economic capsule - november 2014

Economic CapsuleNovember 2014

Research & Development Unit

215th Issue

C O N T E N T S

BANKING SECTOR NEWS Group Results for the 9 Months Ended 30 September 2014

Commercial Bank of Ceylon Loans & Deposits By Product as at 30.09.2014

Hasrath Munasinghe Listed Among Top 100 ‘Most Talented Global Marketing Leaders’

Commercial Bank Launches‘PAYCOM’ Sri Lanka’s first Multilingual MobilePOS Application

Commercial Bank Reduces Interest Rate on Credit Cards

Commercial Bank Commissions Drive-through ATM at Gampaha

ECONOMIC & BUSINESS NEWS Sri Lanka Wins IT/BPM Destination of the Year in UK Again

Sri Lanka Debuts in Global Entrepreneurship Index at # 71

Prospects Improve for Sri Lankan Consumer Durable Retailers in 2015

Renuka Hotels, Cargo Boat Development to Construct Office Complex

ITC Colombo One Breaks Ground

Rocell Set-up Subsidiary in Australia

Munchee Enters Bangladesh

Kandy & Northern Expressway Construction Commenced

International News

Analysis & Forecast

Condominium Industry in Sri Lanka

October, 2014


Banking News

< Research & Development Unit >

Commercial Bank Group Results for the 9 Months Ended 30 September 2014


Loans & Receivables to other Customers By Product (Group)

Due to other Customers By Product (Group)

Commercial Bank Loans & Deposits By Product as at 30.09.2014


Hasrath Munasinghe Listed Among Top 100 ‘Most Talented Global Marketing Leaders’

This prestigious accolade was presented at the 2014 Global Marketing Excellence Awards of the World Marketing Congress at Taj Land’s End, Mumbai recently.

The World Marketing congress is an annual event at which marketers from around the globe are rewarded for their achievements. Recipients are selected by an experienced and prestigious panel of judges after many rounds of evaluation which assess their leadership in achieving marketing excellence, brand building abilities and outstanding contribution to mentor marketing professionals. Candidates from more than 50 countries are considered for this award.

Commercial Bank’s Deputy General Manager – Marketing, Mr Hasrath Munasinghe has been named one of the ‘100 Most Talented Global Marketing Leaders’ by the Chief Marketing Officer (CMO) Council.


Commercial Bank Launches‘PAYCOM’ Sri Lanka’s first Multilingual MobilePOS Application

The Commercial Bank Ceylon and Paycorp International (PYCI), a leading provider of enterprise payment processing solutions to banks, corporates and industry specific vertical markets, have formed a strategic alliance to launch ‘PAYCOM,’ Sri Lanka's first Multilingual MobilePOS solution.

The PAYCOM solution will allow any business to accept credit card and debit card payments anywhere, any time. Businesses can simply download the PAYCOM app to an Android or IOS smart phone or tablet and choose their preferred language, Sinhala, Tamil or English to perform transactions.


Commercial Bank Reduces Interest Rate on Credit Cards

Commercial Bank has announced a reduction in the interest rate applicable on all credit cards issued by the Bank, effective from 5th November 2014.

The interest rate on outstanding balances on Platinum, Gold, Silver and Classic cards has been reduced from 24%to 22%per annum or 1.83%per month.

Commercial Bank has commissioned its latest drive-through Automated Teller Machine (ATM) at the Bank’s Gampaha branch, for the convenience of busy customers.

Commercial Bank Commissions Drive-through ATM at Gampaha


October, 2014


Economic & Business News


Sri Lanka Wins IT/BPM Destination of the Year in UK Again

Sri Lanka won the National Outsourcing Association (NOA) Offshoring Destination of the Year Award 2014 for the second time, validating that the country is a leading destination for outsourcing of information technology and Business Process Management.

In BPM, finance and accounting is a global niche, whilst product engineering in IT is a core competence for the nation.

The quality of service provided in these niches has contributed immensely to the IT/BPM industry’s growth from revenue of $ 213 m in 2007 to $ 720 m in 2014.

Being shortlisted for the European Outsourcing Association (EOA) Offshoring Destination of the Year Award 2014 and winning this award for two years in a row has put Sri Lanka on the map, especially in niche markets of Product Engineering and Finance and Accounting Outsourcing (FAO).


Sri Lanka Debuts in Global Entrepreneurship Index at # 71

Released by the US-based Global Entrepreneurship and Development Institute (GEDI Institute) to mark the global week to celebrate entrepreneurship, the Index sheds light on the efficiency of national startup ecosystems through analysis of 34 essential individual and institutional variables under sub index themes of Attitudes, Abilities and Aspirations.

Sri Lanka is ranked at 103 in the Attitudes Sub Index, 54 in Abilities Sub Index and 59 in Aspirations Sub Index. Sri Lanka is also the best in South Asia this year on its entry whilst several regional countries such as India, Pakistan and Bangladesh had been featured in previous rankings.

Sri Lanka has debuted in the influential Global Entrepreneurship Index (GEI) 2015, ranking at 71 out of 130 nations surveyed and 11th within the Asia Pacific region.


Prospects Improve for Sri Lankan Consumer Durable Retailers in 2015

With improvement in their purchasing power, Sri Lankan consumers are increasingly looking to upgrade to new, more efficient consumer electronics and household white goods. Fitch believes that a recovery is likely for the consumer durables sector in Sri Lanka in 2015.

Demand for consumer electronics and white goods tend to be volatile across business cycles due to their non-essential nature and larger price tags. Fitch expects retailers of consumer durables to achieve modest revenue growth supported by increasing consumer purchasing power following a 25% reduction in domestic electricity tariffs from September 2014 and a cut in the VAT rate to 11% from 12% that will be implemented in 2015.

The consumer durables industry faced a challenging environment in 2013 due to pressure on disposable income and introduction of the VAT, which retailers found difficult to pass on to consumers leading to a negative impact on margins.

The consumer durables industry is characterised by few key players, like Singer (Sri Lanka) PLC (A-(lka)/Stable), Abans Limited (BBB+(lka)/Negative) and Softlogic Holdings PLC, dominating the market. These companies have strong brand portfolios and extensive distribution networks, which are hard to replicate given the investment required and brand equity of established players. This protects the existing players from competition to a certain extent.

According to Fitch Ratings lower borrowing rates, reduced electricity tariffs and an upcoming cut in the value added tax (VAT) will create a more favourable environment for retailers of consumer durables in Sri Lanka in 2015.

Source: Fitch Ratings


Renuka Land Ltd., a joint venture between Renuka Hotels Ltd and Cargo Boat Development Company Plc, has initiated a project to construct a modern rentable ‘Class A’ office building complex in Colombo catering to the much-needed requirement of such a facility in the rapidly developing city.

Enabling convenience and affording accessibility, the building will be located on company-owned land at No. 29, Braybrooke Street, Colombo 2, in the heart of the metropolis.

The total investment for the Board of Investment (BOI) approved project has been estimated at Rs. 2 b.The building will adhere to modern international standards and criteria at all stages of construction along with the introduction of new and innovative features to its design.

The construction of the building, which is scheduled to commence in December this year, will culminate in April 2017.

Renuka Hotels, Cargo Boat Development to Construct Office Complex


ITC Colombo One Breaks Ground

The groundbreaking ceremony for the iconic luxury hotel and residences ITC Colombo One took place recently. ITC is one of India’s largest multi-business enterprises.

Situated along the picturesque coastline overlooking the historic Galle Face Green, ITC Colombo One is likely to offer about 350 rooms in the first phase, more than 130 luxury residences, world-class banqueting and cuisine experiences for which ITC Hotels is globally-renowned, as well as retail and full service office space. Located between the oceanfront and the Beira Lake, the hotel will offer panoramic views of the Indian Ocean as well as the city of Colombo.

With an investment outlay of around USD 300 mn, this luxury hotel will be ITC’s maiden overseas foray in the hospitality sector.


Rocell Set-up Subsidiary in Australia In a bid to boost exports, Royal Ceramics Lanka Plc has set up a fully-owned subsidiary in Australia. Rocell Ltd. has

been incorporated under the laws of Australia to engage in the wholesale and retail business of floor and wall tiles and bathware. The proposed initial investment in the subsidiary is Australian Dollars 0.5mn or Rs.61.5mn. According to Royal Ceramics, country’s tile and ceramic exports increased by 5% (USD 37.8mn) in FY14 from FY 2013. The company registered a growth rate of 7% via exports to countries like the Australia, Maldives and India.

Munchee Enters Bangladesh Ceylon Biscuits Ltd. (CBL) has set up the first Sri Lankan-owned confectionery manufacturing plant overseas in

Bangladesh.

The factory, located 35 km out of Dhaka City in the Gazipur District Sreepur Mauna, had its soft inauguration recently. The company has invested around USD 3 mn in its initial phase and plans to invest up to USD 10 mn in its expansion programs aiming at strengthening its dominance in the region.


Kandy & Northern Expressway Construction Commenced

Construction of the Kandy Expressway by five local contractors commenced on 14 November, with the Pothuhera turn linking it to the Northern Expressway.

Meanwhile, Northern Expressway construction from the Galewela entrance in the Dambulla District commenced on 15 November.

“The construction from Pothuhera to Galagedara will be funded by Chinese banks, the Enderamulla to Veyangoda stretch will be funded by IFC (International Finance Corporation) and the Veyangoda to Galagedara stretch will be funded via a collaboration of local and foreign banks.”

The Colombo-Kandy Expressway, which is separated from the Northern Expressway by the Pothuhera turn, will run to Gannoruwa via Rambukkana, Galagedara and Aladeniya. The Northern Expressway will run to Jaffna via Kurunegala, Galewela and Dambulla. From Colombo to Pothuhera, a distance of around 70 km, both expressways will use one route.

Current travel speeds during peak hours are low along the 115 km road from Colombo to Kandy, requiring three hours. The expressway will reduce the travel time from Colombo to Kandy to 1.5 hours, while travel to Galewela will also be reduced to 1.5 hours.

International News


Oil price slide and sanctions 'cost Russia $140bn'

The falling oil price is costing Russia up to $100bn a year, while Western sanctions have hit the country by $40bn, its finance minister has stated.

According to reports Russia could cut its oil production by about 300,000 barrels a day in an attempt to support the oil price.

Members of the Opec oil cartel may decide to cut production to support prices. Brent crude was trading at $80.25 a barrel on 24.11.14, down 11 cents, while US crude was 10 cents lower at $76.41.

Iran, Libya and Venezuela have urged other Opec members to support oil prices by reducing output, although Kuwait has said that a cut was unlikely.

The oil price has been falling since the summer on abundant global supply, partly due to the US shale boom, and lower demand in Europe and Asia. Brent crude has fallen by more than a third and hit a four-year low of $76.76 a barrel on 14 November.

China cuts interest rates to revive slowing economy

The People's Bank of China has cut its one year deposit rate to 2.75% from 3.0% to try to revive the flagging economy.

The cut, which took the markets by surprise, was the first since 2012, and comes into effect from 22 November. The one-year lending rate will also be reduced from 6% to 5.6%. China’s economic growth slowed to a five-year low of 7.3% last quarter.

Source: BBC Business

Taken from The Economist

Source: Reuters

Cont…


Japan falls into recession

Japan's economy unexpectedly shrank for the second consecutive quarter, marking a technical recession in the world's third largest economy.

Gross domestic product (GDP) fell at annualised 1.6% from July to September, compared with forecasts of a 2.1% rise.

That followed a revised 7.3% contraction in the second quarter, which was the biggest fall since the March 2011 earthquake and tsunami.

Is Germany’s economy getting too weak to pull Europe out of its crisis?

In the third quarter, 2014 the euro zone grew by just 0.6% at an annualised rate. This sluggishness was not primarily due to the countries hit hardest by the crisis—Greece’s economy grew faster than any other euro-zone country, and Spain and Ireland are recovering.

Rather, it is the core countries that are exhausted—and few more so than the biggest, Germany. It grew by just 0.1% in the third quarter, after contracting by the same amount in the previous three months.

U.S. economy resilient in Q3

The US economy grew much faster in the third quarter than first reported, official figures have shown. It expanded at an annualised rate of 3.9% between July and September, up from the 3.5% first estimated by the Bureau of Economic Analysis.

The rise, which follows a strong second quarter, means the US has seen its strongest two consecutive quarters of growth for a decade. Consumer spending was the biggest driver of the raised estimate.


Source: The Economist

Source: The Economist



October, 2014


Analysis & Forecast


Inflation

Sri Lanka had recorded a single digit inflation rate for 68 consecutive months by October, 2014.

Inflation, as measured by the change in the Colombo Consumers’ Price Index, further decreased to 1.6 % in October 2014, on YoY basis, which is the lowest since November 2009. This was mainly supported by the downward revision of electricity tariff, and prices of LP gas and fuel.

Further, the continued deceleration of the prices of key commodities such as fuel in the international market and the stable LKR/USD exchange rate prevailing in the country is likely to have a favorable impact on the country’s rate of inflation during the short-term.

The rate of inflation is likely to remain at around mid single digit levels during 2015 due to a combinations of factors which include the downward trend in fuel prices in the international market and possible further reductions in domestic fuel prices.

What to expect: The indirect impact of the reduction in utility prices are likely to reduce the inflationary pressures during the short-term.

Cont…


Interest Rates

What to expect: With the possible rise in US interest rates beginning with mid-2015, the access that developing countries like Sri Lanka had to large volumes of cheap capital will diminish. When this happens, Sri Lanka's ability to borrow quite cheap from off-shore sources will be less.

This will result in more dependence on borrowing from domestic sources, which in turn will eventually cause interest rates to edge up.

However, thus far domestic interest rates have not picked up due to low domestic credit demand. However, when credit demand does eventually pick up, a gradual rise in domestic interest rates can be anticipated.

The expected pickup in private sector credit growth, the possible increase in US interest rates and downward pressure on LKR/USD exchange rate are likely to apply upward pressure on interest rates in 2015.

Interest rates recorded a declining trend during 2014 as well due to easing monetary policy measures adopted by the CBSL since December 2012 with a view to enhancing credit growth to support the country’s GDP growth. During 2014, the interest rates on Government securities declined significantly than the interest rates on loans and deposit offered by commercial banks.

Cont…


Credit to Private Sector

The YoY growth rate in Credit (outstanding) to the Private Sector by the banking sector had continuously declined up to July 2014 mainly due to a decline in pawning advances, lesser credit demand by the private sector, repayment of loans taken at high interest rates through new loans obtained at prevailing low interest rates and borrowings by the private sector organizations through foreign sources and corporate bonds.

However, the private sector credit growth increased to 4.6 % in September 2014 (YoY) with the highest monthly increase of Rs 52.3 bn so far in 2014 Cont…


Credit to Private Sector (cont…)

The private sector credit growth is expected to improve in 2015 due to measures taken to improve credit growth in 2014, the expected developments in the export sector with the recovery of the country’s main export markets and base effect etc.

Further, the expected improvement in development activities in the country and concessions provided to vehicle imports are likely to increase the import demand and as a result import related lending is expected to pickup.

The salary increment proposed by the 2015 budget for government sector employees is likely to increase the disposable income of them. As a result, demand for products and services is expected to rise, giving a boost to business activity.

This in turn is expected to increase demand for credit in 2015 in the backdrop of a moderate interest rates and inflation scenario.

What to expect:

Cont…


Exchange Rate The domestic foreign exchange market has remained

relatively stable year-to-date.

The Sri Lankan rupee remained stable against the USD with a marginal depreciation of 0.1 % during the year to 13 November 2014. Based on cross currency exchange rate movements, the Sri Lankan rupee appreciated against the euro by 9.8 %, the Japanese yen by 9.1 % the pound sterling by 4.3 % and the Chinese renminbi by 0.9 %. Meanwhile, the Sri Lankan rupee depreciated against the Indian rupee by 1.0 %.

What to expect: The possible rise in US interest rates from mid-2015 is likely to have an unfavorable impact on the foreign investments in government securities and in the CSE. Besides, the concessions provided by the 2015 budget are likely to increase imports such as vehicles in 2015 with added stimulus being provided by expected low interest rates. Due to these factors depreciation pressures on LKR/USD are likely to increase from 2015 onwards. Cont…


Exchange Rate (cont…)

What to expect: (cont)

On the other hand these pressures for depreciation of the rupee will be mitigated by better growth prospects for the US economy and resultant better export earning flows for Sri Lanka. Additionally, Sri Lanka’s foreign exchange inflows are expected to be boosted by better service sector receipts, and remittances and tourism related inflows.

Further, foreign exchange is expected to flow in through bond issues by the government as well as the private sector. Therefore, the LKR/USD exchange rate is not likely to experience a sharp depreciation in 2015 since the US interest rates are likely to pick up only gradually and SL has comparatively a low amount of foreign investments in government securities. Further, the expected surplus in the BOP and the comparatively higher gross official reserve position of the country will provides a cushion for LKR/USD rate in 2015.

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.

The Privilege of a lifetime is being who you are.Joseph Campbell

economic capsule - november 2014

Economy & Finance