ECONOMIC CAPSULE January 2013 < Research & Development Unit >
CONTENTS FINANCIAL SECTOR NEWS ECONOMIC & BUSINESS NEWS Sri Lanka to Grow by 6.8 % IFC AMC Invests USD 75 mn in Commercial Bank to Support Small Businesses in Sri Lanka in 2013: World Bank New Leasing Offers on Isuzu Vehicles from Commercial Bank Sri Lanka on Fast Track to Cut Flood Risk, Modernize Capita and Sathosa Motors External Sector Performance, December 2012 Commercial Bank Commissions Drive-through ATM at Reid Avenue Banking Sector Performance 2012 Inflation, January 2013 CRIB, IFC to Improve Credit Access for Small Biz Worldwide Cost of Living 2013 SNIPPETS Analysis & Forecast Sri Lanka: Medium Term Macroeconomic Framework Economic Challenges Faced by Sri Lanka Latest IMF GDP Projections The World Economy is Improving< Research & Development Unit >
IFC AMC Invests USD 75 mn in Commercial Bank to Support Small Businesses in Sri Lanka IFC, a member of the World Bank Group, is investing USD 75 mn (approximately Rs 9.6 bn) in Commercial Bank of Ceylon, through a fund managed by its Asset Management Company (AMC), to expand Commercial Bank’s operations and increase access to finance for small and medium enterprises (SMEs). This investment with Commercial Bank is IFC’s largest investment in Sri Lanka’s financial markets to date, and is expected to increase access to finance for up to 16,000 small businesses and generate about 170,000 direct and indirect jobs by 2017 through lending to small and medium enterprises. It is also IFC Asset Management Company’s first funding in South Asia, and the largest subordinated debt issued for any bank in Sri Lanka. This investment through the AMC-managed IFC Capitalization Fund will qualify as capital to help Commercial Bank expand its operations, allowing for small businesses across the country to gain better access to credit.
New Leasing Offers on Isuzu Vehicles from Commercial Bank and Sathosa Motors Commercial Bank once again partnered with Sathosa Motors PLC to offer attractive terms and benefits on leases covering the latter’s complete range of Isuzu lorries and buses. The promotion offers a minimum discount of Rs 50,000 on Isuzu lorries and Rs 150,000 on Isuzu buses purchased through this joint promotion, while Sathosa Motors also throws in six labour free services to the package.Commercial Bank Commissions Drive-through ATM at Reid Avenue Commercial Bank commissioned its first drive-through Automated Teller Machine in Sri Lanka, bringing a new dimension in convenience to busy customers. The drive-through ATM, is located at the Bank’s Reid Avenue branch, Thunmulla.
CRIB, IFC to Improve Credit Access for Small BizIFC, a member of the World Bank Group, is working with Sri Lanka’s Credit Information Bureau (CRIB) to make it easier for up to 37,000 micro and small businesses to access loans and other forms of financing using movable assets as collateral.IFC will provide advice and assistance to CRIB to support the legal framework which will enhance financing for firms against movable assets such as inventory and equipment.Expanding the collateral registry to include non-fixed assets, all of which are more readily available to small businesses, makes it easier for them to obtain financing even without traditional mortgages like land or property.
Sri Lanka to Grow by 6.8 % in 2013: World BankSri Lankas economic growth will pick up to 6.8 % in 2013 helped by renewed external demand, better agriculture output, the World Bank stated in a report on global economic prospects.Sri Lankas economic growth is expected to accelerate to 7.2 % by 2015, which was more in line with underlying economic fundamentals, compared to 8.0 % levels seen in 2010 and 2011 with post-war reconstruction. Source: World Bank
Sri Lanka on Fast Track to Cut Flood Risk, Modernize CapitalSri Lanka has begun a fast track execution of a USD 220 mn World Bank funded plan to cutfloods, boost drainage as well as create waterfrontentertainment areas in a bid to modernize the capitalColombo.The Colombo metropolitan region produces almost 60% of gross domestic product and 80 % of industrial output,Rosanna Nitti, senior urban specialist at Sri Lankas WorldBank office stated. "Sri Lanka needs to tap the competitiveadvantages of the Colombo metropolitan region to spearheadand accelerate growth."The project which officially kicked off on July 2012 ties inwith Sri Lanka governments other plans to modernize the cityincluding the outer circular project funded by other donors.Colombo was severely flooded in 2010 with activities in mostareas coming to a standstill but even short spurts of intenserainfall can flood roadways as the cities ageing storm waterdrains overflow.
Inflation, January 2013 CCPI (%) CCPI Core* (%) Period Y-o-Y A.A. Y-o-Y A.A. Dec 12 9.2 7.6 7.6 5.8 Jan 13 9.8 8.1 7.3 6.1 This was mainly due to price increases in several varieties of food items on account of crop damages and supply disruptions due to adverse weather conditions that prevailed in the island. (CBSL)According to CBSL, Inflation is projected tomoderate from March 2013 and reach mid-singledigit levels thereafter. Source: CBSL
Worldwide Cost of LivingTokyo has reclaimed its place as the worlds most expensive city, according to thelatest cost of living index from the Economist Intelligence Unit. The Japanese cityhas ranked first 14 times in the last 20 years; only Zurich (which was first last yearthanks to its strong currency), Paris and Oslo have also placed first in this period.The index is a weighted average of the prices of 160 products and services,with New Yorks figure set to 100 to provide a base for comparisons. Source: Economist Intelligence Unit , The Economist
Capital Investment, LinksSNIPPETS—SNIPPETS—SNIPPETS—SNIPPETS—SNIPPETS—SNIPPETS to Global Economy Key: USD 290mn Soft Loan from Korea IFC CEO Sri Lanka is to get up to USD 290 mn from Sri Lanka needs to Korea for renewable energy and infrastructure promote capital under a framework agreement , the Korean availability to encourage embassy stated. investment and find ways BOI Appoints New Chairman Under the arrangement, the two Governments to link with the global Sri Lankas Board of Investment appointed are expected to work closely to develop a range economy to achieve Dr. Lakshman Jayaweera, a Sydney of projects including construction of sustainable growth, based chemical engineer and entrepreneur, administrative complexes, renewable energy stated the IFC Executive as its chairman and director general. plants and infrastructure development. Vice President and CEO Jin-Yong Cai. Private SL to Develop Trincomalee Port City with ADB sector is challenged by Finance lack of long term finance The Asian Development Bank (ADB) has agreed and infrastructure to extend USD 85 mn to provide a new look for constraints. He US Trade Mission in Sri Lanka Trincomalee via an Integrated Urban especially highlighted the Development Project. need to concentrate on A multi-sector US Trade The overall objective of the project is to improve SMEs. Mission – the first since the end planning and for the delivery of priority of the conflict visited Sri Lanka “One major constraint in infrastructure and local services in the to explore business and our view is the investment opportunities. Trincomalee Urban Development area. infrastructure, particularly if you want to grow the The Trade Mission includes economy at eight per companies in the education Canal Development cent on consecutive sector, design consulting Sri Lanka will also rehabilitate a colonial era years. We need power, services and engineering, food canal north of the capital Colombo for tourism transportation, water and industries, healthcare, airline Cont promotion and to improve the livelihoods of waste treatment. These support, and infrastructure … people living in the area. A 14 kilometer stretch of are critical for what I term development . Hamilton Canal running from Negombo to the ‘support infrastructure’.
SNIPPETS—SNIPPETS—SNIPPETS—SNIPPETS—SNIPPETS—SNIPPETSLOLC Micro Credit Secures Largest U.S. Government Slams S&P with USD 5 bn Fraud LawsuitMicrofinance Syndicated Loan ofUSD 55.5 mn The US government is seeking USD 5 bn in its civil lawsuit against Standard & Poors, accusing the ratings service of defrauding investors, in one of the most ambitious cases yet from theLOLC Micro Credit Ltd. (LOMC) Justice Department over conduct tied to the financial crisis.secured a syndicated loan of USD 55.5mn facilitated by a reputed consortium The United States stated S&P inflated ratings and understated risks associated with mortgageof Development Financial Institutions securities, driven by a desire to gain more business from the investment banks that issued those(DFIs) from around the world. securities. S&P committed fraud by falsely claiming its ratings were objective, the lawsuit stated. The Justice Department and multiple states are also discussing suing Moodys Corp for defrauding investors, according to people familiar with the matter, but any such move will likely wait until a similar lawsuit against rival Standard and Poors is tested in the courts.
Analysis & ForecastSri Lanka: Medium Term Macroeconomic Framework 2012 Projections Indicator Unit (Est) 2013 2014 2015 Real Sector Real GDP Growth % 6.5 7.5 8.0 8.3 GDP Deflator % 8.5 7.0 6.0 5.0 The projections for 2013 are based on the following assumptions Total Investment % of GDP 30.3 31.0 32.0 32.5 Global economy expected to grow by around External Sector 3.3%. Trade Balance % of GDP -15.1 -14.4 -13.3 -12.7 Commodity prices expected to remain Current Account Bal % of GDP -5.5 -4.7 -3.3 -2.0 reasonably stable. Overall Balance USDmn 100 510 795 1,925 Advanced economies expected to maintain Fiscal Sector accommodative policies. Current Account Bal % of GDP -0.8 -0.1 0.8 1.4 Domestic weather conditions expected to be Overall Budget Deficit % of GDP -6.2 -5.8 -5.2 -4.7 favourable. Government Debt % of GDP 81 78 75 71 Monetary Sector Broad Money Growth (M2B) % 16.2 15.0 15.0 14.0 Source: Central Bank of Sri Lanka – Road Map 2013
Analysis & Forecast Economic Challenges Faced by Sri Lanka The problem of twin deficits (budget and trade/current Dual deficits pose challenges in several developing countries account) and implementing structural reforms that will help to strengthen the framework to address those problems. The budget deficit has been the main source of instability in the system over the last thirty five years. As a result, Sri Lanka has been a high inflation, high nominal interest rate and over-valued currency economy.Chronic imbalances require more and more external borrowing… The current account of the budget has been in deficit every single year since 1988 i.e. the government has borrowed to meet recurrent expenditure every year for close to 25 years. This "living beyond ones means" for so long has been possible because of the grants and very concessional loans (around 5% of GDP) received as budgetary financing. With graduation to lower-middle-income country status, a new paradigm has come into play. Addressing the challenges posed by this has been postponed by first sovereign borrowing in international capital markets and now foreign borrowing by banks and corporate. However, it cannot be done for much longer and the authorities will have to get to grips Source: World Bank with the fiscal deficit at some point soon. Cont
Analysis & ForecastEconomic Challenges Faced by Sri Lanka (cont…) The difficult policy challenge for a developing country facing external shocks is: How to maintain macroeconomic stability, without cutting investments in physical (infrastructure) and human capital (education) that are essential for long term growth and, without imposing the burden of adjustment on the poor Exchange Rate Stability: The Fatal Illusion International experience shows that access to foreign funds dries up quickest for countries with chronic current account and fiscal deficits When the pressure on the current account of the balance of and high dependence on short term commercial borrowings. payments and exchange rate arise from deep rooted structural imbalances, attempting to stabilize the nominal exchange rate is a This does not mean the answer is in going back to the failed policies sure path to a crisis: of the past, putting up shutters through trade restrictions and other The commitment – implicitly or explicitly - to any kind of nominal barriers, and de-linking the domestic economy from the global exchange rate target is particularly dangerous in the context of a economy. liberal capital account as the private sector is likely to under-hedge Over time, these restrictions induce resources (labour, land, capital) the exchange rate risk involved in foreign currency borrowings. This away from other productive sectors, including exports, increasing increases the chances of a serious banking crises. their costs, so that the initial reduction in imports is matched by a Chronic current account deficits, if financed by foreign debt - whether reduction in exports, so that there is no net effect on the current private or government - can only end up in sustained downward account. pressure on the exchange rate although there will be ups and downs along that downward path. Cont
Analysis & ForecastEconomic Challenges Faced by Sri Lanka (cont…) This is the international experience of numerous countries over many decades: import restrictions end up being a tax on exports. They are not a long term answer – only a fetter on long term growth. Structural measures related to SOE reform. Addressing low productivity, particularly in agriculture and the public service; factor and product market reforms; improving the investment climate, particularly through consistent, predictable and transparent policies; strengthening education, training and skills development; R&D; innovation etc that are well known. Source: Prof. Sisira Jayasuriya & Dr. Indrajit Coomaraswamy
Analysis & Forecast InternationalThe World Economy is Improving. But not as much as some Investors seem to think…There are three reasons to feel more hopeful about the world economy. First, several disasters have been avoided.Europe’s politicians have shown themselves determined to save the single currency. America’s politicians avoided falling off the “fiscal cliff”. And now that Republicans in the House of Representatives have offered to extend the debt ceiling for three months, there is hope that America’s fiscal battles will be waged by negotiation rather than blackmail. All this has boosted financial markets—and should encourage firms and consumers to invest and spend more. A second reason for cheer comes from central banks’ activism.In September the European Central Bank promised unlimited bond-buying to keep the euro together. Then the Federal Reserve pledged to hold interest rates down until America’s unemployment rate falls below 6.5%, along with open-ended monthly bond purchases. The Bank of Japan, under pressure from a new government, appeared to join the club of the bold. It doubled its inflation target, to 2%, promising to buy assets on an open-ended basis from 2014. With central banks pledging to buy more bonds for longer, which keeps their yields low, it is no surprise that investors are piling into riskier assets. Indeed, that’s partly the point: higher share prices make investors more likely to boost consumption. Evidence that growth may be accelerating, at least in some places, provides the third reason for optimism.Much of the good news stems from China, where GDP growth jumped in the last three months of 2012, to 7.9% from 7.4% in the previous quarter. The latest figures, from retail sales (up 15.2% year-on-year in December) to industrial production (up 10.3%), have all been better than expected. The ebullient also point to America, where the housing-market recovery is gathering strength.
Analysis & Forecast InternationalThe World Economy is Improving. But not as much as some Investors seem to think… (cont…)Curb your enthusiasm…These are all good reasons for feeling better about the world economy’s prospects. But they need to be put into context.Politicians may have avoided catastrophes, but their policies are still flawed.America’s cliff-avoiding tax deal, for instance, implies an immediate fiscal squeeze of 1-1.5% of GDP without any resolution of the country’slong-term deficit. That tightening—much of which comes from a rise in payroll taxes on all workers—hasn’t yet shown up in the data. But itsoon may, and in an economy that has been growing at only 2% a year, the hit will be noticeable, perhaps more powerful than the boost froma healthier housing market.The prospect of central bank activism is not all it is cracked up to be. The fine print of the Bank of Japan’s promises was much less boldthan the headlines. The European Central Bank’s pledge to hold the single currency together does not extend to a willingness to loosenmonetary policy further. And even at the Fed, worries about the unintended costs of unlimited bond-buying may grow.The biggest reason for caution, though, lies in the gap between financial-market optimism and economic reality.That gap is widest in Europe. The single currency may not be about to fracture, but its economies are still in deep trouble: the IMF expectsthe euro-zone economy to shrink by 0.2% this year. Those on the periphery are stuck in recessions. Even those in the core are lookingweaker. With more fiscal austerity ahead and credit tight, it is hard to see how Europe returns to growth. The reforms needed to make theeuro work are far from complete. America looks set to administer itself another dose of short-term austerity without addressing its long-termfiscal problems. Japan’s economy needs deep changes. The latest bout of optimism in the markets is welcome, but governments should notlet it infect them with a dangerous complacency. Source: The Economist
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