economic capsule - june 2017

Economic CapsuleJune 2017

246th Issue

Research & Development Unit

C O N T E N T S

ECONOMY & BUSINESS

Sri Lankan Economy: Fitch

Sri Lanka Economy Grows by 3.8% in 1Q,2017

External Sector Performance – 1Q, 2017

Inflation

Credit Growth

Middle East Diplomatic Dilemma Adds Uncertainty to Migrant Workers and Remittances in the Region: CCC

Sri Lanka Tops First Island Economy of the Future Rankings

India’s ITC Group to Build Mid-market Hotel Chain with MMBL Leisure

Debug Hospitality and Leisure launches Amber Collection in Sri Lanka

Jetwing Lake Opens

Waters Edge Breaks Ground for Extensive Expansion Project

SL Invites Bids for Ferry Transport System in Colombo

Sri Lanka - Land of Real Estate Opportunities: JLL

INTERNATIONAL

FED Hikes Rates

Asian central banks have cause to keep holding rates while the Fed hikes

BANKING & FINANCE

Commercial Bank named Best Bank in Sri Lanka for 7th time by FinanceAsia

Condominium Industry in Sri Lanka

October, 2014


Banking & Finance

Commercial Bank named Best Bank in Sri Lanka for 7th time by FinanceAsia

< Research & Development Unit >

Commercial Bank has been adjudged the Best Bank in Sri Lanka by FinanceAsia at the magazine’s annual Country Banking Achievement Awards for domestic banks.

This is the seventh Best Bank award conferred on Commercial Bank by the prestigious Hong Kong based publication in the nine years since the Bank became the first entity in Sri Lanka to receive this coveted accolade in 2009.

The FinanceAsia Country Awards are based on the respective banks’ performance along with key events of the year, financial results including profits, NPL ratios, provisioning, return on equity, capital adequacy ratios, total assets, loans, deposits, branch network, vision and long-term strategy, market position versus the nearest competitor, principal sources of profit, and feedback of stock market analysts.


October, 2014


Economy & Business

Sri Lankan Economy: Fitch


Strengths Weakness

GDP Growth Stronger than Peer Median Weak external buffers & High upcoming external

debt repayments

Ongoing USD 1.5bn 3-year Program With IMF

Supporting Reforms; Fiscal Consolidation

Positive

High government debt levels & high share of

foreign currency debt in total government debt

Well-educated labor force; Ranks above ‘B’

median on UN Human Development Index

High interest payments as a share of government

revenue

Sri Lanka has a clean external debt service

record

Strengths & Weaknesses

Source: Fitch - Sri Lanka Sovereign Outlook, Sovereign and Banking Forum, June 2017 Cont…

Sri Lankan Economy: Fitch (cont…)


Positive Negative

Continued improvement in public finances

underpinned by a credible medium-term fiscal

strategy, including a broadening of the

government revenue base.

Deterioration in policy coherence and credibility,

leading to a loss of investor confidence, or a

derailment of the International Monetary Fund

supported programme that leads to external

funding stress.

Increase in foreign-exchange reserves

supported by smaller current-account deficits

and higher non-debt capital inflows.

Reversal of fiscal improvements that leads to a

failure to stabilise government debt ratios.

Rating Sensitivities

Source: Fitch - Sri Lanka Sovereign Outlook, Sovereign and Banking Forum, June 2017

Sri Lanka Economy Grows by 3.8% in 1Q,2017

SL’s economy grew by 3.8 % in 1Q-17 with the agriculture sector shrinking 3.2 %, amid a drought. Industry sector and services sector grew by 6.3% and 3.5% respectively.

3.8%

Agriculture 3.2%

Industry 6.3% Services 3.5%

5.3%

Source: Department of Census and Statistics, Sri Lanka

External Sector Performance – 1Q, 2017


Category(USD mn) (%)

Jan-Mar 16 Jan-Mar 17 Y-O-Y Change

Exports 2,739.2 2,774.3 1.3

Textiles and garments 1,369.3 1,275.8 -6.8

Tea 313.1 349.1 11.5

Imports 4,594.5 5,278.9 14.9

Fuel 485.7 882.1 81.6

Vehicles 231.6 191.9 -17.2

Trade Balance -1,855.3 -2,504.5 -35.0

Earnings from tourism 1,003.3 1,037.9 3.4

Workers’ remittances 1,793.4 1,733.7 -3.3

The deficit in the trade account of the BOP increased to USD 828 mn in March 2017 from USD 617 mn in March 2016.

Gross official reserves has improved to above USD 7.0 bn by mid-June 2017. Meanwhile, the Sri Lankan rupee has depreciated against the USD by 2.3 % during 2017 up to 21 June.

Exports in 1Q-17, increased by 1.3% largely due to increases recorded in agricultural exports led by tea

Import expenditure in 1Q-17, increased by 14.9% led by fuel imports in the intermediate goods category

Source: CBSL

Inflation

Following the increasing trend in the first quarter of 2017, year-on-year headline inflation, based on both CCPI & NCPI, moderated during the months of April and May. Core inflation has also displayed a similar trend.

According to CBSL, as the impact of the revisions to the tax structure and weather-related supply disruptions is expected to dissipate in the period ahead, inflation is projected to moderate to mid-single digits by the end of 2017.

The growth of credit to the private sector continued to decelerate gradually.

According to CBSL, further deceleration in the growth of credit to the private sector is anticipated, given the prevailing high lending rates in the market.

Credit Growth


Middle East Diplomatic Dilemma Adds Uncertainty to Migrant Workers and Remittances in the Region: CCC


The Middle East region contributed the largest share, of 53.7% (US$ 3,889 Mn), to worker remittances in 2016. However the Middle East’s total worker remittances has been declining over the years from 60.1%, in 2010, to 54%, in 2015.

In 2016, more than 80% of the total migrant employees were recruited by just 4 countries; The Kingdom of Saudi Arabia, Qatar, United Arab Emirates and Kuwait.

Saudi Arabia, UAE, Bahrain and Egypt, recently severed diplomatic ties with Qatar, along with closure of air, sea and land travel links to the country.

There are approximately 150,000 Sri Lankan migrant workers in Qatar, and reportedly they have not been affected by this issue in the short run.

Considering that Qatar is highly reliant on imports from the region and the fact that Qatari Riyals is being devalued due to the above mentioned Middle East countries selling off the currency, there may be long term issues that may impact the economy.

However, the Qatar Finance Minister has stated that the sanctions will not impact Qatar greatly as they have ample foreign reserves and will source their imports from other nations.

Source: CCC , EIU – June 2017, Economic Update

Sri Lanka Tops Island Economy of the Future Rankings


“Data shows that 2016 was a bumper year for Sri Lanka’s FDI, which increased nearly 147% from 2015, to reach more than $ 2.8 billion in estimated totals for announced projects, though some plans have been scaled back,” the report said.

Between 2012 and 2016, financial services were the leading sector by number of projects, recording 43 investments. Food and tobacco, transportation and business services were the country’s next biggest sectors for inward FDI across this period, each accounting for nearly 9% of the country’s total, the report added.

Under the subsection ‘Food for thought’, the report noted the food and tobacco sector has become a more prominent FDI sector in Sri Lanka, accounting for 6.5% of total FDI in 2012, and rising to 16% in 2016. According to a report by the Sri Lanka Export Development Board published in 2016, it is estimated that more than two million people are employed in the sector.

Sri Lanka has topped the rankings of fDi Intelligence Magazine’s first-ever Island Economy of the Future for 2017/18, with Cyprus and the Dominican Republic ranking second and third respectively. The publication, is a subsidiary of The Financial Times UK.

According to greenfield investment monitor fDi Markets, the South Asian country attracted 172 inward investment projects between 2012 and 2016, the highest of all countries included in the analysis.


SL Invites Bids for Ferry Transport System in Colombo

Sri Lanka’s Megapolis Ministry has called for expressions of interest to establish a ferry system in Colombo canals through a public-private partnership.

The process is open to international and local investors and is supported by PPP advisors from the Government of the Netherlands, under a technical assistance initiative.

Three lines for passenger transport earmarked by the ministry are Wellawatte-Battaramulla (IW1), Fort-Union Place (IW2), Mattakkuliya-Hanwella (IW3).

Wellawatte-Battaramulla (IW1) is phase 1 and will intersect six main roads – Marine Drive, Galle Road, High level Road, Baseline Road, Nawala Road and Parliament Road and has been identified as immediately actionable.

Fort-Union Place (IW2) will connect Fort and commercial areas in Union Place and will provide time savings during peak time.

Mattakkuliya-Hanwella (IW3) on the Kelani River will be an alternate mode for the low level corridor.

Sri Lanka - Land of Real Estate Opportunities: JLL

OFFICE MARKETS

Office Market Trends

• Lease transactions dominate the commercial markets with outright purchases few and far between.

• Information Technology(IT)/Information Technology Enabled Services (ITeS) companies’ continuous expansion strategies require them to move to larger space formats and, therefore, they prefer the flexibility afforded by lease contracts.

• Upcoming mixed use development projects like Cinnamon Life and Shangri-La, located in the CBD area, will inevitably increase the overall supply of office space in Colombo.

• IT/ITes companies may move out of CBD areas as rentals are high in these locations. Banking, Financial Services and Insurance (BFSI) companies may also retain only nominal corporate office spaces in CBD, with back offices relocating to more cost effective space in secondary locations.

RETAIL MARKET

Retail Market Trends

• The Sri Lankan consumer is rapidly becoming more brand conscious and demand for better quality goods and services is driven by rising average incomes.

• Key occupiers of existing malls are apparel retailers, mobile and accessory outlets and food and beverage operators.

• The retail market suffers from fragmentation and there is lack of good quality mall spaces, that provide entertainment and leisure facilities and adequate parking.

Colombo’s eight operational shopping centres account for approximately 0.8 mn square feet of built-up area, and have an average vacancy rate of less than 5%.

The city of Colombo is Sri Lanka’s most prominent commercial office destination. Currently, the Colombo office market comprises nearly 1 mn square feet of Grade A stock witnessing 95% occupancy levels.

< Research & Development Unit > Cont…

CBD – CBD of Colombo is the financial, business and

transportation hub of Sri Lanka.

SBD –SBD of Colombo is primarily residential with strip retail

activity along major transport corridors.

Source: Sri Lanka - Land of Real Estate Opportunities, JLL, May 2017

Sri Lanka - Land of Real Estate Opportunities: JLL (cont…)

Luxury Housing


For a growing high and middle income population, luxury housing is a key attraction in residential markets. Demand for such housing is derived from a growing urban wealthy demographic. In addition to this, non-resident Sri Lankans (NRSLs) keen to invest in their country of origin also drive demand.

Luxury Residential Trends

• Sri Lanka’s luxury residential market is driven by resident Sri Lankans as well as NRSL population.

• Majority of the luxury apartments are located in Colombo 3, CBD.

• Currently over 3000 units are under development and these projects are due for completion between 2017-19

Hotel Supply

−According to the Sri Lanka Tourism Development Authority (SLTDA), Sri Lanka has approximately 28,500 keys of which 67% is in the informal sector constituting small luxury boutique hotels, unclassified hotels and supplementary establishments.

−A large portion of the country’s hotel inventory is currently dominated by domestic hotel chains such as John Keells, Aitken Spence and Jetwing Hotels which have chains across the country while new International players have started to enter the market particularly in Colombo, but also along the southern coastal region in the resort sector.

Hotel Supply (cont…)

Cont…

−Colombo City hotels have seen some pressure with the entry of hotels in the budget and midscale segments and commercial growth has been minimal, with the country seeing limited foreign investment and moderate expansion in corporate activity.

While Colombo has a diverse demand base, future growth in the largely commercial-driven hotel sector will be linked to:

• Level of corporate growth and foreign investment

• A concentrated marketing effort

• Development of Colombo as a leisure destination


Sri Lanka - Land of Real Estate Opportunities: JLL (cont…)


Hotel Supply (cont…)

JLL is tracking a hotel supply pipeline in Colombo of close to 4,500 rooms, largely concentrated towards the luxury segment and upper upscale segments (branded hotels classification based on pricing and product).

With hotel inventory in Colombo expected to double over the next 3-4 year period, substantial efforts will be needed to boost both corporate and leisure demand to keep pace with the rapid growth in supply.

The Leisure segment has seen promising growth, with the revenue of the top four listed hotel companies with resort assets across the country demonstrating a 3% growth over 2014-15, despite substantial additions in the formal and informal sector.

While occupancy levels have shown fair growth over the last year, market Average Room Rates have also seen growth with the changing supply composition, with new supply in the luxury and upper upscale segments entering the market.

With resort properties experiencing extremely high occupancy levels during peak season, there continues to be strong potential to develop in the leisure segment.

Hospitality Trends

• Aggressive expansion plans by local leaders in the hospitality industry - John Keells, Aitken Spence, Jetwings, Amaya Leisure, Laugfs Holdings.

• With high levels of interest from international hospitality players including the Shangri-la Group, ITC Hotels, Starwood Hotels and Resorts, Marriott International, Hyatt Hotels Corporation and Moevenpick Hotels, many major global hotel chains are looking to have a presence in the country.

• The South-west coast is Sri Lanka’s best performing stretch and will continue to be the prime preference for mass market tourists.

• Increased destination marketing and a more varied hotel offering will help change Sri Lanka’s perception as a budget destination to one offering a range of tourism experiences.

• Improving tourism infrastructure at leisure destinations and upcoming tourist circuits will boost Sri Lanka’s overall attractiveness as a leisure destination, while specific measures to promote Sri Lanka as a MICE and entertainment destination are likely to see benefits in the long-term



October, 2014


International


FED Hikes Rates

The Federal Reserve raised interest rates on 14th June’17 for the second time in three months and said it would begin cutting its holdings of bonds and other securities this year, signaling its confidence in a growing U.S. economy and strengthening job market.

In lifting its benchmark lending rate by a quarter percentage point to a target range of 1.00% to 1.25% and forecasting one more hike this year, the Fed seemed to largely brush off a recent run of mixed economic data. Source: USA TODAY


Asian central banks have cause to keep holding rates while the Fed hikes

Asian central banks have not blinked since the Federal Reserve raised U.S. rates for the third time in six months last week (14 June).

New Zealand, Taiwan and the Philippines are all expected to hold rates on. Indonesia and Japan stood pat, as Australia and India did earlier in June.

China's central bank, which raised some interest rates after the Fed's March move, kept them unchanged this time.

Unlike in past Fed tightening cycles, Asia is much more reliant on China than on the United States.

"There is a common thread and it is that China, Asia's economic engine, continues to stutter," according to Frederic Neumann, HSBC's co-head of Asian economic research in Hong Kong. "We have more central banks on hold or even with an easing bias because China is weighing on demand and the western world isn't strong enough to compensate for that."

In 2016, U.S. trade with 10 top Asian partners rose by roughly 25 % from levels before the 2008-09 global financial crisis. But China's trade with the other nine grew almost 60 % in the same period to $1.05 trillion. The United States' trade with those nine countries is about half as much.

Source: Reuters

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 >

economic capsule - june 2017

Economy & Finance