Economic Capsule - March 2013


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Economic Capsule - March 2013

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Economic Capsule - March 2013

  1. 1. < Research & Development Unit >March 2013E C O N O M I C C A P S U L E
  2. 2. FINANCIAL SECTOR NEWS  Commercial Bank Bags Best Bank Awardfor the 15th Time Commercial Bank Ranked Sri Lanka‟s „Most Desired‟Employer Customer Service Points OpeningsECONOMIC & BUSINESS NEWS  Sri Lanka‟s Economy Grows by 6.4% in 2012 Sri Lanka Faces Growth and External Pressures: Moody‟s External Sector Performance - January 2013 Inflation Eases in March 2013 Credit to Private Sector  Sri Lanka Classified Less Indebted by US-ESCAP: CentralBank Sri Lanka Tourism Arrivals up 13.4% in January India Eases Restrictions on Sri Lankan Exports Top Chinese Trade Delegation Visits Sri Lanka Cyprus: Financial Crisis Fitch Upgrades Philippines to Investment Grade ADB Global Outlook Sri Lanka: Economic Prospects< Research & Development Unit >C O N T E N T S
  4. 4. Commercial Bank has set yet another record, winning the „BestBank in Sri Lanka‟ title for the 15th consecutive year, in an annualranking published by Global Finance magazine for the past 20years.The magazine‟s list of the 22 „Best Emerging Markets Banks inAsia,‟ selected after an in-depth survey, is to be published in itsMay 2013 issue.Commercial Bank Bags Best Bank Awardfor the 15th Time< Research & Development Unit >
  5. 5. Commercial Bank has been ranked number one in a survey of‘Employers of Choice’ in Sri Lanka, published in the March 2013issue of LMD magazine. The Bank achieved an Employer ChoiceIndex of 105 in the survey conducted by TNS Lanka. The objective of the survey was to benchmark corporate entitiesand organisations as preferred employers in Sri Lanka. In its reporton the survey, LMD magazine states that “Commercial Bank wins aseal of approval as the most desired employer in Sri Lanka.” The magazine listed 42 companies in the ranking, which includestwo global banks, multinationals, leading Sri Lankan conglomeratesand top apparel manufacturers.< Research & Development Unit >Commercial Bank Ranked Sri Lanka’s‘Most Desired’ Employer
  6. 6. < Research & Development Unit >Customer Service Points OpeningsCommercial Bank
  7. 7. FINANCIAL SECTOR NEWS< Research & Development Unit >ECONOMIC & BUSINESS NEWS
  8. 8. < Research & Development Unit >Sri Lanka’s Economy Grew by 6.4% in 2012Sri Lanka’s economy expanded by 6.4% in 2012, slowing from a record8.2% growth in 2011.The economy grew 6.3% in 4Q, 2012 over the corresponding period ofthe previous year, picking up from a three-year low of 4.8% in 3Q, 2012.Sector 2011 2012ServicesGrowth % 8.6  4.6Share of GDP % 59.5 58.5IndustryGrowth % 10.3 10.3Share of GDP % 29.3 30.4AgricultureGrowth % 1.4  5.8Share of GDP % 11.2 11.1GDP growth % 8.3  6.4
  9. 9. < Research & Development Unit >Sri Lanka Faces Growth and External Pressures: Moody’s Sri Lankas economy faces slower growth and elevated external pressure in the year ahead. Although the government will likely continue to make gradual progress in reducing its deficit,the debt burden will remain high. The absence of a new funding program is credit negative from the perspectives of externalpayments and growth. The government will continue to gradually reduce its budget deficit, but the composition ofdeficit reduction will be key. Supplier cash arrears, weak structural revenue reform and contingent liabilities in the SOEsector are concerns. High inflation and rapid credit growth are risks to macroeconomic stability.Cont…
  10. 10. < Research & Development Unit >Sri Lanka Faces Growth and External Pressures: Moody’s (cont…) Moodys External Vulnerability Indicator (EVI)- which gauges if foreign reserves areadequate to cover short-term external debtand long-term debt maturing over the nextyear in the event of sudden stop in externalcredit extension - is expected to remain highat 124% in 2013, from 132% in 2012. This level is appreciably above the 100%threshold of reserve coverage for externalcreditors. This is partly because higher commercialbank issuances, which are classified asbanking sector external liabilities havecontributed to outstanding short-term debt.132% in2012
  11. 11. < Research & Development Unit >External Sector Performance - January 2013Category Jan 12USD mnJan 13USD mnGrowth(%)JanuaryExports 888.2 726.7 -18.2Agricultural Products 181.5 167.0 -7.9Tea 103.9 101.0 -2.8Industrial Products 703.0 557.7 -20.7Textiles and garments 366.6 333.9 -8.9Rubber products 78.2 62.8 -19.8Food, beverages andtobacco 20.8 12.4 -40.3Mineral Products 2.6 1.0 -60.4Imports 1,915.0 1,507.2 -21.3Consumer Goods 287.7 246.8 -14.2Intermediate Goods 1,096.5 819.6 -25.3Fuel 515.1 269.7 -47.6Textiles and textile articles 203.0 203.2 0.1Investment Goods 523.3 440.2 -15.9Balance of Trade -1,026.8 -780.4 -24.0Workers‟ Remittances 472.8 524.0 10.8Portfolio Investments (Net) 4.1 -10.4 -Earnings from Tourism 88.9 107.2 20.5Inflows to the Government 325.7 801.8 146.2 The trade deficit continued tonarrow and recorded a 24 %(yoy) decline in January 2013. Expenditure on importsdeclined by 21.3 %, (yoy), toUSD 1,507. Earnings from exportsdeclined by 18.2 % to USD727 mn in January, asearnings from all majorcategories of exportsdeclined, on a year-on-yearbasis. The decline wasmainly driven by industrialexports which declined by20.7 %. Gross official reservesamounted to USD 6,855 mnand in terms of months ofimports, GOR wereequivalent to 4.4 months ofimports by end January 2013.
  12. 12. < Research & Development Unit >Inflation Eases in March 2013MonthCCPI (%) *CCPI Core (%)Year onYear (Y-o-Y)AnnualAvg.(A.A)Year onYear(Y-o-Y)AnnualAvg. (A.A)Feb 9.8 8.6 7.4 6.3Mar 7.5 8.8 6.8 6.4*The price movement excluding Fresh Food, Energy, Transport, Riceand Coconut in the CCPI basket. According to CBSL, headline inflation in Marcheased considerably from a month earlier largelydue to a statistical phenomenon called the *baseeffect.The *Base effect relates to inflation in the corresponding period of the previous year, if theinflation rate was too low in the corresponding period of the previous year, even a smallerrise in the Price Index will arithmetically give a high rate of inflation now. On the otherhand, if the price index had risen at a high rate in the corresponding period of the previousyear and recorded high inflation rate, a similar absolute increase in the Price index nowwill show a lower inflation rate now.
  13. 13. < Research & Development Unit >Credit to Private Sector  Credit to private sector in January on yoy basishad grown by only 15.5%.From 17.6% in December and by under half of 37% risewitnessed a year earlier. Cumulative credit to private sector as at January2013, amounted to Rs. 2.368 trillion.Up by Rs. 10 bn from end December 2012 figure of Rs. 2.358trillion. A year ago the figure was Rs. 2.050 trillion.Compared to the increase of credit of Rs. 352 bn extended to theprivate sector by commercial banks in 2012, the Central Bankexpects credit to the private sector to increase by around Rs. 435billion (18.5% yoy) in 2013. Some pinned the low pace of growth to weakerappetite for borrowing from the private sector in viewof the poor economic fortunes whilst others linked itto interest rate still being relatively higher. Official sources noted that the growth indicates thatthe relaxation of monetary policy in December 2012 isyet to be reflected in bank lending.
  14. 14. < Research & Development Unit >Sri Lanka Classified Less Indebted by US-ESCAP: Central Bank Sri Lanka has qualified under the “less indebted” category in five out of six external debt indicators in accordance with theparameters defined in the manual on Effective Debt Management of the UN-ESCAP, to assess the external debt vulnerabilityof a country. As indicated below, the only indicator in which Sri Lanka is placed in the “moderately indebted” category (>30% and <50%) is“the Disbursed external debt outstanding to Gross national income” category, where Sri Lanka‟s indicator value is 37%, whichis marginally above the threshold level specified for the „Less indebted category‟.Assessment of External Debt Vulnerability of Sri Lanka - 2012(As per the parameters defined in the manual on Effective Debt Management of the UN-ESCAPIndicatorUN-ESCAP) Definition LevelsSL2012LessIndebtedModeratelyIndebtedHighlyIndebtedDisbursed External Debt Outstanding/Gross National Income <30% >30% and <50% >50% 37.0%Disbursed External Debt Outstanding /Exports of Goods and Non-Factor Services <165% >165% and <275% >275% 112.6%Total External Debt Service Payments/Exports of Goods and Non-Factor Services <18% >18% and <30% >30% 10.7%External Interest Payments/Exports of Goods and Non-Facto Services <12% >12% and <20% >20% 3.7%Net Present Value of External Debt/Gross National Income <48% >48% and <80% >80% 40.0%Net Present Value of External Debt/Exports of Goods and Non-Factor Service <132% >132% and <220% >220% 130.0%
  15. 15. < Research & Development Unit >Sri Lanka Tourism Arrivals up 13.4% in JanuaryAccording to 2012-2013 FutureBrand Country Index, following are the rankings given for TourismSri Lankas tourism arrivals rose 13.4 % to 97,411 in January 2013 from a year earlier, with double digitgrowth from Western Europe and China.OverallSubcategories Under TourismValue forMoneyAttractionsResort &LodgingOptionsFood Shopping Beaches1 Italy Thailand Japan Mauritius Italy United States Australia2 Japan Malaysia United States Switzerland France France Bahamas3 France Germany Italy Maldives Japan Italy Maldives64 Sri Lanka 65 61 62 68 76 42Source: Echelon March 2013
  16. 16. < Research & Development Unit >India Eases Restrictions on Sri Lankan Exports India has announced that it would raise the quota on apparel exports from Sri Lanka under duty freeconcessions from five million pieces to eight million. Textile exports to India would be slapped a lower 5 % duty from the earlier 11 %. India also doubled the validity period for sanitary import permits for processed meat products from6 months to one year. As bilateral trade volumes between Sri Lanka and China topped USD 2.67 bn in 2012, a high levelChinese trade delegation led by the Vice Governor of Yunnan Province, Ding Shaoxiang visitedSri Lanka to boost the growing Sri Lanka-China bilateral trade.Top Chinese Trade Delegation Visits Sri Lanka
  17. 17. < Research & Development Unit >Cyprus: Financial Crisis The Republic of Cyprus joined the European Union in 2004 and joined the eurozone (i.e. adopted the Euro as its official currency)in January 2008. Not surprisingly, this has turned out to be a less than ideal choice (though one required by members of theEuropean Union once they meet certain criteria) due to the financial crisis that started adversely affecting both the financialstability of the region and the Euro itself around that time. For a while, Cyprus was riding out the crisis quite well- it suffered less severe adverse effects than the rest of the eurozone upuntil 2012 and had been growing faster than surrounding countries during that time.What went wrong? Unfortunately, Cyprus shares not only strong cultural ties to Greece but strong financial ties as well. Specifically, Cypress is a large holderof Greek government and corporate bonds, so the sharp decline in the value of those assets had a particularly severe negative impact onCypriot banks. In fact, the fact that the value of Greek debt was written down as part of the bailout deal for Greece actually meant thatCyprus was essentially pushed towards needing a bailout itself. „Cyprus Popular Bank‟ and the „Bank of Cyprus‟, the two main financial institutions in the country, couldnt withstand their losses andrequested assistance from the Cypriot government. The countrys government, in turn, chose to nationalize Cyprus Popular Bank. Unfortunately, this didnt solve the problem, since the Cypriot government couldnt really afford the bailouts that it had enacted. Financialmarkets also made it difficult for the Cypriot government to finance the bailouts, since the interest rate on Cypriot debt increased due tothe countrys tenuous position. Cont…
  18. 18. < Research & Development Unit >Cyprus: Financial Crisis (cont…)Bailout from EU & IMF Therefore, the Cypriot government moved the problem up the financial food chain by asking the European Central Bank, theEuropean Commission, and the International Monetary Fund for help. Unlike a lot of previous bailouts, the original Cypress bailout plan involved having depositors in Cypriot banks fund the bailout.Not surprisingly, this was a quite controversial provision, and there was a lot of debate regarding how to allocate this "bailouttax" to accounts. In fact, it was brought into question whether such a plan would even be feasible, since Cypriot bank deposits are insured andthus implicitly guaranteed that they will not be subject to loss of value. Such a plan would have, however, had the benefit ofgetting 10 billion euros in bailout funds from the International Monetary Fund and the European Central Bank. The government tried to move this plan forward, but a vote was delayed and depositors started a run on the banks in orderto avoid a potential bailout tax. Taxing Cypriot bank accounts initially appeared preferable to raising regular taxes in order to fund the bailout because asignificant fraction of depositors in Cypriot banks, especially high-value depositors, are not residents of Cypress. (In otherwords, Cyprus was happy to have foreigners partially fund its bailout, even if it made the country a less attractive financialcenter in the future.)Cont…
  19. 19. < Research & Development Unit >Cyprus: Financial Crisis (cont…)Russia’s offer To make matters more interesting, Russia offered Cyprus a loan with very generous terms in order to get its financial situation resolved(this is potentially not unrelated to the fact that a lot of the high-value depositors in Cyrus are in fact Russian.) This loan was not as attractive as it seemed on the surface, however, since it appears that the loan was offered in return for the Cypriotgovernment looking the other way regarding various tax evasion and arms dealing practices. In any case, the Cypriot government was left without an attractive solution to its problem, though possible options are an austerityprogram similar to what has been enacted in Greece, a new version of the bank deposit tax, or Cyprus exit from the eurozone (so that itcan use its own currency that it not pegged to the Euro to cover its debts).Capital controls Because the latter two of these options adversely affect the value of bank deposits, the Cypriot government has put capital controls inplace that restrict the ability for depositors to withdraw their funds. As a result, some residents of Cyprus are even turning to virtualcurrency Bitcoin (Bitcoin is a digital currency, a protocol, and a software that enables instant peer to peer transactions, worldwidepayments, low or zero processing fees etc.) to conduct business transactions. It appears that depositors in Cypriot banks could lose up to 60 % of their value on deposits over 100,000 Euro, with 37.5 % of holdingsover 100,000 Euro becoming shares and 22.5 % earning no interest and being subject to further write-offs. There is additional concern that such a plan will have negative repercussions for other countries, where depositors are concerned thatsuch a bailout implementation could become the norm.Source: Jodi Beggs, Guide
  20. 20. < Research & Development Unit >Fitch Upgrades Philippines to Investment Grade Fitch Ratings upgraded the Philippines Long-Term Foreign-Currency Issuer Default Rating (IDR) to BBB- from BB+. The Long-Term Local-Currency IDR has been upgraded to BBB from BBB-. The Outlooks on both ratings are Stable. The agency has also upgraded the Country Ceiling to BBB from BBB- .Many emerging economies rely on foreign creditors to bridge the gap between theirexports and imports. The Philippines is a bit different. It relies on overseasemployers.Over 10m Filipinos, equivalent to about a quarter of the country‟s labour force, liveor work abroad, permanently or temporarily, legally or illegally, in over 200 countries.Their remittances are equivalent to 8.5% of GDP, helping the country to plug itstrade deficit and amass over $80 billion of currency reserves.As a result, the Philippines has become a net creditor to the rest of the world (seechart), not just a net supplier of labour.These impregnable external finances are one reason why Fitch, a ratings agency,awarded the Philippines its first ever investment-grade credit rating on March 28th.Source: The Economist
  21. 21. < Research & Development Unit >Fitch Upgrades Philippines to Investment Grade (cont…)The upgrade of Philippines sovereign ratings reflects the following factors: Fitch The Philippines sovereign external balance sheet is considered strong relative to A range peers, let alone BB and BBB categorymedians. The Philippine economy has been resilient, expanding 6.6% in 2012 amid a weak global economic backdrop. Improvements in fiscal management begun under President Arroyo have made general government debt dynamics more resilient toshocks. Favourable macroeconomic outturns have been supported in Fitchs view by a strong policy-making framework. Governance standards, as measured in international indices such as the World Banks framework, remain weaker than BBB rangenorms but are not inconsistent with a BBB- rating as a number of sovereigns in this rating category fare worse than the Philippines.Governance reform has been a centrepiece of the Aquino administrations policy efforts. Entrenching these reforms by 2016 is a policypriority of the government. The Philippines average income is low (USD2,600 versus BBB range median of USD10,300 in 2012), although this measure does notaccount directly for the significant support to living standards from remittance inflows. The countrys level of human development (asmeasured in the United Nations Development Programmes index) is less of an outlier against BBB range peers. The Philippines had a low fiscal revenue take of 18.3% of GDP in 2012, compared with a BBB range median of 32.3%. This limits thefiscal scope to achieve the governments ambition of raising public investment. The recent introduction of a "sin tax", against stiff politicalopposition, will likely lead to some increment in revenues and underlines the administrations commitment to strengthening the revenuebase.Source: Fitch Ratings
  22. 22. < Research & Development Unit >Analysis & Forecast
  23. 23. < Research & Development Unit >Analysis & ForecastADB‟s, Asian Development Outlook 2013 (ADO 2013), forecasts gross domestic product (GDP) growthin developing Asia of 6.6% in 2013 and 6.7% in 2014. In 2012, the region grew 6.1%.ADB Global OutlookSource: ADO 2013
  24. 24. < Research & Development Unit >Economic Growth Private consumption expenditure, which accounts for about 70% of GDP, will remain the main engine of economic expansion, fuelled byrising incomes and remittances from Sri Lankans abroad. Investments are expected to expand further in 2013, with higher growth in construction buoyed by large infrastructure projects. Slow recovery in the euro area, Sri Lanka‟s largest export market, would continue to constrain growth potential somewhat. Exports will have to wait at least another year for a stronger recovery because weak external demand will continue in 2013. From the supply side, expansion is expected in services, led by the hotels and other tourism-related activities, along with growth in externaland domestic trade. Agriculture is expected to improve with normal weather. Economic growth will be subject to constraint from the balance of payments. Larger imports associated with high economic growth willworsen the trade deficit and—unless financed by exports, workers‟ remittance, and capital inflow—depreciate the currency. Because of the need to address inflation, the monetary policy stance set at the end of 2012 is not expected to be relaxed, which will restraineconomic growth.1As such, GDP growth is expected to edge up to 6.8% in 2013 and then advance by 7.2%In 2014 on better external conditions.Analysis & Forecast Sri Lanka: Economic ProspectsCont…
  25. 25. < Research & Development Unit >Analysis & Forecast Sri Lanka: Economic Prospects (cont…)Inflation Average inflation in 2013 is expected to be 7.5%, little improved from a year earlier, despite the base effect from the energy priceadjustments in 2012 disappearing in the second quarter 2013, expected declines in global commodity and oil prices, and expected exchangerate stabilization at current levels. Gas prices were adjusted upward by 2% and diesel by 5% in the last week of February 2013. Further price increases are required to addressthe current operating losses of the Ceylon Electricity Board (CEB), and to pay down debts to banks that funded previous years‟ losses. Theestimated loss was about Rs89 billion (equal to 1.2% of GDP) for Ceylon Petroleum and Rs65 billion (0.9%) for the CEB. An increase in thenational minimum wage is a risk that could top up inflationary pressures. Monetary policy will therefore need to remain tight to limit second-round effects and anchor inflation expectations in 2013.External Sector External demand is expected to recover gradually in 2013. Merchandise exports are projected to grow at a slow 4% in 2013 and 5% in2014. Meanwhile, worker‟s remittances will continue to expand rapidly. Services exports are expected to be boosted by growing tourism, thefurther development of business process outsourcing, and higher income from trade and shipping services partly derived from the opening ofnew port facilities. Revenues from these items will allow imports to expand by 6% in 2013 and 10% in 2014 without widening the current account deficit as ashare of GDP. Normal weather would increase the share of hydropower generation and contain the oil bill. The current account deficit is thusexpected to be 5.0% of GDP in 2013 and 4.5% in 2014, both improvements on the estimated 5.8% in 2012. It is assumed that the currentaccount deficit will continue to be financed by capital inflows.Source: ADO 2013
  26. 26. The 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 orotherwise, suffered in consequence of using such information for whatever purpose.Research & Development Unit