. < Research & Development Unit > Asia Debt Binge to Dampen Growth But Not Derail It- Oxford Economics Ltd • Asia’s soaring levels of debt will weigh on growth over the next decade - especially in China, Malaysia, Thailand and India - but it won’t be enough to derail the region’s economy. • That’s because of mitigating factors such as high domestic savings and resilient supply side dynamics, according to Oxford Economics Ltd.-Singapore. • "These should act as substantial buffers. Even with growth slowing to 3.5% by 2030 (from around 5%currently), it is expected that Asia will remain the largest contributor to global growth in the long run.“ • Oxford forecasts that in the long run, the debt of households and non-financial companies will remain above 100% of gross domestic product in most Asian economies, excluding Japan. Source: Bloomberg
  23. 23. < Research & Development Unit > Japan posts longest growth streak since 1980s bubble economy • Japan’s economy posted its longest continuous expansion since the 1980s boom as fourth quarter growth was boosted by consumer spending, moving Prime Minister Shinzo Abe’s revival plan a step closer to vanquishing decades of stagnation. • The economy expanded at a 0.5% annualized rate in October-December, less than the median estimate for annualized growth of 0.9%. • Japan’s economy grew a real 1.6% in calendar 2017, the fastest increase since a 2.0% expansion in 2013. Source: Reuters
  24. 24. < Research & Development Unit > German economy books strong finish to 2017 • Europe’s largest economy Germany expanded 0.6% between October and December, official data showed, highlighting the country’s economic strength as politicians struggle to form a government. • The figure follows up growth of 0.9% in the first quarter of 2017, 0.6% in the second, and 0.7% in the third – all adjusted for price, seasonal and calendar effects. • Combined, the quarterly results add up to 2.2% expansion over the full year, the fastest rate since 2011. Source: Bloomberg “Looking ahead, the same fundamentals which have supported growth in 2016 and 2017 should still be in place this year”, economist Carsten Brzeski of ING Diba bank said, pointing to low interest rates, a strong labour market and a synchronised upturn across the 19-nation euro zone.
  25. 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. < Research & Development Unit >

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