Economic CapsuleApril 2016

Research & Development Unit

232nd Issue

C O N T E N T S

BANKING AND FINANCE Commercial Bank wins top Global Brand Excellence Award Commercial Bank signs agreement with Bank Muscat Oman for instant money transfers

ECONOMY & BUSINESS Sri Lanka: Medium Term Macroeconomic Framework – CBSL

Sri Lanka Among Six High Leverage Risk Countries: Moody’s

Repatriation of Payments Received for Goods Exported from Sri Lanka

Sri Lanka Will Benefit from European Union’s Termination of Ban on Imported Fish: Moody’s

Possible Strategic Steps for Sri Lanka’s Apparel Sector: WB

Sri Lankan IT Industry Leverages Niche Appeal: Oxford Business Group

Global Economic Update Euro zone economy above pre-crisis peak as growth surges past U.S., Britain

U.S. economy stalls in first quarter as activity weakens broadly

Chinese economy shows signs of debt-fueled recovery

Trade growth to remain subdued in 2016 as uncertainties weigh on global demand

Condominium Industry in Sri Lanka

October, 2014

Research & Development Unit

Banking & Finance

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Commercial Bank wins top Global Brand Excellence Award

With this prestigious award, Commercial Bank has reaffirmed its status as one of the strongest brands in Sri Lanka and the Asia Pacific region. The award won by the Bank was the only one presented in that category.

The award for ‘Marketing Campaign of the Year’ was won for the Bank’s attractive thematic corporate campaign which engages multiple target segments and is based on the Bank’s role of focusing on and empowering the aspirations of customers under the proposition ‘The Bank for Your Success.’

Commercial Bank was presented the award for ‘Marketing Campaign of the Year’ at the 2016 CMO Asia Awards for Excellence in Branding and Marketing in Kuala Lumpur, Malaysia.

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Commercial Bank signs agreement with Bank Muscat Oman for instant money transfers

The mobile app makes it possible for users to send cash remittances to recipients in Sri Lanka or transfer money to accounts at Commercial Bank 24/7. They may also transfer funds to accounts at other banks in Sri Lanka via Commercial Bank.

The Commercial Bank of Ceylon recently formalised its tie-up with the Bank Muscat Oman to facilitate remittances to Sri Lanka via the latter’s new feature-rich mobile banking app, with the signing of an agreement in Muscat.

Condominium Industry in Sri Lanka

October, 2014

Research & Development Unit

Economy & Business

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Sri Lanka: Medium Term Macroeconomic Framework - CBSL

Source: CBSL Annual Report 2015

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IMF Reaches Staff Level Agreement with Sri Lanka on Three-Year US$ 1.5 Bn EFF

The Sri Lankan authorities and the IMF have reached a staff-level agreement on a 36-month (3 year) Extended Fund Facility (EFF) for 185 % of Sri Lanka’s quota in the IMF (about SDR 1.1 bn or US$ 1.5 bn). This agreement will be subject to completion of

prior actions and approval by the IMF’s Executive Board, which is expected to consider Sri Lanka’s request in early June.

Formal approval of the EFF is expected to catalyze an additional US$ 650 mn in other multilateral and bilateral loans, bringing total support to about US$ 2.2 bn (over and above existing financing arrangements).

Cont..

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IMF Reaches Staff Level Agreement with Sri Lanka on Three-Year US$ 1.5 Bn EFF (cont..)

The authorities’ program supported by the IMF focuses on a comprehensive set of reforms to Sri Lanka’s tax system eliminating exemptions, holidays, and special rates to broaden the tax base and create a tax system that is simple, efficient, and more equitable.

The government will seek to raise the tax-to-GDP ratio to near 15 % by 2020 by implementation of a new Inland Revenue Act, reform of the VAT and the customs code.

These efforts on tax policy will be complemented by capacity building and reform in revenue administration—making full use of automated systems and information technology to bolster tax collection while also clamping down on corruption and discretionary tax treatment.

Together with more efficient management of government expenditure, the program will support a steady reduction of the overall fiscal deficit to 3.5 % of GDP by 2020 equivalent to a shift from primary (excluding interest costs) fiscal deficits to primary surpluses that will underpin a much-needed reduction of public debt.

Source: IMF

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Sri Lanka Among Six High Leverage Risk Countries: Moody’s Sri Lanka has been categorised among six high

leverage risk countries by Moody’s along with China, Japan, Mongolia, Hong Kong and Macao as high public, private sector leverage poses credit risks across the Asia Pacific region.

With regard to Sri Lanka, Moody’s said Sri Lanka has a very high debt burden compared to its rating peers.

General government debt stood at around 76.0% of GDP in 2015, up from 71.6% five years earlier, and well above the 48.6% median for B-rated sovereigns. Cont..

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Sri Lanka Among Six High Leverage Risk Countries: Moody’s (cont..) Interest payments consume nearly a third

of government revenues much higher than rating peers.

More than 40% of Government debt is denominated in foreign currency. This exposes the Government to a larger repayment burden in the event of a depreciation in the local currency, as happened in late 2015.

Reliance on bilateral and multilateral lenders reduces but doesn’t eliminate vulnerability to international market volatility, as financing strains posed by falls in capital inflows in recent months have shown.

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Repatriation of Payments Received for Goods Exported from Sri Lanka As part of current policy measures taken to improve the foreign exchange inflows to the country, the Ministry of Finance has issued the Gazette Notification (Extraordinary) No: 1960/66 dated 01 April 2016 containing the following.

i. Repealing the exemption granted in respect of payment for goods exported from Sri Lanka in the Extraordinary Gazette Notification No. 759/15 dated 26 March 1993.

ii. Requiring repatriation of any such payment retained abroad as at 01 April 2016 to Sri Lanka not later than 01 May 2016.

iii. Requiring any such payment received on or after 01 April 2016 to be repatriated to Sri Lanka within 90 days from the date of exportation of goods.

These proceeds may be credited to any Foreign Currency Account maintained in the name of the exporter in the Domestic Banking Unit of a Licensed Commercial Bank (LCB) or sold to a LCB. Source: CBSL

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Sri Lanka Will Benefit from European Union’s Termination of Ban on Imported Fish: Moody’s

Cont..

The European Commission has announced that it had removed Sri Lanka from the list of non-cooperative countries in the fight against illegal fishing, effectively lifting a ban on fish imported from Sri Lanka by the EU.

Sri Lanka’s resumption of exporting fish to the EU will boost exports, foreign exchange revenues, employment and income, all credit-positive effects at a time when GDP growth is moderate and balance-of-payment pressures have intensified.

More generally, the ability of Sri Lankan authorities to implement legislation and measures aimed at preventing and sanctioning illegal fishing is a credit-positive indication of the sovereign’s institutional capacity to execute change to address key impediments to growth and external stability.

The EU’s step also bodes well for further measures fostering higher exports from Sri Lanka to the region. In particular, Sri Lanka is negotiating a return to the EU’s Generalised Scheme of Preferences plus (GSP+), which would eliminate all tariffs on Sri Lanka’s exports at their entry in the EU.

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Sri Lanka Will Benefit from European Union’s Termination of Ban on Imported Fish: Moody’s (cont..)

The EU ban on fish exports negatively affected Sri Lanka’s economy and balance of payments.

Before the ban, 40% of Sri Lanka’s fish exports were shipped to the EU. In 2015, with the ban in place, fish exports declined 35.5% to $163.1 mn (see exhibit).

As a result, fish exports amounted to around 1% of total exports, down from 1.5% in 2014.

Other main export markets for Sri Lanka’s fish exports are the US and Japan.

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Possible Strategic Steps for Sri Lanka’s Apparel Sector: WB

Cont..

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Possible Strategic Steps for Sri Lanka’s Apparel Sector: WB (cont..)

Cont..Full Report - Stitches to Riches?- Apparel Employment, Trade, and Economic Development in South Asia – World Bank Group

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Sri Lankan IT Industry Leverages Niche Appeal: Oxford Business GroupConsistently ranked as a top global destination for business process outsourcing (BPO) and IT, Sri Lanka’s tech services industry has grown substantially in recent years, with high expectations and ambitious targets going forward.

Recent years have seen significant growth in Sri Lanka’s ICT revenues, particularly exports, given its limited domestic market.

From $128m in revenue in 2007, figures rose to $325m in 2009, $440m in 2011 and $719m in 2013, representing 6.47% of total exports. With official figures slightly delayed and reliant on periodic industry surveys, estimates for 2014 were around $820m with projections for 2015 topping $1bn.

Challenges remain, notably in supplying the advanced IT graduates necessary to spur future growth; however, with fundamental infrastructure largely in place, Sri Lanka should continue to expand its role in a burgeoning global market.

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Sri Lankan IT Industry Leverages Niche Appeal: Oxford Business Group (cont..) The industry aims for a total of $5bn in revenue by 2022, with 200,000 direct jobs and 1000

new start-ups Stakeholders highlight that the development of Sri Lanka’s IT sector remains quite

differentiated from that of neighbouring India, specifically, Sri Lanka shows unique expertise around building intellectual property and software engineering, at a higher value-added segment of the market. In India it has historically been a numbers game, with a wide range of services offered at a low price point, according to Mack Gill, CEO of MillenniumIT.

Apart from products and services, there is also an emphasis on different sized clients. Jeevan Gnanam, CEO of Orion City, the island’s only private IT park, told OBG that Sri Lanka has a true leg up on India in the small and medium-sized enterprises (SMEs) market.

The country is an increasingly favourable destination for outsourcing. In early 2016 AT Kearney ranked Sri Lanka 14th on its Global Services Location Index, which gauges the commercial attractiveness for offshoring of some 55 countries. Sri Lanka moved up two places year-on-year, ranking highest in financial attractiveness and slightly lower in the availability of skilled professionals and overall business environment.

Full Article - Sri Lankan IT industry leverages niche appeal

Condominium Industry in Sri Lanka

October, 2014

Global Economic Update

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Euro zone economy above pre-crisis peak as growth surges past U.S., Britain

• Overcoming years of poor health and crisis, the euro zone economy grew at its fastest pace in five years in the first quarter, 2016 driven by unlikely stars such as France and Spain.

• It now stands larger that in did at its peak before the financial crisis, albeit having taken eight years to recover. The bloc also slipped back into deflation in April.

• Blowing past both the U.S. and British economies, the latter weighed down by uncertainty over possibly leaving the Europe Union, euro zone growth doubled from the previous quarter, beating even the most optimistic expectations on healthy household consumption and a rebound in investments.

• Growth among the 19 countries sharing the euro jumped 0.6 % on the quarter, well past expectations for 0.4 % and ahead of Britain's 0.4 %.

U.S. economy stalls in first quarter as activity weakens broadly

• U.S. economic growth braked sharply in the first quarter 2016 to its slowest pace in two years as consumer spending softened and a strong dollar continued to undercut exports, but a pick-up in activity is anticipated given a buoyant labor market.

• Gross domestic product increased at a 0.5 % annual rate, the weakest since the first quarter of 2014.

• Growth was also held back by businesses stepping up efforts to reduce unwanted merchandise clogging up warehouses.

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Trade growth to remain subdued in 2016 as uncertainties weigh on global demand

• Growth in the volume of world trade is expected to remain sluggish in 2016 at 2.8%, unchanged from the 2.8% increase registered in 2015.

• Imports of developed countries should moderate this year while demand for imported goods in developing Asian economies should pick up.

• Global trade growth should rise to 3.6% in 2017, according to WTO economists.

• Exports of developed economies lagged behind developing countries in 2015, with 2.6% volume growth in the former and 3.3% in the latter.

• Developed economies imports surged last year while developing countries stagnated, with growth of 4.5% in the former and 0.2% in the latter.

• A sharp trade slowdown affected all regions in 2015Q2 but was mostly reversed by the end of the year.

Chinese economy shows signs of debt-fueled recovery

• China posted its slowest economic growth since 2009 but a surge of new debt appears to be fueling a recovery in factory activity, investment and household spending in the world's second largest economy.

• Official data showed China's gross domestic product grew at an annual rate of 6.7 % in the first quarter of 2016, easing slightly from 6.8 % in the fourth quarter as expected.

• However, other indicators released showed new loans, retail sales, industrial output and fixed asset investment were all better than forecast.

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 >