Economic Capsule - February 2018

Economic Capsule
February 2018
254th
Issue
Research & Development Unit
Economic Capsule is now on

C O N T E N T S
BANKING & FINANCE
 Commercial Bank ends 2017 on exceptionally strong footing
 Commercial Bank Performance for the year ended 31st December
2017
 Commercial Bank receives Best Green Bank & Best Private Bank awards from International Finance
 Commercial Bank sets new digital banking record
ECONOMY & BUSINESS
 Fitch Affirms Sri Lanka at 'B+'; Outlook Stable
 Economic Update
 Biz confidence rises for fourth consecutive month
 Construction sector challenged by continued labor shortage – RIU
 Sri Lanka real estate market 2018 –JLL
 USD 75mn more from ADB to boost SMEs
 Tariffs, not a revenue raising device- Harvard economist Robert Lawrence
INTERNATIONAL
 Asia Debt Binge to Dampen Growth But Not Derail It
 Japan posts longest growth streak since 1980s bubble economy
 German economy books strong finish to 2017

Condominium Industry
in Sri Lanka
October, 2014
Banking and Finance

< Research & Development Unit >
Commercial Bank ends 2017 on exceptionally
strong footing
• Commercial Bank posted profit before VAT and NBT of Rs 28.064 bn for the year ending 31st
December 2017 reflecting growth of 18.14%, a performance the Bank attributes to substantial
core business growth through adherence to the fundamentals of ‘pure banking.’
• Gross income increased by a healthy 24.10% to Rs 115.594 bn, bolstered by interest income of
Rs 103.034 bn, up Rs 22.296 bn or 27.62% primarily due to a significant growth in the Bank’s
loan book over the 12 months.
• CBC paid approximately 41% of its profit to the government as taxes in a year of volatility and
headwinds, but posted typically robust growth in all key performance indicators to end 2017
on steadfast note.
• Profit before income tax grew by 15.62% to Rs 23.183 bn, the lower rate due to the impact on
the full year of the November 2016 increase in the VAT rate from 11% to 15%.
• Profit after tax for the year improved by 14.25% to Rs 16.581 bn.

Commercial Bank Performance for the year
ended 31st
December 2017

Commercial Bank receives Best Green Bank & Best
Private Bank awards from International Finance
• Commercial Bank received the awards for ‘Best Green Bank’
and ‘Best Private Bank’ in Sri Lanka presented by
International Finance Magazine (IFM) of the UK.
• The Best Green Bank award recognizes the catalytic role
Commercial Bank has played in promoting environmental
sustainability through its lending for renewable energy
projects and other initiatives that help reduce the
environmental footprint of its clients, as well as the Bank’s
own efforts to make its operations eco-friendly.
• The Best Private Bank award is presented to banks that have
introduced innovative banking products and offer a wide
range of services to customers, regardless of size, public or
private status.

Commercial Bank sets new digital banking record
• A whopping Rs 662.95 bn was
transacted through digital banking
channels alone, by customers of the
Commercial Bank in 2017.
• This is the highest value the Bank has
handled digitally in a single year since
the launch of its Mobile and Online
Banking platforms, which make up its
‘anytime, anywhere’ digital banking
offering.
• The remarkable growth in the use of these channels was reflected in an increase of 31.31%
in digital transaction values, and a 16.45% increase in the number of digital transactions
conducted in 2017 over the previous year.

in Sri Lanka
October, 2014
Economy & Business

Fitch Affirms Sri Lanka at 'B+'; Outlook Stable
• According to Fitch, Sri Lanka's revised policy framework supports
macroeconomic stability. In Fitch's view, policies aimed at fiscal
consolidation and maintenance of a disciplined monetary stance under
the framework of the three-year IMF-supported programme have
improved Sri Lanka's policy coherence and credibility.
• Fitch's outlook for the banking sector is negative, based on Fitch
assessment of a difficult operating environment. This is reflected in an
increase in NPLs following a period of rapid credit growth and some
capitalisation pressures.
• Fitch Ratings has affirmed Sri Lanka's Long-Term Foreign-Currency
Issuer Default Rating (IDR) at 'B+' with a Stable Outlook.
Cont..

Fitch Affirms Sri Lanka at 'B+'; Outlook Stable
RATING SENSITIVITIES
The main factors that, individually or collectively, might lead to positive rating action are:
• A further improvement in external finances supported by higher non-debt creating inflows
or a reduction in external sovereign refinancing risks from improved liability management.
• Continued improvement in public finances underpinned by a credible medium-term fiscal
strategy, including a further broadening of the government revenue base.
• Continued implementation of economic policies that support underlying macro stability.
The main factors that could lead to negative rating action, individually or collectively, are:
• Deterioration in policy coherence and credibility, leading to a loss of investor confidence,
or a derailment of the IMF supported programme that leads to external funding stress.
•Reversal of fiscal improvements that leads to a failure to stabilise government debt ratios.

Economic Update
Nationwide Inflation Slows Down
•Inflation, as measured by the change in the National Consumer Price Index (NCPI)
(2013=100), Decreased to 5.4% in January 2018 from 7.3% in December 2017, on year-
on-year basis. This decline is due to the high base prevailed in January 2017 as well as
the monthly decline in Food prices in January 2018.
•The NCPI Core inflation, which reflects the underlying inflation in the economy,
decreased to 2.1 % in January 2018 from 2.7 % in December 2017 on year-on-year basis.
Credit to Private Sector Decline Further
•Growth of credit to the private sector decelerated to 14.7% (YoY) in December 2017 from 21.9% at end 2016 (Average growth
was 18.3% in 2017 compared to 25.9% in 2016)
•The cumulative expansion in credit during 2017 was Rs. 617.4 bn in comparison to Rs. 754.9 bn in 2016.
External Trade Performance – December 2017
•Export earnings: On a cumulative basis, export earnings recorded the historically highest value of USD 11.4 bn in 2017 (10.2%
YoY growth) mainly due to the notable increase in tea, textiles and garments, and petroleum products exports. The leading
markets for merchandise exports of Sri Lanka during 2017 were the USA (25.6%), the UK (9.1%), India (6.1%), Germany (4.7%) and
Italy (4.7%) accounting for about 50% of total exports.
Cont..

Economic Update (cont…)
External Trade Performance – December 2017 (cont…)
•Import expenditure: On a cumulative basis, import expenditure
recorded the historically highest value of USD 21 bn in 2017 (9.4% YoY
growth).
•This was largely led by higher imports of fuel and rice. However,
import expenditure on machinery and equipment, sugar, spices and
fertilizer declined during the year. India (21.4%), China (18.8%), UAE
(7.5%), Singapore (6.2%) and Japan (5.0%) were the main import origins
accounting for about 59 % of total imports during 2017.
• Cumulative trade deficit increased to USD 9,620 mn in 2017 from
USD 8,873 mn in 2016.

Biz confidence rises for fourth consecutive
month
• The latest edition of business magazine LMD reports
an increase of five basis points in the LMD-Nielsen
Business Confidence Index (BCI), from 122 in December
to 127 in January 2018.
• LMD notes that this is the first time since June 2016
that the BCI has improved over four consecutive
months with the index standing nine basis points
above its 12 month average.
• Nielsen’s Managing Director notes that “apart from visible activity in the
construction or infrastructure space, business leaders say the Government’s efforts
to improve the investment climate are bearing fruit and foreign direct investment
(FDI) in specific sectors is increasing.”

Construction sector challenged by
continued labour shortage – RIU
• The Sri Lankan construction industry is worth
approximately USD 8Bn and is already under strain owing
to rising construction costs.
• According to a report done by the Real Estate Intelligence
Unit (RIU), the industry is challenged by a shortage in
skilled construction workers due to two factors;
 firstly, there is a large number of potential labour who seek employment as trishaw drivers.
 secondly, due to worker migration to the Middle East where there is a much higher earning potential.
• The industry is plagued with a high labour turnover and increasing labour demand has
resulted in long delays for work to be completed.
• Further, there is an upward pressure on overall payments to labours fuelled by the
shortage.
• According to RIU, the increase in wages can cause the cost of construction to go up by at
least 7%.

• According to Jones Lang LaSalle (JLL) a global real estate services
firm, in 2017, about 95% of Sri Lanka’s ‘Grade A’ office space of
about a million square feet was occupied, and a larger proportion
of the demand was driven from Domestic firms.
2018 indicates positive signs towards the commercial property
sector and the overall economic growth of the country.
Positive signs towards Sri Lanka’s commercial property
• Due to continuous economic growth as well
as many private sector businesses and
startups springing in the country, the need
for physical workspace has increased.
• This has resulted in an increase in demand
towards commercial properties in the
recent years.
Cont..
Sri Lanka real estate market 2018 –JLL

< Research & Development Unit > < Research & Development Unit >
Port City will become a reality during 2018
Sri Lanka real estate market 2018 –JLL (cont…)
Investors sitting on land banked plots which have traditionally commanded
premium prices, by virtue of sea view and CBD location, might discover
weakened buyer sentiment in the face of competition from clean title, serviced
development plots with sea front location, being released into the market by
Port City during 2018.
• Port City will become a reality during 2018
with the launch of serviced development plot
sales to second-tier investors/developers and
the commencement of a mixed use pilot
project to showcase the master planned mega
project to a global audience.
Cont..

Residential & Apartments
• With significant unsold inventory remaining at many high profile
Colombo projects, new supply entering the market with ITC, The One
and One Colombo (Tata), the luxury residential sector already looked
set for another challenging year, but suffered another body blow in
the 2018 budget, with the reintroduction of 15% VAT on new
condominium sales.
January has seen brisk sales for some projects and disappointment
for others, so the picture remains unclear, but with over-supply
concerns and increased buyer costs to contend with, developers
will have to discount/incentivize and up their marketing game, if
sales volumes are to be maintained.
• Despite a slowdown in construction as a response to lacklustre sales, increased supply,
especially in the luxury sector, at projects such as Astoria and Shangri La will feed into the
market during 2018, as buy-to-let investors receive their apartments.
Cont..

• While there is still sufficient demand in the market to absorb the majority of this
new inventory, older apartment blocks which might be displaying signs of age
or lacking in amenities, will come under increased pressure to secure tenants
unless asking rents reflect the disparity in appeal.
Residential & Apartments

USD 75mn more from ADB to boost SMEs
• The Government signed a loan agreement with
Asian Development Bank (ADB) to obtain additional
funding for a Small and Medium Enterprise (SME)
Line of Credit Project.
• The Finance Ministry said in a statement the
Government had obtained ADB Financial assistance
of USD 100mn in 2016 to finance the SME Line of
Credit Project. The objective of the project was to
strengthen the SME sector in Sri Lanka by
facilitating access to finance and expand the
employment opportunities in the sector.

Tariffs, not a revenue raising device
- Harvard economist Robert Lawrence
• The decline of exports as a percentage of GDP since the early 2000’s, correlates with the
increase of import tariffs.
• According to him, Sri Lanka should instead move towards a simpler tariff structure, and
implement direct taxes on things like income and property to maintain revenue. “90% of
the country’s tariffs should be in the simple schedule, and then there may be some
exceptions,” he said noting that those exceptions should be for firms that actually had
long-run growth potential.
• Sri Lanka must reform its imports tariffs in order to increase exports, according to
Harvard economist Robert Lawrence.
• Tariffs are the wrong way to raise revenue,” he said. Lawrence is the Faculty Chair of the
Practice of Trade Policy Executive Program at the Harvard Kennedy School.

in Sri Lanka
October, 2014
International

Asia Debt Binge to Dampen Growth But Not
Derail It- Oxford Economics Ltd
• Asia’s soaring levels of debt will weigh on growth over the next decade - especially
in China, Malaysia, Thailand and India - but it won’t be enough to derail the
region’s economy.
• That’s because of mitigating factors such as high domestic savings and resilient
supply side dynamics, according to Oxford Economics Ltd.-Singapore.
• "These should act as substantial buffers. Even with growth slowing to 3.5% by 2030
(from around 5%currently), it is expected that Asia will remain the largest
contributor to global growth in the long run.“
• Oxford forecasts that in the long run, the debt of households and non-financial
companies will remain above 100% of gross domestic product in most Asian
economies, excluding Japan.
Source: Bloomberg

Japan posts longest growth streak since
1980s bubble economy
• Japan’s economy posted its longest
continuous expansion since the 1980s boom
as fourth quarter growth was boosted by
consumer spending, moving Prime Minister
Shinzo Abe’s revival plan a step closer to
vanquishing decades of stagnation.
• The economy expanded at a 0.5% annualized
rate in October-December, less than the
median estimate for annualized growth of
0.9%.
• Japan’s economy grew a real 1.6% in calendar
2017, the fastest increase since a 2.0%
expansion in 2013.
Source: Reuters

German economy books strong finish to
2017
• Europe’s largest economy Germany expanded 0.6% between October and
December, official data showed, highlighting the country’s economic strength as
politicians struggle to form a government.
• The figure follows up growth of 0.9% in the first quarter of 2017, 0.6% in the
second, and 0.7% in the third – all adjusted for price, seasonal and calendar
effects.
• Combined, the quarterly results add up to 2.2% expansion over the full year, the
fastest rate since 2011.
Source: Bloomberg
“Looking ahead, the same fundamentals which have supported growth in 2016 and 2017
should still be in place this year”, economist Carsten Brzeski of ING Diba bank said, pointing
to low interest rates, a strong labour market and a synchronised upturn across the 19-nation
euro zone.

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.

Economic Capsule - February 2018

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Economic Capsule - February 2018