The document provides an economic capsule covering topics in banking/finance, the economy/business, and international news. Some key points: 1) Commercial Bank was named Best Internet Bank in Sri Lanka for the third year and launched a mobile remittance channel between South Korea and Sri Lanka. 2) Sri Lanka's economy grew 3.2% in the first quarter of 2018. The US Federal Reserve raised interest rates which could impact emerging markets and trigger capital outflows from Sri Lanka. 3) Global foreign direct investment flows fell in 2017 and growth prospects for 2018 remain modest due to trade tensions and tax reforms. China and the EU warned that unilateral trade actions risk pushing the world into recession.

1. Economic Capsule
June 2018
258th Issue
Research & Development Unit

2. CONTENTS BANKING & FINANCE
 Commercial Bank adjudged Best Internet Bank in Sri Lanka for 3rd year in a row
 Commercial Bank launches mobile remittance channel between SK & SL
ECONOMY & BUSINESS
 Economy grows at 3.2% in 1Q, 2018
 FED hikes rates
 Sri Lanka - prudent strategy
 Global investment trends and prospects
 Sri Lanka Risk Assessment Matrix: IMF
 Beira Lake to be developed into commercial hub
INTERNATIONAL
 China, Europe Warn Trade War Could Trigger Global Recession
 World’s rich grow richer
 Japan’s Robots

3. Banking & Finance

4. Commercial Bank adjudged Best Internet
Bank in Sri Lanka for 3rd year in a row
< Research & Development Unit >
Commercial Bank has been named the Best
Internet Bank in Sri Lanka by Global Banking &
Finance Review of the UK, for the third successive
year.
The accolade was created to recognise companies
within the global financial community that provide
their customers a high quality of service and
innovation via online and digital platforms.
The value of Commercial Bank’s Online Banking transactions grew to Rs 663 bn by
the end of 2017, making it one of the most popular digital payment platforms of
Sri Lanka.

5. Commercial Bank launches mobile
remittance channel between SK & SL
< Research & Development Unit >
Commercial Bank has become the first Sri Lankan
institution to launch a ‘Mobile to Account Remittance
Service’ between South Korea and Sri Lanka, facilitating
real time fund transfers from an estimated 30,000 Sri
Lankans employed in the East Asian nation.
The service, launched in collaboration with Global Money Express Co Ltd.
(GME), one of the first exchange companies in the Republic to obtain a
money transfer licence, paves the way for real time fund transfers between
the two countries at lower charges and higher exchange rates.
Prior to the launch of the GME-Commercial Bank Mobile to Account
Remittance Service, Commercial Bank’s own sophisticated real-time on-line
money transfer service ‘e-Exchange’generated substantial foreign exchange
earnings annually in remittances from expatriate Sri Lankans working in
South Korea.

6. Economy & Business

7. Economy grows at 3.2% in 1Q, 2018
< Research & Development Unit >
30.4
7.0
53.6
8.9
Contribution to the GDP (%) Agricultural activities 4.8%
Growing of Rice 56.6%
Growing of Cereals (except rice) 40.2%
Growing of Vegetables 22.3%
Growing of Oleaginous Fruits ( including coconut) (13.5%)
Growing of Rubber (13.9%)
Industrial activities 1.0%
Electricity, gas, steam and air conditioning supply 10.2%
Construction activity (4.9%)
Service activities 4.4%
Financial Service activities and auxiliary financial services 12.2
Insurance, reinsurance and pension funding 9.3
Growth % - Sectorwise
Source: DCS

8. FED hikes rates
• The US Federal Reserve raised the target federal funds rate by 0.25%, taking it to
1.75% to 2%. The rise marks the Fed's seventh rate increase since 2015.
Global impact
• Some of the most dramatic effects have appeared in emerging
markets, as higher US rates lure back investors who in recent years
had looked for returns abroad.
• The retreat from emerging markets remains relatively modest, with
flows to bond and equity funds down less than 10% from their
peaks.
• But it has coincided with - and partially fuelled - a stronger dollar,
contributing to currency crises in countries such as Argentina,
Turkey and Brazil.
• It has also prompted central banks elsewhere, including in
Indonesia, Malaysia and Hong Kong, to raise their own interest
rates in defence.

9. Sri Lanka - prudent strategy
• As pointed above, Sri Lanka’s GDP growth rate for
1Q, 2018 is only 3.2%.
• Therefore, some may point out that it may be good
to try and boost growth by reducing interest rates.
• However, at a time when regional economies have
increased their interest rates in response to the
increase in the FED Funds Rate in the US, Sri Lanka
cut its policy lending rate by 25 basis points in early
April, 2018.
• Hence, if there are further rate cuts in Sri Lanka, it
could trigger greater foreign fund outflows, thereby
applying further pressure on the rupee which has
depreciated by 3.3% year-to-date 22nd June, 2018.
• Foreigners had sold Rs.22.5 bn worth of government
bonds year-to-date June 10, 2018.
Cont.

10. Sri Lanka - prudent strategy (cont.)
• At a time when the US is increasing its FED Funds Rate, it may be unwise for a
country like Sri Lanka to attempt policy rate cuts, since that may contribute to an
intensification of government bond sales by foreigners (pls. refer figure in previous
slide) thereby applying further pressure on the rupee.
• In view of the above, a more prudent strategy to boost GDP growth would be to
take steps to increase domestic investments and Foreign Direct Investments (FDI)
by maintaining political stability, policy consistency, eliminating bureaucratic delays
and improving the efficiency and delivery of public services.

11. Global investment trends and prospects
< Research & Development Unit >
• Global foreign direct investment (FDI) flows 2017 fell
by 23 % to $1.43 trillion. This is in stark contrast to the
accelerated growth in GDP and trade.
• FDI flows to developing economies remained stable at
$671 bn, seeing no recovery following the 10 % drop in
2016.
• Inward FDI flows to developed economies fell sharply,
by 37 %, to $712 bn.
• Projections for global FDI in 2018 show fragile growth.
Global flows are forecast to increase marginally, by up
to 10 %, but remain well below the average over the
past 10 years.
Cont.

12. Global investment trends and prospects (cont.)
< Research & Development Unit >
• However, risks are significant, and policy uncertainty abounds.
- Escalation and broadening of trade tensions could negatively affect
investment in global value chains (GVCs).
- In addition, tax reforms in the United States and greater tax competition are
likely to significantly affect global investment patterns.
• A decrease in rates of return is a key contributor to the investment
downturn.
- The global average return on foreign investment is now at 6.7 %, down from
8.1 % in 2012. Return on investment is in decline across all regions.
• FDI activity was lower across all sectors.
- Mergers & Acquisitions values were down in the primary, manufacturing and
services sectors.
Cont.

13. Global investment trends and prospects (cont.)
< Research & Development Unit >
- The fall in greenfield announcements in 2017 was
concentrated in services.
- However, over the past five years, the level of greenfield
projects in manufacturing has been consistently lower
than in the preceding five-year period across all
developing regions.
• Growth in global value chains (GVCs) has stagnated.
- Growth in GVC participation decreased significantly this
decade compared with the last, across all regions,
developed and developing.
- The GVC slowdown shows a clear correlation with the
FDI trend and confirms the impact of the FDI trend on
global trade patterns.
Cont.
What is a 'Green Field Investment’
A type of foreign direct investment (FDI)
where a parent company builds its
operations in a foreign country from the
ground up.
In addition to the construction of new
production facilities, these projects can
also include the building of new
distribution hubs, offices and living
quarters. (Investopedia)
What are GVCs?
Companies used to make things
primarily in one country. That has all
changed. Today, a single finished
product often results from
manufacturing and assembly in multiple
countries, with each step in the process
adding value to the end product.
Through GVCs, countries trade more
than products; they trade know-how,
and make things together. Imports of
goods and services matter as much as
exports to successful GVCs. (World Bank)
Source: World Investment Report 2018

14. < Research & Development Unit >Source: UNCTAD, FDI/MNE database (www.unctad.org/fdistatistics)
Cont.

15. < Research & Development Unit >
• Government policy should focus on matching local industrial policy with free trade
deals as structural changes in the economy cannot be accomplished through
liberalization alone according to Ms. Wijeratne.
• Drawing a connection between industrial policies and investment policies, Ms.
Wijeratne points out that a chapter on investment liberalisation in a FTA for
example cannot stand alone from a holistic and integrated industrial and
agricultural policy which according to the World Investment Report 2018 has to
contain detailed pragmatic recommendations and a timeline for action with clearly
delineated division of responsibility among public and private sector stakeholders.
In the backdrop of declining global foreign investment flows Sri Lanka’s
Director General of Commerce, Ms. Sonali Wijeratne, has pointed out:

16. Sri Lanka Risk Assessment Matrix: IMF
Cont.
PotentialDomesticShocks

17. Sri Lanka Risk Assessment Matrix: IMF (cont.)PotentialExternalShocks
Source: IMF Sri Lanka 2018 Article IV – June 2018

18. < Research & Development Unit >
Over 200 acres of land around the Baire
Lake in Colombo 02 belonging to the Ports
Authority, Sathosa and Transport Ministry
are being developed as a Commercial hub,
according to the ministry of Megapolis and
Western Development.
• According to the Megapolis Minister, two 2.5
kilometre walk ways from Vauxhall street to
Peoples Bank HQ and another from Gangarama
temple to Hilton hotel will also be built soon.
• Under the proposed new development in the area
on the other side of D.R. Wijewardane Mawatha
the railway station will also be upgraded as a main
transport hub.
• The banks of Beria Lake will be developed initially
before executing the development activities on the
land adjoining the lake whilst improving the quality
of environment and beauty of the city.
• World bank will part sponsor the funding of the
project and the rest will be from the government.
Beira Lake to be developed into commercial hub

19. International

20. < Research & Development Unit >
China, Europe Warn Trade War Could Trigger
Global Recession
- Vice Premier Liu He, President Xi Jinping’s top
economic adviser stated China and the EU had agreed
to defend the multilateral trading system, following
talks in Beijing.
- The comments, made at a press briefing with European Commission Vice President
Jyrki Katainen, come as both sides prepare to face off against U.S. President Donald
Trump’s tariff threats.
- Both China and the EU are coming under pressure from Trump, as the U.S. president
seeks to remake a global trading system that he sees as rigged against the world’s
largest economy. Source: Bloomberg
China and the European Union vowed to oppose
trade protectionism in an apparent rebuke to the
U.S., saying unilateral actions risked pushing the
world into a recession.

21. < Research & Development Unit >
World’s rich grow richer
Global personal financial wealth grew by 12% in 2017 to $201.9 trillion
in US dollar terms.
The total was roughly 2.5 times as large as the world’s GDP for the year ($81 trillion).
Source: Global Wealth Report 2018 - BCG
‒ The main drivers were the bull market environment in all
major economies with wealth in equities and investment
funds showing by far the strongest growth and the
significant strengthening of most major currencies against
the dollar.
‒ In terms of asset classes, $121.6 trillion (60%) of global
wealth took the form of investable assets mainly equities,
investment funds, currency and deposits, and bonds with
the remaining $80.3 trillion (40%) held in non-investable
or low-liquidity assets such as life insurance, pensions
funds, and equity in unquoted companies.

22. Japan’s Robots
Japan is also one of the most robot-integrated economies in the world in terms of
“robot density” measured as the number of robots relative to humans in
manufacturing and industry.
Japan led the world in this measure until 2009, when Korea’s use of industrial
robots surged and Japan’s industrial production increasingly moved abroad.
For policymakers, the first hurdle is to accept that change is coming.
Artificial intelligence, robotics, and automation have the potential to make just as
big a change, and the second hurdle may be to find ways to help the public prepare
for and leverage this transformation to make lives better and incomes higher.
Strong and effective social safety nets will be crucial, since disruption of some
traditional labor and social contracts seems inevitable.
But education and skills development will also be necessary to enable more people
to take advantage of jobs in a high-tech world.
And in Japan’s case, this also means a stronger effort to bring greater equality into
the labor force between men and women, between regular and non regular
employees, and even across regions so that the benefits and risks of automation
can be more equally shared.
Japan is still a leader in robot production and industrial use.
The country exported some $1.6 bn worth of industrial robots in 2016 more than the next five
biggest exporters (Germany, France, Italy, United States, South Korea) combined.
Source: IMF

23. 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 >