Economic Capsule - March 2015

Economic CapsuleMarch 2015

Research & Development Unit

219th Issue

C O N T E N T S

BANKING SECTOR NEWS

New Operating Instructions on the Special Interest Scheme for Senior Citizens

Removal of the 5 % Special Standing Deposit Facility Rate

ECONOMIC & BUSINESS NEWS

Government Borrowings

GDP 2014

External Sector Performance – January 2015

RBI, CBSL Enter into USD 400 mn Currency Swap

News Snippets

Analysis & Forecast

Sri Lanka Economic Prospects: ADB

Condominium Industry in Sri Lanka

October, 2014


Banking News

< Research & Development Unit >

New Operating Instructions on the Special Interest Scheme for Senior Citizens

• Eligible senior citizens: All resident Sri Lankan citizens above 60 years of age

• Deposits covered:

a) One year Rupee fixed deposits of up to Rs. 1.0 mn in total opened in banks by eligible senior citizens on an individual basis with effect from 16.01.2015.

b) Fixed deposits of up to Rs. 2.5 mn opened prior to 16.01.2015 under the 12% Special Interest Scheme.

• Interest rate payable with effect from the date of opening the deposit:

a) 15% per annum for (a) above

b) 12% per annum for (b) above

Accordingly, the Operating Instructions dated 25.02.2015 on this scheme were revokedSource: CBSL


Removal of the 5 % Special Standing Deposit Facility Rate

• Benefiting from lower interest rates and higher demand for bank funds, credit to the private sector revived after a setback recorded particularly in the early part of 2014.

• Given signs of sustained increase in credit flows to the private sector, the view of the Central Bank was that the restriction placed on access to the SDF is no longer required.

• Accordingly, the 5 % SDF rate was withdrawn with effect from 2 March 2015. The Central Bank is also of the view that the removal of the special SDF rate of 5 % would help stabiliseovernight interest rates within the policy rate corridor of the Central Bank.

In September 2014, the Central Bank rationalized access to its Standing Deposit Facility (SDF) with a view to encourage commercial banks to utilize the substantially high amount of excess liquidity prevailing in the market to enhance credit flows to the private sector at reasonable interest rates.

Source: CBSL


October, 2014


Economic & Business News

Government Borrowings (Jan 1 - Apr 3 2015)


T-Bill Auctions

Total Amount Accepted (Rs Mn)

Weighted Average Yield P.A. After Tax

– Range (%)

91 Day 72,641 5.76 - 7.10

182 Day 60,043 5.86 - 7.31

364 Day 81,938 6.00 - 7.37

T-Bond Auctions

Issue Date

Period of Maturity

Amount Accepted

(Rs Mn)

Weighted Average Yield

(net of tax) (%)

12.03.15 3Y 2M 22,943 8.70

26.03.15 4Y 6M 19,245 8.92

17.03.15 4Y 6M 24,763 9.13

30.03.15 5Y 2M 5,265 9.07

17.03.15 6Y 4M 21,206 9.55

10.03.15 7Y 4M 18,240 9.17

26.03.15 8Y 5M 20,100 9.73

12.03.15 8Y 5M 14,462 9.79

30.03.15 10Y 20,103 10.03

10.03.15 10Y 15,707 10.09

10.03.15 20Y 17,890 11.20

27.02.15 30Y 10,058 11.73

Sri Lanka Development Bonds (SLDBs)

Issue Date TenorAmount

Accepted (USD Mn)

Weighted Average

Margin (bps) over 6M

LIBOR

02.03.15 3Y 156.5 377

27.03.15 5Y 100.0 405

• The government’s debt burden, inclusive of central government guaranteed contingent liabilities, amount to 88.9% of GDP as revealed by the last budget presented by the government (Jan. 2015).

• Government’s borrowings in USD terms for the period 01 Jan – 03 April, 2015 amounted to USD 3.45 bn.

• While the government needs to borrow to fund its expenditure, it nevertheless will contribute to increase the already high debt burden of the country.

• Therefore, the government will have to increasingly focus on attracting more FDI which will help to reduce its dependence on debt.

Source: CBSL

GDP 2014

1Q 2Q 3Q 4Q

7.6 7.8 7.7 6.4


Agriculture

Services

Industry

Industry

Agriculture

Services

Shar

e (

%)

Source: DCS

External Sector Performance – January 2015


CategoryJan 2014US$ mn

Jan 2015 US$ mn

Growth (%)

Exports 903.9 909.8 0.6

Textiles and garments 412.0 409.9 -0.5

Tea 116.1 113.5 -2.2

Imports 1,655.5 1,681.6 1.6

Fuel 491.2 289.2 -41.1

Machinery and Equipment 196.9 240.6 22.2

Trade Balance -751.5 -771.9 2.7

Earnings from Tourism 233.3 248.7 6.6

Workers’ Remittances 555.5 523.5 -5.8

• In January 2015, the BOP is estimated to have recorded a deficit of USD 696.5 mn, compared to the surplus of USD 732.9 mn in the corresponding period of 2014.

• Sri Lanka’s gross official reserves estimated to be USD 7.4 bn as at end February 2015. Gross official reserves were equivalent to 4.5 months of imports.

Source: CBSL


• The Reserve Bank of India has signed a Currency Swap Agreement with the Central Bank of Sri Lanka.

• The Central Bank of Sri Lanka can make withdrawals of US Dollar or Euro in multiple tranches up to a maximum of USD 400 million or its equivalent. This is expected to further economic co-operation between the two countries.

• The agreement is valid for a period of three years from the date of signing.

Source: RBI

RBI, CBSL Enter into USD 400 mnCurrency Swaps


Sri Lanka JKH Waterfront Project Viable

• Sri Lanka's John Keells Holdings is confident of the viability of its Waterfront development project, which will target the corporate conference market in the region, Ajith Gunewardene stated with gaming appearing to be off the table.

• According to JKH Deputy Chairman Ajit Gunewardene, the core of the project is to target the conference and corporate incentive market from the region. It is a very large market that today the country cannot cater to, because it does not have the facilities.

• The space within the project at any given time can accommodate up to three thousand delegates. Sri Lanka could also host large international conferences and exhibitions of the style now found in Shanghai and Singapore.

• The project will also have commercial space and 450 apartment, creating a "mega community within the city.

Sri Lanka confident of regaining GSP Plus: DG Commerce

• Sri Lanka is confident of regaining the GSP Plus trade deal giving duty free access to the European Union which would help exporters, a top trade official has stated.

• According to R.D.S. Kumararatne, Director General, Department of Commerce, the new government was acting to meet EU conditions required to regain the trade concession and that recent talks had indicated the EU was favourably inclined.

Sri Lanka to Call Bids for Kandy Expressway This Month

• Sri Lanka is planning to call expressions of interest to build an expressway to Kandy in central hills this month, According to Highways Minister Kabir Hashim .

• The 'Central Expressway' leading to Kandy would be the first phase of an expressway leading to the Jaffna peninsula.

News Snippets

Cont..


Sri Lanka Energy Utilities to Raise US$ 2.5bn Through Bonds

• Sri Lanka's state-owned energy utilities are to issue USD 2.5 bn worth of bonds as part of a restructuring plan by the new government.

• The financial restructuring of the debt-ridden Ceylon Petroleum Corporation and Ceylon Electricity Board is part of a wider 10-year energy sector plan announced by Power and Energy Minister.

• One of the aims of the new plan is the broadening of energy sector investments to include bonds, debentures, public-private partnerships and other novel financial instruments.

• The CPC is to issue two billion US dollars in bonds while the CEB will issue 500 million dollars in debentures to restructure their debt portfolios, according to the Sri Lanka energy sector development plan for 2015-2025.

Sri Lanka Tea, Rubber Estates Suffer Massive Losses amid Falling Commodity Prices

• Falling international commodity prices due to an underlying strengthening of the US dollars has hit Sri Lanka's plantations firms which has lost Rs. 2.8 bn in the past year on tea and rubber.

• By the end of 2014, 19 regional plantations companies has stated that they lost an average of 30 rupees per kilogram of tea sold with an average cost of 455 rupees and a net sales average of 455 rupees.

• The loss on a kilogramme of rubber was 35 rupees, with average cost of production at 327 rupees and net sales average of 292 rupees.

News Snippets (cont…)

Source: economynext


October, 2014


Analysis & Forecast

Sri Lanka Economic Prospects: ADB


Economic Growth:

o Risks to economic growth arise from uncertainties during the transition and a wait-and-see approach adopted by investors.

o Growth in 2015 will be affected by the political transition and the revised priorities of the government.

o Construction will slow after leading growth in the recent years, driven by large government infrastructure projects.

o Political uncertainty would retard private investment. While investment is likely to lose momentum in 2015, consumption is expected to pick up. Price reductions for food and fuel will encourage private consumption, and government consumption will rise with the shift in the budget toward recurrent expenditure. Cont..

Sri Lanka Economic Prospects: ADB (cont…)


o Somewhat faster growth in advanced economies will benefit export industries such as apparel and tourism. How well agriculture performs after mixed fortunes over the past 5 years will depend on the weather, but increases in government-guaranteed prices for several agricultural products should boost production. Against this backdrop, assuming that politics settle in the second half of 2015 and that investment rebounds, growth is projected to ease to 7.0% in 2015 and then strengthen to 7.3% in 2016.

Inflation:

o Inflation is expected to remain low in 2015, held in check by a series of reductions in fuel prices in September and December 2014 and January 2015 that are expected to restrain other prices. With international oil prices expected to remain low this year and next, inflationary pressures are eased. Moreover, the government’s revised budget announced tax reductions for several essential items including flour, bread, milk powder, and sugar. Accordingly, inflation is expected to ebb to 2.0% in 2015 before rebounding to 5.0% in 2016 on account of the base effect. Cont..



Monetary Policy:

o With inflation remaining low, the central bank has signaled that monetary policy will maintain its current accommodative stance. Policy rates are likely to be kept low in 2015, supporting higher private sector credit.

External Sector:

o Exports will continue to improve in 2015 and 2016 as Sri Lanka’s partner economies pick up pace. Imports are expected to rise, though imports of investment goods will likely slow on more moderate investment.

o Higher domestic consumption will exert upward pressure on imports and shift the composition of imports away from investment to consumption goods, while low international oil and food prices will help contain total value.

Cont..



o Earnings from tourism and remittances are expected to continue current growth trends. They will contain the current account deficit at 1.4% of GDP in 2015. The deficit is projected to widen marginally to 1.5% in 2016 as the economy and domestic investment pick up.

Foreign Investments:

o Indications are that Sri Lanka is being viewed more favorably internationally with the change in government and its policies, which will attract higher foreign investment and cement trade ties, especially with Europe and the US. These factors will strengthen the balance of payments position in the medium term.

Cont..



o With GDP per capita estimated at about $3,700 in 2014, Sri Lanka is at the cusp of gaining upper-middle-income status. While the country has been focusing on infrastructure and human capital development, the time has come to adjust strategy to enable it to rise to the next stage of development. Private sector investment should take over the role of driving economic growth. A new focus on human capital development has already started, and emphasis should gradually shift to higher skills and tertiary education to meet the market requirements of the knowledge economy.

o With upper-middle-income status comes the need for greater gains in efficiency, or total factor productivity, to continue climbing to high-income status. Sri Lanka should start by strengthening its technological readiness to accept technology transfer through foreign direct investment. At the same time, it should begin innovating. The development of infrastructure and human resources should be adapted to this new policy agenda.

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.

“Courage is the first virtue that makes all other virtues possible”

Aristotle

Economy & Finance

Economic Capsule - March 2015