economic capsule - august 2017

Economic CapsuleAugust 2017

248th Issue

Research & Development Unit

C O N T E N T S

Sri Lanka outlook: IMF

Significant downside risks confront the economy: IMF

Risks to public debt sustainability continue to remain high: IMF

Drought and its Macroeconomic Implications: IMF

Sri Lanka Tourism sector eyes USD 7 bn earnings by 2020

Sri Lanka on Path to 100% Renewable Energy

Sri Lanka’s first waste to energy initiative gets off ground

SINOSURE backs first-ever private sector financing facility in Sri Lanka

Govt. aims to attract USD 500 mn FDI from Milleniya EPZ with Thai developer

ODEL expands retail space

China's Economic Outlook: IMF

Condominium Industry in Sri Lanka

October, 2014


Economy & Business

< Research & Development Unit >

Sri Lanka outlook: IMF

• Real GDP: GDP growth is projected to recover gradually to 4.7 % in 2017, supported by the continued momentum in construction and service sectors since late 2016. Growth is projected to reach 5.2 % over the medium term in line with potential.

• Inflation: Headline inflation peaked in March 17 but will likely stay above 5 % for much of the year due to high food prices and base effects from the VAT rate hike in 2016.

• Current Account Deficit: The current account deficit is expected to widen slightly to 2.5 % of GDP due to drought-driven increases in oil and food imports, and higher capital goods imports.

Source: IMF Second Review Under The Extended Arrangement Under The Extended Fund Facility – August 2017

Cont…


Significant downside risks confront the economy: IMF

• External Risks: Resumption of capital outflows in response to a significant

further strengthening of the US dollar and higher rates, or due to a weakening of the external position.

The yet-unproven commitment to exchange rate flexibility under capital outflows adds to the risk.

• Domestic Risks: Delays in revenue mobilization and SOE reforms, as well

as pressures from the government’s large gross financing needs (19 % of GDP in 2017), of which 40 % is financed externally.

A larger-than-estimated fiscal cost of drought could also add to these financing pressures. Another risk emanates from the still uncertain economic consequence of the floods in late-May 2017.


Cont…

Risks to public debt sustainability continue to remain high: IMF• Public debt is expected to rise slightly to 85 % of GDP in 2017 due to still

large fiscal deficit and exchange rate depreciation.

• If contingent SOE debt is included, total public debt would rise to 94 % of GDP (considered as a shock scenario) and decline below 90 % of GDP by 2020.

• The likelihood of such a scenario has increased due to delays in energy pricing reform.

• External debt remains sustainable but is high at 57 % of GDP and vulnerable to currency risks.

• Further, rollover need will increase as external sovereign debt begins to mature in 2019, calling for advance planning and medium-term debt management. Source: IMF Second Review Under The Extended Arrangement Under The Extended Fund Facility – August 2017


Drought and its Macroeconomic Implications: IMF Drought: Rainfall over August–December 2016 fell far short of the historical

average, with September 2016 being the lowest at less than 20 % of a normal year. The drought was preceded by heavy rain and flooding in May 2016, an erratic weather pattern possibly caused by climate change.

Although rainfall has recovered since January 2017, the water availability in the nation’s reservoirs was only 40 % of capacity in March 2017, still below 70 % a year ago.

Economic impact: Agricultural production has suffered, bringing down GDP by an estimated 0.3 percentage points in 2017 and water supply for drinking and hydropower generation fell.

A food shortage and an increase in thermal power generation are expected to raise imports of food and oil by 0.3% of GDP this year. Food inflation accelerated to 8.6% in April.


Cont…


Drought and its Macroeconomic Implications: IMF (cont…)

Fiscal impact. The government is providing cash transfers to drought affected families for a limited duration, with the cost estimated at 0.05–0.1 % of GDP.

The increase in thermal power generation in late 2016-early 2017 could at current tariffs inflict financial losses of about ¼ percent of GDP for the CEB, the state electricity company.

This will eventually raise public debt if not covered by future tariff increases.



Sri Lanka Tourism sector eyes USD 7 bn earnings by 2020

According to Sri Lanka Tourism Strategic Plan (TSP) 2017-2020, Sri Lanka Tourism will, target USD 7 bn in earnings in 2020.

Source: Sri Lanka Tourism Strategic Plan 2017-2020 Cont…


Sri Lanka Tourism sector eyes USD 7 bn earnings by 2020 (cont…)

Six transformational themes are defined in the TSP to help achieve objectives and address the systemic failures identified.

Source: Sri Lanka Tourism Strategic Plan 2017-2020


Sri Lanka on Path to 100% Renewable Energy

Sri Lanka can meet its current and future electricity demand by judicial use of renewable energy by 2050, according to a joint study by the UN Development Programme (UNDP) and the Asian Development Bank (ADB).

SL’s installed electricity generation capacity needs;

2050

Current 3,700 MW

34,000 MW, of this

15,000 MW 16,000 MW 3,000 MW

Wind energy Solar energy Hydro and biomass

Cont…


Sri Lanka on Path to 100% Renewable Energy (cont…)

• The assessment indicates that the substitution of imported fossil fuel with renewable energy until the year 2050 provides direct monetary benefits and will reduce Sri Lanka’s fuel import bill by about USD 18 bn cumulatively.

• The report also identifies the need for structural changes in the retail tariffs of Sri Lanka to warrant financial sustainability of its operations.

• The report estimates that in order to transition to 100% electricity generation by renewable energy, Sri Lanka will need investment of USD 50 bn.

• Further, it emphasizes the need to develop the ancillary services market in light of these changes in the generation system.

Source: ADB


Sri Lanka’s first waste to energy initiative gets off ground

First project: will see 700 MT of waste generated from the Colombo Municipal Council daily being processed through an incineration plant run by the Western Power Company, a fully-owned subsidiary of Aitken Spence Plc. The investment for the project will be USD 98 mn and will add 10 MW to the national grid.

Second project: also a PPP with a Korean company called K.C.H.T Jang, will invest USD 95 mn to set up a plant to process up to 630 MT of unsorted waste generated from the suburbs of the Colombo and Gampaha districts. This plant will add another 10 MW to the grid.

Sri Lanka will see two solid waste-to-energy power plants starting construction as two public-private partnership (PPP) projects in Muthurajawela. The total investment for the project will be around USD 193 mn.

The two plants will add 20 Mega Watts of electricity to the national grid once commissioned and will convert waste generated in Colombo and Gampaha into energy.


SINOSURE backs first-ever private sector financing facility in Sri Lanka

Laugh Gas Plc and Standard Chartered recently announced the first-ever private sector financing facility in Sri Lanka supported by China Export and Credit Insurance Corporation (SINOSURE) for the 30,000 MT LAUGFS Import and Export Terminal at Hambantota.

• The LPG storage terminals by LAUGFS Terminals Ltd., a subsidiary of LAUGFS Gas Plc, is being built with an investment of USD 80 mn and will be one of the largest LPG import and export terminals in South Asia.

• Strategically located at the Hambantota Port, the LAUGFS LPG Terminal will operate as a central hub for LPG importing, re-exporting as well as for provisioning to retailers.


Govt. aims to attract USD 500 mn FDI from Milleniya EPZ with Thai developer

The hyped up Milleniya Export Processing Zone (EPZ) in the Kalutara District, which is to be developed as a public-private partnership with Thai industrial park development giant, Rojana Industrial Park Public Company Ltd (Rojana), will attract USD 500 mn in its initial phases, the Sri Lankan government said recently.


ODEL expands retail space

• The new space was internationally designed and built by Blocher Partners the Germany headquartered architecture firm that designed the 645,000 sq. ft. ODEL Mall that will soon begin to take shape at the adjoining site.

ODEL stated that it has added another 10,000 sq. ft. to its flagship store at Alexandra Place, offering an assortment of top international brands.

• The extension increases the floor area of the Alexandra Place store to 52,000 sq. ft. and is the second such investment by Softlogic in the location in the past eight months. In December 2016, the company opened ‘The Promenade’ a 16,000 square-foot open-air lounge.


Condominium Industry in Sri Lanka

October, 2014


International

China's Economic Outlook: IMF

IMF have revised up China’s growth outlook compared to 2016. Growth between 2017 and 2021 for the world’s second largest economy is now expected to average 6.4 %, compared to 6.0 % last year.

But at a cost of higher debt, which leads to rising risks. According to IMF, total non-financial sector debt which includes household, corporate and government debt is expected to continue to rise strongly, reaching almost 300 % of GDP by 2022, up from 242 % in 2016. This raises concerns for a possible sharp decline in growth in the medium term.

Given strong growth momentum, now is the time to intensify deleveraging efforts.The Chinese government has started to take important initial steps to facilitate private sector deleveraging—credit growth is slowing and the large “credit gap” is narrowing. These efforts should intensify, with the overarching priority being to focus more on the quality and sustainability of growth, and less on quantitative targets.


The 100 Richest Tech Billionaires In The World 2017

Source: Forbes


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 - august 2017

Economy & Finance