economic capsule - january 2015

Economic CapsuleJanuary 2016

Research & Development Unit

229th Issue

C O N T E N T S

BANKING AND FINANCE Commercial Bank the Highest Ranked Bank in Latest LMD 100

First Japanese Bank Enters Sri Lanka

Korea EXIM Bank Opens Office in Sri Lanka

ECONOMY & BUSINESS Weak Pickup in Global Growth, with Risks Pivoting to Emerging Markets: IMF

Global Economy: Transitions & Risks

China Economic Growth Slowest in 25 years

Iran Economic Sanctions Lifted

Fall of the Oil Prices

Global Foreign Direct Investment Hit Eight-year High in 2015: UNCTAD

Attracting FDI Key Focus: PM

China’s worldwide Investments and Contracts 2014

Sri Lanka Govt. to Subscribe USD 268 mn for AIIB Membership

Wealth of Richest 1% Equal to other 99%: Oxfam

Condominium Industry in Sri Lanka

October, 2014


Banking & Finance

4< Research & Development Unit >

Commercial Bank the Highest Ranked Bank in Latest LMD 100

Commercial Bank has topped the LMD 100 ranking of Sri Lanka’s leading listed companies in terms of Assets, Second place overall on Profit After Tax (PAT) and Fifth place overall on Turnover in the magazine’s just published rankings for 2014-15. The Bank also won the Sector Award for Banking at the ceremony.

The highest ranked bank in the LMD 100, Commercial Bank is also ranked second overall in terms of Shareholders’ Funds.


First Japanese Bank Enters Sri Lanka Japan’s Bank of Tokyo-Mitsubishi UFJ

Ltd. (BTMU) announced the commencement of its business operations at the representative office in Colombo to promote investment between the two countries.

The representative office in Colombo will focus on supporting Japanese companies for their investment activities in Sri Lanka; managing relationships between BTMU and Government institutions or customers in Sri Lanka and conducting research into the political and economic situation, financial market and business environment in Sri Lanka.

The bank has also signed a MoU with Bank of Ceylon (BoC) to create a wide range of financial services products.


Korea EXIM Bank Opens Office in Sri Lanka

The Export-Import Bank of Korea, an official export credit agency of the Republic of Korea, has opened their representative office in the Sri Lankan capital Colombo.

The Export-Import Bank of Korea operates as an official export credit agency that provides financing for international trade and overseas investment.

Since 1978, Korea Eximbank has provided USD 340 mn for both trade between Sri Lanka and Korea and for Korean companies’ foreign direct investments in Sri Lanka. Korea Eximbank also provides Official Development Assistance and up to 2015 had disbursed USD 606 mn for 27 development projects in Sri Lanka.

Condominium Industry in Sri Lanka

October, 2014


Economy & Business


Weak Pickup in Global Growth, with Risks Pivoting to Emerging Markets: IMF

Cont..SourceIMF


Weak Pickup in Global Growth, with Risks Pivoting to Emerging Markets: IMF (cont..)

2015 (E)

2016 (P)

2017 (P)

World Output 3.1 3.4 3.6

Adv. Economies 1.9 2.1 2.1

Emerging & Dev. Economies 4.0 4.3 4.7

United States 2.5 2.6 2.6

Euro Area 1.5 1.7 1.7

Japan 0.6 1.0 0.3

Russia -3.7 -1.0 -1.0

China 6.9 6.3 6.0

India 7.3 7.5 7.5

Saudi Arabia 3.4 1.2 1.9

In advanced economies, a modest and uneven recovery is expected to continue, with a gradual further narrowing of output gaps.

The picture for emerging market and developing economies is diverse but in many cases challenging.

The slowdown and rebalancing of the Chinese economy, lower commodity prices, and strains in some large emerging market economies will continue to weigh on growth prospects in 2016–17.

Cont..Source: IMF


Transition Risk

• The slowdown and rebalancing of economic activity in China away from investment and manufacturing toward consumption and services

• A sharper than expected slowdown could take a toll on trading partners and have global financial market repercussions .

• Lower prices for energy and other commodities

• Further price drops will worsen the growth outlook for already-strained commodity producers.

• The Gradual tightening in U.S. monetary policy Further

• Further dollar appreciation would put additional pressures on firms in emerging market economies.

Global Economy: Transitions & Risks

Source: IMF World Economic Outlook (WEO) Update – January 2016


China Economic Growth Slowest in 25 years

• China's economy grew by 6.9% in 2015, compared with 7.3% a year earlier, marking its slowest growth in a quarter of a century.

• China's growth, seen as a driver of the global economy, is a major concern for investors around the world.

• After experiencing rapid growth for more than a decade, China's economy has experienced a painful slowdown in the last two years.

• However, ongoing growth worries have prompted the country's central bank to cut interest rates six times since November 2014.

Cont..


• It's come as the Chinese central government wants to move towards an economy led by consumption and services, rather than one driven by exports and investment. But managing that transition has been challenging.

• The drama of China's stock market crash over the last year has affected investor sentiment as well.

• China‘s Industrial production - or factory output - expanded 5.9% in December, down from 6% in November. Retail sales grew 11.1%, down from 11.3% in November.

• The health of the labour market, retail sales and industrial production data are all key indicators for growth. Like any economic data, it's important to look at the themes and trends that drive them and not just the headline figure.

When you look at China with this lens, we're not seeing a meltdown, just a slowdown.

China's growth in 2015 was equivalent to the size of the entire economy of Switzerland or Saudi Arabia. That's not an easy feat and shows the magnitude of the accomplishment.

China Economic Growth Slowest in 25 years (cont..)

Source: BBC Business, Reuters


• Economic sanctions on Iran have been lifted after it agreed to roll back the scope of its nuclear activities. What does this mean for Iran and the rest of the world?

• The lifting of sanctions has opened the Iranian economy - one of the last great untapped emerging markets - to international trade and investment.

Iran Economic Sanctions Lifted

• Iran can now return to the oil market, and is expected to start exporting an estimated 300,000 barrels per day immediately. This, in an already oversupplied market, will contribute to the falling price of petrol for consumers across the world.

• Iran will also have access to more than $100bn of money that was frozen overseas. However, it can only spend about $30-50bn, as the rest is thought to be locked into previous commitments. Cont..


Iran Economic Sanctions Lifted (cont..)Impact on Sri Lanka Sri Lanka is looking to expand trade with Iran, which was a

key source of petroleum imports, after international sanctions were lifted with a trade delegation due in February 23.

Sri Lanka's only refinery owned by state-run Ceylon Petroleum Corporation is geared to refine Iranian light crude and finds it difficult to handle other types. The refinery faced severe problems getting enough yields of light distillates during the sanctions period.

Other than petroleum imports, Iran is looking to supply medicine, medical equipment, agricultural machinery such as tractors, fertilizer, bitumen, and petrochemicals to Sri Lanka.

Meanwhile Sri Lanka is keen to export Ceylon Tea, apparels, coconuts and cashew to Iran.

USD 1600 mn

SL – IranBi-lateral trade

USD 188 mn

Before Sanctions (2011)

After Sanctions (2015)


Fall of the Oil Prices

• Oil prices have fallen again, sinking below $28 a barrel.

• The price of Brent crude fell to $27.67 a barrel at one point, its lowest since 2003, while US crude fell as low as $28.36.

What are the main reasons behind the fall in prices?In a nutshell, it's down to too much supply and too little demand. China's economic slowdown has curbed appetite for commodities in general, While Saudi Arabia, which produces a third of the Opec cartel's output, is keener on

preserving its market share than it is on cutting production to boost prices. At the same time, the rise of the US as a shale oil producer means it now imports

less oil, adding to the glut on world markets. Prices could take another hit as Iranian crude freed from sanctions flows back on to

world markets. Cont..


Fall of the Oil Prices (cont..)

The end of nuclear related sanctions on Iran on Jan. 16 has freed the OPEC member, once the group’s second-biggest producer, to revive crude exports slashed in half by almost four years of restrictions.

Impatient to claw back lost revenue, the Persian Gulf nation has issued a directive to restore daily output by 500,000 barrels as soon as possible.

According to executive director of the International Energy Agency (IEA), Fatih Birol, “It is the third year in a row we have more supply than demand”.


Global Foreign Direct Investment Hit Eight-year High in 2015: UNCTAD

Cont..

Global FDI flows jumped 36% in 2015 to an estimated US$ 1.7 trillion, their highest level since the global economic and financial crisis of 2008-2009.

A surge in FDI targeting developed economies (+90%) was the principal factor behind the global rebound.

Amount (USD bn)

Growth Rate (%)

World 1,699 36.5

Developed economies 936 89.9

Developing economies 741 5.3

Developing Asia 548 15.5

As a result, the pattern of FDI by economic grouping tilted in favor of developed countries which now account for 55% of global FDI inflows in 2015.

Developing Asia, with its FDI flows surpassing USD 500 bn, remained the largest FDI recipient region in the world, accounting for one third of global FDI flows.

Source: UNCTAD

FDI Inflows, 2015


Global Foreign Direct Investment Hit Eight-year High in 2015 (cont..)

Cont..

Estimated FDI inflows: top 10 host economies, 2015 (USD Bn)

Foreign Direct Investment Inflows, 2000-2014 (USD Bn)

Source: UNCTAD


Attracting FDI Key Focus: PMWill go ahead with Port City Project

Despite facing an “uncertain year,” Prime Minister Ranil Wickremesinghe was confident Sri Lanka would achieve fiscal consolidation through continuation of Chinese projects including the Port City and possible assistance from the International Monetary Fund (IMF).

Wickremesinghe remained upbeat while addressing the media on the sidelines of the World Economic Forum, in Davos, insisting the Government was still only having discussions with the IMF.

He also confirmed the $ 1.4 billion Port City project would be allowed to continue along with the second phase of the Hambantota Harbour.

USD750 mn

Source: CBSL & BOI


Attracting FDI Key Focus: PM (cont..)

Acknowledging China was one of the biggest economic powers in the world Wickremesinghe went on to say within Sri Lanka there were a large number of infrastructure projects being funded by the Chinese Government.

The PM further stated “we are going ahead with many of those projects (Chinese's projects), including the Port City and further development of the Hambantota Harbour, but we have also said we would like to see Chinese investment as infrastructure alone is not sufficient.

Now we are talking of investments and I think the Chinese Government has also decided manufacturing industries should move out and Sri Lanka seems to be one of the locations their industries should move out to.

We are looking at Chinese participation in the logistics hub as well as more investment in the real estate sector.”

21

China’s worldwide Investments and Contracts 2014

China investments' abroad are massive, amounting to $870 billion at the end of 2014.

Australia$ 61.3 Bn

USA$ 71.9 Bn

Sri Lanka $ 8.9 Bn

India$ 11.9 Bn

Pakistan$ 17.8 Bn

Source: China Global Investment TrackerData compiled by The American Enterprise Institute and The Heritage Foundation


Sri Lanka Govt. to Subscribe USD 268 mn for AIIB Membership

The AIIB is expected to lend USD10 bn-15 bn a year for the first five or six years and will start operations in the second quarter of 2016. Thirty founding countries that hold over 74 % of shares in the bank have ratified the AIIB agreement and the remaining countries have until the end of the year to complete the membership process.

China has an initial subscription of USD 29.78 bn in authorized capital stock in the AIIB, out of a total of USD 100 bn.

Despite opposition from Washington, US allies including Australia, Britain, German, Italy, the Philippines and South Korea have agreed to join the AIIB in recognition of China’s growing economic clout.

Following the launch of the Asian Infrastructure Investment Bank (AIIB), Cabinet has approved Sri Lanka to subscribe around USD 268 mn and draft a fresh bill to allow the country to obtain formal membership.


Wealth of Richest 1% Equal to other 99%: Oxfam

The richest 1% now has as much wealth as the rest of the world combined, according to Oxfam.

Oxfam also calculated that the richest 62 people in the world had as much wealth as the poorest half of the global population.

It takes cash and assets worth $68,800 to get into the top 10%, and $760,000 to be in the 1%.

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 >

“The agenda should be to improve institutions and incentives; to promote competition and efficiency; to

implement policies that raise productivity; to truly help the poor and the destitute; and to put an end to corruption

and abuse"

Sebastian Edwards

Sebastián Edwards is a Chilean economist, professor, speaker, and consultant. He is currently the Henry Ford II Professor of International Business Economics at the UCLA Anderson School of Management at the University of California, Los Angeles.

https://upload.wikimedia.org/wikipedia/commons/4/48/En-us-A.p.j._Abdul_Kalam_from_India_pronunciation_(Voice_of_America).ogg



economic capsule - january 2015

Economy & Finance