Economic Update. EIU November 2015 SNAPSHOT

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1 EIU November Economic Update Contents 1. External Sector Performance - tember Interest Rates Inflation (CCPI) Credit Growth Tourism - Tourist Arrivals Sri Lankan Economy Further Insights Producer Price Index-3rd Quarter Sri Lanka Company Earnings for 2nd Quarter National Consumer Price Index (NCPI)-ober Computer Literacy Statistics- (First Six Months) (newly released) Global Economy Developed Economies Emerging Markets Commodities - Oil Risks... 5 SNAPSHOT US economy seeing stronger recovery with encouraging job creation numbers and all indications are that US Fed is likely to raise rates in December or latest January. Emerging Markets showing continued volatility, but driven also by commodity price weaknesses for key Ems like Brazil, South Africa, and Russia. China hard landing concerns grow; PBoC cuts rates in ober in bid to boost growth, worries over spill over effects to South East and East Asia given tight trade integration. Oil prices remain at historic lows, but need to watch action by Saudi Arabia on whether they will cut supplies amidst an increasingly hard to manage currency peg French Societe Generale argues that two global risks are likely: 1) a British exit from the Eurozone (45% probability) and an economic hard landing in China (30% probability). For tember data, core inflation edged slightly up and, except in agriculture, the Producer Price Index showed a decline. The Census Department launched a new National Consumer Price Index, but data is still new and comparisons are premature. Sri Lanka corporate earnings picked up 10.7% (YoY) with the largest sector wise contributors being Banks, Finance and Insurance sector (40%); Beverages, Food and Tobacco sector (18%); and Diversified Holdings (13%) respectively. The economy s growth continues to come from domestic non-tradable sectors and not the tradable (exports) side of the economy. 1

2 1. External Sector Performance - tember The trade deficit narrowed by 4.1% to USD 733mn (MoM), but cumulatively has widened during first 9 months of by 3.8% to USD 6,145 mn driven by non-oil imports. Earnings from tourism in the first 10 months of estimated to have grown by 17.9%. Workers Remittances recorded a moderate growth of 1.8% in the first 9 months of. Gross Official Reserves have strengthened to around USD 8 bn by early November (from USD 6.8 bn at end tember) with receipts from the sovereign dollar bond (USD 1.5 bn). LKR has depreciated by 8.1% against the USD so far in. 2. Interest Rates Commercial Bank Average Weighted Prime Lending Rate (AWPR) Treasury Bill Yield Week ending 20 th Nov Week ago days days Commercial Bank Average Weighted Lending rate (tember ) Commercial Bank Average Weighted Fixed Deposit Rate ( ober ) Latest available month Month before Inflation (CCPI) Consumer Price Inflation ober Month ago Point to point Average Core Inflation ober Month ago Point to point Average Credit Growth Growth in Credit to Private sector tember August July (.)

3 5. Tourism - Tourist Arrivals ober January-ober Country of Residence % % Change Change Western Europe 36,749 32, , , of which UK 9,970 10, , , Asia 68,230 58, , , of which India 30,574 26, , , Other 27,301 31, , , Total 132, , ,448,119 1,228, Sri Lankan Economy Further Insights 6.1. Producer Price Index-3 rd Quarter Annual Change Economic Activity July Aug Jul Aug July / July Aug /Aug / All Activities Agriculture Manufacturing Electricity and Water Supply Sri Lanka Company Earnings for 2 nd Quarter Overall market Earnings Picked up 10.7% (Y-O-Y) to Rs.46.7 billion. Largest sector wise contributors to growth is Banks, Finance and Insurance sector (40%); followed by Beverages, Food and Tobacco sector and Diversified Holdings (18% and 13% respectively). Chemicals and Pharmaceuticals Sector grew by 180%, Stores and Supplies Sector by 137%, and Motor Sector by 78% than the year earlier. But, the Plantation Sector fell by 138%, Investment Trusts by 66% and Hotels and Travels Sector by 95% compared to same period last year. 3

4 6.3. National Consumer Price Index (NCPI)-ober Month on Month Changes of NCPI by Main Groups of National Market Basket Major Group* Index Number Monthly changes of the Expenditure value (Rs.) Monthly Changes of the Index (%) All items Food and Non Alcoholic beverages Non Food Alcoholic Beverages, Tobacco and Narcotics Clothing and Footwear Education Restaurants and Hotels Other What is the difference between CCPI and NCPI? CCPI measures the changes over time in the general level of prices of consumer goods and services and base period is 2006/07 from June 2011, covering the urban areas of the Colombo District. NCPI is the latest consumer price index released by the Department of census and Statistics will be released monthly commencing from November with a time lag of 21 days. NCPI will have weights based on consumer spending in 2012/13. (The index weights are based on expenditure data derived from the Household Income and Expenditure Survey (HIES) conducted in 2012/13) National Consumer basket includes 407 items which represent the consumer expenditure of all households in the country. Base year is 2013 for NCPI Computer Literacy Statistics- (First Six Months) (newly released) Province Computer literacy Rate (%) Western Central Southern Northern Eastern North Western North Central Uva Sabaragamuwa

5 7. Global Economy 7.1 Developed Economies Better-than-expected jobs report in ober points to strengthening US recovery. US Federal Reserve indicating possible rate hike next month, given new confidence in the US economy Developing countries will see their dollar borrowing costs rise, and may shy away from selling global debt (e.g. Vietnam putting off a US$ 3 bn bond sale). Japan as fallen into recession for the fourth time in five years, highlighting the need for structural reforms to aid the economy US Fed Rate Rise Implications for LK The much-debated US interest rate rise will narrow the interest-rate differential between with emerging markets like Sri Lanka, and there could be a further outflow of funds. This could nudge CBSL in the direction of tighter monetary policy by way of raising policy interest rates. An outflow of funds would put downward pressure on the LKR, and consequently cause capital account problems given the substantial foreign-currency denominated debt obligations that need to be serviced. 7.2 Emerging Markets Continued bearish sentiment around Emerging Markets (EMs) Many EM indicators skewed by data from Brazil, South Africa and Russia, which are impacted by the lower commodity price scenario seen at present But EMs have much lower sovereign and corporate debt levels than their developed country counterparts, which is a positive story for weathering any future economic difficulty. Continued worries around a hard-landing in China and how that will negatively impact wider Asia given the tight integration of East and South East Asian economies value chains. People s Bank of China cut rates again in late ober to stimulate growth. 7.3 Commodities - Oil Oil continues at historic lows. Some concerns arising on possible shock due to actions by Saudi Arabia given the unsustainable price peg alongside falling oil revenues 7.4 Risks Main global risk in the short-term is of global volatility in currency and asset markets stemming from US Fed rate hike and associated global rate rises. In the medium-term, French bank Society Generale placed probability estimates on two global economic risks 1) a British exit from the Eurozone (45% probability) and an economic hard landing in China (30% probability). 5