Economic Capsule - May 2013


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Economic Capsule - May 2013

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Economic Capsule - May 2013

  1. 1. < Research & Development Unit >May 2013ECONOMIC CAPSULE
  2. 2. FINANCIAL SECTOR NEWS  Commercial Bank ends Tough 1Q with PBT of Rs 3.23 billion Commercial Bank is Again MoneyGram’s ‘Most Productive Network’ in South AsiaECONOMIC & BUSINESS NEWS  CBSL Cuts Policy Rates by 50 Basis Points Credit to Private Sector Slows Down Further Interest Rates External Sector Performance—1Q 2013 Sri Lanka gets USD 218mn FDI in 1Q 2013 Nepal’s First Forbes Billionaire to Expand Investments in SL Sri Lanka’s Progress in Millennium Development Goals China Offers Sri Lanka USD 2.2 billion in Loans Abans to Build USD 100 mn Lifestyle Mall Developing World’s Share of Global Investment to Triple by 2030 Bangkok Ranked Worlds Top Travel Spot Analysis & Forecast: IMF Forecast for Sri Lanka Analysis & Forecast: Sri Lanka: Key Issues Analysis & Forecast: Sri Lanka: Risk Assessment MatrixC O N T E N T S
  3. 3. Financial Sector News
  4. 4. < Research & Development Unit >Commercial Bank ends Tough 1Q with PBT of Rs 3.23 billion Commercial Bank has posted profit before tax of Rs 3.23 billion on  gross income of Rs 16.77 billionfor the three months ended 31stMarch 2013, despite the challenges of reduced foreign exchangeincome and narrowing margins in the reporting period. The Bank’s foreign exchange income had declined by Rs 1.47 billion or 65% over the correspondingquarter of the previous year, due to the appreciation of the Sri Lanka Rupee against the US Dollarduring the reporting period as against a depreciation during the corresponding quarter of theprevious year. Interest income improved by 24% to Rs 14.487 billion in the period under review, but interestexpenses increased at a higher rate of 44% to Rs 8.874 billion, exerting pressure on interest margins.Consequently, the interest margin for the quarter declined to 4.34% from the 4.85% reported for2012. As a result of these factors, the Bank’s profit after tax of Rs 2.241 billion for the three months waslower by Rs 563 million over the first quarter of 2012. Cont…
  5. 5. < Research & Development Unit >Commercial Bank ends Tough 1Q with PBT of Rs 3.23 billion (cont…) Total deposits of the Bank grew by Rs 13.570 billion over the three months since December 2012,surpassing Rs 400 billion to Rs 408.945 billion at 31st March 2013, recording a growth ofapproximately 4%, while its interest earning assets too increased by the same percentage, growingby Rs 15.907 billion to Rs 389.451 billion at the end of the quarter reviewed. Total assets of the Bank increased by 4.91% to Rs 536.9 billion from Rs 511.7 billion at the end of2012. The Bank’s Tier I Capital Adequacy Ratio improved to 12.72% as at 31st March 2013 from 12.64% at31st December 2012, while total capital adequacy (Tier I and Tier II) increased to 16.62% from13.85%, largely due to a sum of US$ 75 million raised by the Bank from the International FinanceCorporation (IFC) as a ten year Subordinated Term Debt that qualifies for Tier II Capital.
  6. 6. < Research & Development Unit >Commercial Bank is Again MoneyGram’s ‘Most ProductiveNetwork’ in South Asia The Commercial Bank of Ceylon, has been adjudged the‘Most productive network in South Asia’ in 2012 forMoneyGram, the global funds transfer company. This is the 2nd successive year that the bank received thisaward, which was presented at MoneyGram’s regionalconference in Jodhpur India.
  8. 8. < Research & Development Unit >CBSL Cuts Policy Rates by 50 Basis PointsThe Monetary Board of Central Bank ofSri Lanka reduced its policyrates by 50 basis pointseach with effect from 09 May, 2013.Previous Rate(since 12.12.12)Rate w.e.f.09.05.13Repo 7.50 7.00RRepo 9.50  9.00 The rate cut comes despite comments from the International Monetary Fund (IMF) which saidSri Lanka must not ease monetary conditions as inflation remains a concern, even though theprices rose at a slower pace in April than in the previous month. The central bank stated that there was now a need to stimulate the domestic economy after aslower-than-expected pick-up in economic activity in the first few months of 2013. According to CB Governor, “credit growth has been rather slow, so there was a need to give impetusto stimulate growth and we decided to cut the rates. Inflation is also well under control." Cont…
  9. 9. < Research & Development Unit >CBSL Cuts Policy Rates by 50 Basis Points (Cont…)In addition, the reserve maintenance period of commercial banks will also be increasedto two weeks from one week with effect from 1st June 2013 in order to offer greaterflexibility to commercial banks in managing their liquidity, while maintaining theStatutory Reserve Ratio at the current level of 8 %.
  10. 10. < Research & Development Unit >Credit to Private Sector Slows Down FurtherDespite the easing of monetaryconditions, in December 2012, creditgrowth has continued to moderate toabout 10.9 % by March 2013, partlyreflecting the base effect, as againstthe Central Banks targeted growth ofcredit to the private sector by yearend of about 18.5 %.(YoY Change %)
  11. 11. < Research & Development Unit >Interest RatesMarket interest rates have beenadjusting downward, albeitslowly, responding to the easingof monetary conditions sinceDecember 2012.
  12. 12. < Research & Development Unit >External Sector Performance—1Q 2013CategoryJan-Mar2012USD mnJan- Mar2013USD mnGrowthJan- Mar(%)Exports 2,570.1 2,363.2 -8.1Agricultural Products 575.5 551.2 -4.2Tea 335.7 333.6 -0.6Industrial Products 1,977.2 1,804.9 -8.7Textiles and garments 1,036.1 1,050.0 1.3Mineral Products 14.4 4.0 -72.0Imports 5,349.2 4,492.0 -16.0Consumer Goods 882.1 711.2 -19.4Intermediate Goods 3,146.9 2,622.1 -16.7Fuel 1,552.7 1,079.2 -30.5Textiles & textile articles 532.1 496.2 -6.7Investment Goods 1,309.0 1,156.6 -11.6Trade Deficit -2,779.1 -2,128.9 -23.4 By end March 2013, gross officialreserves amounted to USD 6,689mn, while total internationalreserves, which include grossofficial reserves and foreignassets of commercial banksamounted to US dollars 8,121 mn. In terms of months of imports,gross official reserves wereequivalent to 4.4 months ofimports by end March 2013.Source: CBSL
  13. 13. Sri Lanka gets USD 218mn FDI in 1Q 2013 Sri Lanka has received USD 218 mn of foreign directinvestments in the first quarter of 2013 and istargeting two billion dollars for the full year,according to investment promotion ministerLakshman Abeywardena. The investors came from, Taiwan, Canada, VirginIslands, Netherlands, Singapore, UK, Australia andIndia. In 2012 Sri Lanka received USD 1,338 mn inFDI up from USD 1,066 mn a year earlier.< Research & Development Unit >
  14. 14. < Research & Development Unit > Binod already has considerable investments in Sri Lanka, including a major equity stake inowning company of Taj Samudra, Taj Exotica and Vivanta hotels in Sri Lanka (as well asMaldives) and two Jetwing resorts (Vil Uyana and Jetwing Sea). He has also acquired three bungalows in Hatton and identified several tourist sites andassets around the country as part of launching his Chaudhary Group’s (CG) up marketexperiential holidays (Zinc Hospitality, Zinc Boutique Journeys and &Beyond) in Sri Lankaamong rich Western tourists. This is in addition to working with Jetwing to put up an 85-room luxurious hotel in Kandy with an investment of USD 15 million. Additionally, CG has recently set up Sri Lanka office (Cinnovation Group) to fast track aproposed one million ton capacity cement mill in Jaffna with an envisaged investment ofUSD 75 to 100 millionNepal’s First Forbes Billionaire to Expand Investments in SLNepal’s Fortune Billionaire Binod Chaudhary, Chairman of the Cinnovation/Chaudhary Group, aconglomerate of close to 80 companies with interests in banking, foods, cement, real estate, hotels,power, retail and electronics wants to expand his investments in Sri Lanka.
  15. 15. < Research & Development Unit >Sri Lanka Reaping Peace Dividend: HSBC “Despite being one of the smaller economies inemerging Asia at USD 60 bn in 2012, Sri Lanka’sinfrastructure development is greater than many of itsneighbours, as measured by the AIM (AsiaInfrastructure Measure),” stated HSBC Global Researchin a latest Asia macro economics report titled ‘Bridgingthe gap: Asia needs to invest over US$ 1 trillion in urbaninfrastructure’. In the chapter on Sri Lanka titled ‘Peace dividend,’ thereport said that development has been sustained since2007, with the AIM climbing through the years. The HSBC report has categorised Sri Lanka among three‘Take off’ economies with the other two being Chinaand Malaysia. Source: Daily FT
  16. 16. Sri Lanka’s Progress in Millennium Development Goals (MDGs)< Research & Development Unit >Sri Lanka is facing a mixed score card with regard to its progress in achieving MillenniumDevelopment Goals (MDGs) as per the latest Asian Development Bank (ADB) findings.Out of the 21 broadergoals, Sri Lanka hasprogressed to an “earlyachiever” on 11 of thosewhilst being on track onfour goals. However on thetwo aspects of forest coverand CO2 emissions, SriLanka is regressing and onfour goals Sri Lanka’sprogress is slow.Source: ADB
  17. 17. < Research & Development Unit >Abans to Build USD 100 mn Lifestyle Mall The Abans Group in collaboration with Silver Needle Hospitality signed anagreement with AEDAS an internationally reputed, award winning architecturalfirm to lead the design for their proposed USD 100 mn five-star super mallopposite the Beira Lake in Colombo. The construction will commence early nextyear and is expected to be completed by 2016. The Abans Lifestyle Mall, which will be named the Colombo City Centre, will beunique as it will be the first and only lifestyle mall in Sri Lanka on par with thehuge super malls in Singapore and Dubai.China Offers Sri Lanka USD 2.2 billion in Loans China has offered Sri Lanka about USD 2.2 billion in loans for infrastructure projectsand a free trade pact. China and Sri Lanka agreed on USD 1.5 billion in private-sector investment in thenorthern express highway, which links Kandy in the central part of Sri Lanka, to Jaffnain the north. Officials from the two sides also agreed on the extension of a railway, the southernhighway and the development of the port of Colombo.
  18. 18. < Research & Development Unit > The percentage of global investment that goes to developingcountries should triple in the next two decades as emergingeconomies catch up to richer nations and become moreintegrated into financial markets, according to the World Bank. China will account for 30 % of global investment in 2030, withBrazil, India and Russia together accounting for another 13 %. In terms of volumes, investment in the developing world willreach USD 15 trillion, versus USD 10 trillion in high-incomeeconomies. China and India will account for almost half of all globalmanufacturing investment.Developing World’s Share of Global Investment to Triple by 2030Source: World Bank
  19. 19. < Research & Development Unit >Bangkok Ranked Worlds Top Travel Spot Bangkok has edged outLondon as the worlds mostpopular air travel destination,becoming the first Asian cityto earn the distinction,according to a ranking by theMasterCard Index of GlobalDestination Cities. Istanbul and Dubai showedthe strongest expectedgrowth in the number ofvisitors. The ranking was based on acitys expected internationalair travel arrivals and theamount of money spent inthe city by those arrivals. Source: Reuters
  20. 20. < Research & Development Unit >Global Economy Advancing but Pace of Recovery Varies, says OECDEconomic Outlook The global economy is moving forward,but divergence between countries andregions reflects the uneven progressmade toward recovery from theeconomic crisis, according to the OECD’slatest Economic Outlook. Historicallyhigh unemployment remains the mostserious challenge facing governments. World real gross domestic product (GDP)is projected to increase by 3.1% this yearand by 4% in 2014. Across OECDcountries, GDP is projected to rise by1.2% this year and by 2.3% in 2014, whilegrowth in non-OECD countries will riseby 5.5% this year and 6.2% in 2014. The United States was seen driving global growth with the worldsbiggest economy projected to expand 1.9 % this year and thenaccelerating to 2.8 % in 2014, which would be the countrys bestrate since 2005. In contrast, the euro zone was estimated to remain in recession fora second year. The OECD sees its economy contracting 0.6 % in2013 and then returning to growth next year with a rate of 1.1 %.Change in real GDP, in per centSource: OECD
  21. 21. Analysis & Forecast
  22. 22. < Research & Development Unit >IMF Forecast for Sri Lanka2011 2012 2013 P 2014 P 2015 PReal GDP growth % 8.2 6.4 6.3 6.8 6.5Inflation (end-of-period) % 4.9 9.2 7.9 6.7 6.5Revenue % of GDP 14.3 13.0 13.2 13.7 14.1Expenditure % of GDP 21.4 19.7 19.3 19.3 19.3Central government balance % of GDP -6.9 -6.4 -5.8 -5.4 -5.0Government debt (domestic and external) % of GDP 78.4 80.2 79.9 78.0 75.8Current account balance % of GDP -7.8 -6.6 -5.7 -5.3 -4.9Gross official reserves (end of period) USD mn 5,758 6,677 6,964 6,798 7,095External Debt (public & private) % of GDP 49.8 56.7 54.8 53.7 52.5Cont…
  23. 23. < Research & Development Unit >SRI LANKA: KEY ISSUESContext: Notable progress has been achieved in recent years, on both the policy and macroeconomicfronts. Challenges remain, however, including in the near term elevated inflation and slowing, yetresilient, growth.The current account deficit is narrowing, but exports and FDI are lower than expected. Safeguardingmacroeconomic stability and launching a new phase of structural reforms would facilitate ambitiousmedium-term development goals. Reducing high public debt levels requires continued fiscal consolidation. IMF supports the authorities’ 5.8% of GDPbudget deficit target for 2013. A critical issue is strengthening the revenue system to support consolidation while making space for capitalinvestment and key social spending in order to sustain robust and inclusive growth. A second generation of tax reform focused on base broadening and improving administration is needed. Addressing losses at state-owned energy companies requires a comprehensive approach.Fiscal policy:Cont…
  24. 24. < Research & Development Unit >KEY ISSUES (cont…) With inflation elevated and growth slowing, monetary policy is facing a challenging task. Policy was eased recently. Further stimulus should remain on hold until inflation pressures decline. Moving toward a flexible inflation targeting framework would provide a nominal anchor for monetary policy in thecontext of exchange rate flexibility.Monetary and exchange rate policy: The Financial Sector Assessment Program (FSAP) update recognized progress made in strengthening bankingsupervision and financial soundness indicators are strong. However, rapid credit expansion in recent years justifies heightened vigilance for systemic vulnerabilities. Annual stress tests and raising capital buffers in banks exposed to notable credit risks, more robust consolidatedsupervision and macroprudential frameworks, and development of pension and crisis preparedness frameworkswould help cement financial stability.Financial stability: :Cont…
  25. 25. < Research & Development Unit >KEY ISSUES (cont…) Exports have declined significantly as a share of GDP and world exports since 2000. Deeper integration with the world economy, attracting FDI, and a more enabling environment for exports and theprivate sector would broaden the sources of growth and enhance external resilience. Important measures include reducing policy barriers, continuing to expand infrastructure and improve the businessclimate, reforming the trade tariff structure, and sustaining exchange rate flexibility.Strengthening trade and broadening growth:Cont…
  26. 26. < Research & Development Unit >Sri Lanka: Risk Assessment MatrixRisk Up/Down-sideLikelihoodImpact Policy ResponseTax revenue weakness continues.Larger-than-expected budget deficit. H HAccelerate revenue administration reforms,broaden base, curtail non-essentialspending.Stalled or incomplete delivery of Euro area policycommitments, protracted period of slow Europeangrowth. Fiscal policy shock in the U.S.Emerging markets capital flow reversal, weaker FDI orremittance inflows. Pressure on reserves. M HAllow exchange rate flexibility. Fiscal spaceis limited.Inflation pressures broaden.  M H Tighten monetary policyGlobal oil shock triggered by geopolitical events, causinghigher losses at SOEs, inflation, or weaker growth. L MAdjust domestic energy prices, allowexchange rate flexibility, vigilance for impacton core inflation and banks asset quality.Banks asset quality deteriorates in aftermath of veryrapid credit growth. M LIntensify risk-focused supervision, continueenforcing prudential regulations.Source: IMF
  27. 27. 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 or otherwise,suffered in consequence of using such information for whatever purpose.Research & Development Unit