ANALYST CERTIFICATIONS AND REQUIRED DISCLOSURES BEGIN ON PAGE 21

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1 July 2017 FC Research ANALYST CERTIFICATIONS AND REQUIRED DISCLOSURES BEGIN ON PAGE 21

2 Monetary Policy Review Rating Outlook: Moody s... 4 Inflation... 5 M2B & Sector Credit... 7 Reserves & Liquidity... 8 Currency Movement... 9 Government Securities Finance Sector Rate Movement External Sector Tourist Arrivals Global Markets FC Research July

3 Policy rates unchanged Private sector credit growth decelerated gradually to 20.4% in March 2017 and 20.0% in April The Earlier tightening of monetary policy by central bank and resultant increase in interest rates impacted the credit growth. Despite improved export performance, a sustained increase in import expenditure resulted in a trade deficit of 3.3Bn till April Gross official reserves improved to above USD 7.0 Bn by mid-june from 5.1Bn by end April Both the government securities market and the Colombo Stock Exchange experienced foreign inflows in recent months. Accordingly policy rates were decided to be maintained at, Standing Deposit Facility Rate 7.25% Standing Lending Facility Rate 8.75% Statutory Reserve Ratio (SRR) 7.50% FC Research July

4 Moody's assigned B1 Negative on Government of Sri Lanka in its annual credit analysis. In its latest report Moody s state B1 rating is supported by the economy's robust mediumterm GDP growth prospects, relatively large economy, and high income levels. A progress is witnessed with some reforms under its three-year IMF Extended Fund Facility program. Particularly, revenue measures aimed at increasing taxes, such as last year's VAT rate hike and this year's pending new Inland Revenue Reform act, have the potential to sustainably increase government revenues. External and foreign currency debt which account for about 43% of total government debt, give rise to significant exposure to external financing conditions. Measures to build foreign-exchange reserves would help establish buffers against external pressure by large volumes of external government debt maturing in 2019 and beyond. FC Research July

5 8.0% 7.1% 7.3% 6.8% 7.0% 6.0% 5.0% 4.0% 3.0% 5.4% 5.5% 5.8% 5.0% 3.8% 3.7% 3.8% 4.8% 4.4% 4.2% 4.1% 4.0% 5.8% 4.5% 7.0% 5.5% 6.8% 7.3% 6.9% 6.0% 6.1% 5.2% 5.1% Increase of food items by 4.8%MoM and non-food items by 0.3%MoM. 2.0% 1.0% 0.0% Inflation YoY Core Inflation YoY Source: Dept. Census and Statistics On a YoY basis inflation started to incline with non food inflation increasing to 4.8% despite dip in food inflation to 9.1% compared with May 2017, 4.6% and 9.3% respectively. FC Research July

6 10.0% 9.0% 8.6% 8.0% 7.0% 6.0% 5.3% 5.0% 4.0% 3.0% 6.4% 5.8% 4.5% 4.7% 5.0% 4.1% 4.2% 8.2% 6.5% 8.4% 7.1% NCPI for May 2017 decreased to 7.1% from 8.4% in April % 1.0% 0.0% Source: Dept. Census and Statistics On YoY basis inflation started to drop with non food inflation and food inflation decreasing to 4.5% and 10.6% respectively. FC Research July

7 LKR 'Bn Sri Lanka's private sector credit growth dropped in April 2017 to LKR 18.9Bn from LKR 82Bn in March 2017,credit to the government and state enterprises depicted a remarkable drop M2b Growth MoM +0.94%, YoY %, YTD +6.02% State Credit & Private Credit MoM +0.4%, YoY %, YTD +4.51% LKR 6, % 3.50% 5, % 5, % 5, % 2.66% 1.68% 5, % 1.44% 1.60% 2.00% 1.43% 1.59% 1.28% 1.40% 1.57% 2.26% 5, % 2.00% 1.31% 1.36% 1.23% 1.50% 4, % 0.94% 4, % 0.59% 0.98% 4, %0.19% 1.01% 0.50% 4,200 4, % M2b MoM Growth Source: CBSL State Credit Private Credit FC Research July

8 5,120 5,046 5,292 5,452 5,645 5,664 5,619 6,069 6,054 6,019 6,294 6,225 6,573 6,489 6,599 6,456 6,746 6,954 Msrket Liquidity (LKR 'Bn) 7,304 Foreign Reserves continued to rise to USD 6.95Bn in June USD 'Mn 7,500 7,000 6,500 6,000 5,500 5,000 4,500 Market liquidity declined due to improved foreign inflows Market Liquidity CBSL Reserves Source: CBSL CBSL Reserves (LKR 'Bn) Gross Official Reserves (USD mn) Source: CBSL FC Research July

9 YTD 2017 June 2017 USD:LKR Movement Sri Lankan Rupee vs Global Currencies Japan YEN 0.0% India Rupee US Dollar -0.6% -0.7% China Renmiibi -1.9% UK Pound Euro -3.0% -2.2% Aus Dollar -4.0% Can Dollar -4.4% -5.0% -4.0% -3.0% -2.0% -1.0% 0.0% 1.0% US Dollar China Renmiibi -5.4% -2.5% Can Dollar -6.4% Japan YEN India Rupee -6.7% -7.6% UK Pound -8.6% Source: CBSL Aus Dollar -9.0% Euro -11.2% -12.0% -10.0% -8.0% -6.0% -4.0% -2.0% 0.0% Source: CBSL FC Research July

10 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun Excess Liquidity CBSL Holdings of Gov. Securities Source: CBSL FC Research July

11 Week Ending Bills ('Mn) Bonds ('Mn) Total June 2017 YTD Maturities 185,931 1,041, Jun-17 29,500 29, Jun-17 28,970 28, Jun-17 25,629 45,000 70, Jun-17 30,276 30, Jun-17 5,405 5,405 Total Issued 164,780 New Issues 164, ,763 Excess/(Deficit) -21, ,414 CBSL Holdings of Gov. Securities YTD As at End May ,409 As at End June ,185 Increase/ (Decrease) 2, ,893 FC Research July

12 With renewed interest witnessed, a net increase of LKR 16.9Bn was recorded as foreign inflows to government securities for June 2017, resulting in 15-35bps dip in yields specifically in the 2 year to 10 year bonds % 13.00% 12.00% 11.00% 10.00% 9.00% 31-May 30-Jun Source: CBSL Interest Rate Change (bps) Tenure 31-May 30-Jun Change (bps) 31-Mar Change (bps) 3M 9.65% 9.55% % -13 6M 10.20% 10.23% % Yr 10.65% 10.50% % Yrs 10.80% 10.65% % Yrs 11.05% 10.75% % Yrs 11.45% 11.25% % Yrs 11.55% 11.35% % Yrs 11.68% 11.38% % Yrs 11.73% 11.38% % Yrs 11.70% 11.45% % Yrs 11.95% 11.70% % Yrs 12.00% 11.80% % Yrs 12.08% 11.98% % -127 FC Research July

13 AWPR vs AWDR 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% Interest Spread 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% AWPR AWDR Source: CBSL Source: CBSL Source: CBSL FC Research July

14 ,042 Exports improved 11.9%YoY during April Industrial exports increased by 8.6%YoY, due to higher exports of transport equipment, petroleum products and textiles and garments while Agricultural exports increased by 22.7%YoY with a 17.1%YoY growth in tea. Exports Category 2016 (USD Mn) 2017 (USD Mn) Change (%) USD 'Mn 1,100 Industrial Exports - Apr - YTD Agricultural - Apr - YTD , , (0.4) ,050 1, Mineral and other - Apr - YTD Total - Apr - YTD , , Source: CBSL FC Research July

15 1,439 1,461 1,433 1,589 1,566 1,543 1,611 1,604 1,590 1,676 1,649 1,732 1,798 1,816 1,869 1,906 Import expenses grew by 9.8%YoY during Apr 2017 with increase in all main categories of imports. The expenditure on intermediate and Consumer goods was driven mainly by expenditure on fuel and base metal and non food consumer goods. Imports Category 2016 (USD Mn) 2017 (USD Mn) Change (%) USD 'Mn 2,000 Consumer goods - Apr - YTD Intermediate - Apr - YTD Investment goods - Apr - YTD , , , , , , ,900 1,800 1,700 1,600 1,500 1,400 1,300 Total - Apr - YTD 1, , , , , Source: CBSL FC Research July

16 Balance of Trade -1, ,200-1, Source: Central Bank FC Research July

17 USD 'Bn Balance of Payments remains negative ,000-1,200 Tourism Earnings and Worker Remittances together reached USD 763Mn (-6.0%YoY). Dipping Worker Remittances depicts a concern on the BOP. 1, , Jan-Apr Apr Apr-17 Jan-Apr April Change USD Mn Nov (%) Trade Balance Trade Balance -13.2% % Earnings from Tourism % Workers Remittances YTD USD Mn % Change (%) Trade Balance -2, , % Earnings from Tourism Workers Remittances 1, , % 2, , % Trade Balance Earnings from Tourism Workers Remittances FC Research July

18 '000 UP 4.5% UP 4.8% Indian arrivals were up 2.8% to 27,836 in the month of June compared with the same period last year while Chinese arrivals dipped by 13.8% to 17, Source: SLTDA FC Research July

19 Surge in China's manufacturing surprises experts: China's official purchasing managers index for the manufacturing sector posted a surprise increase to 51.7 for June, up from May's The median forecast of analysts surveyed by Market News International projected a decline to KSE100 Euro Stoxx 50 Nifty S&P 500 Dow Jones Nikkei 225 FTSE 100 VN Index -8.00% -6.00% -4.00% -2.00% 0.00% 2.00% 4.00% 6.00% Japan's manufacturing index declines to 7-month low: Japan's manufacturing output and work orders are weakening. For June, the Nikkei Flash Japan Manufacturing Purchasing Managers' Index declined to 52, a seven-month low. US consumer spending, exports drive upward revision of Q1 GDP: The Commerce Department said the US economy expanded 1.4% in the first quarter, rather than its previous estimate of 1.2%. The revision was largely driven by data that showed consumer spending and exports grew more than the agency previously thought. Source: Bloomberg FC Research July

20 This Review is prepared and issued by First Capital Holdings PLC. based on information in the public domain, internally developed and other sources, believed to be correct. Although all reasonable care has been taken to ensure the contents of the review are accurate, First Capital Holdings PLC and/or its Directors, employees, are not responsible for the correctness, usefulness, reliability of same. First Capital Holdings PLC may act as a Broker in the investments which are the subject of this document or related investments and may have acted on or used the information contained in this document, or the research or analysis on which it is based, before its publication. First Capital Holdings PLC and/or its principal, their respective Directors, or Employees may also have a position or be otherwise interested in the investments referred to in this document. This is not an offer to sell or buy the investments referred to in this document. This Review may contain data which are inaccurate and unreliable. You hereby waive irrevocably any rights or remedies in law or equity you have or may have against First Capital Holdings PLC with respect to the Review and agree to indemnify and hold First Capital Holdings PLC and/or its principal, their respective directors and employees harmless to the fullest extent allowed by law regarding all matters related to your use of this Review. No part of this document may be reproduced, distributed or published in whole or in part by any means to any other person for any purpose without prior permission. FC Research July

21 This report was prepared, approved, published and distributed by First Capital Equities (Pvt) Ltd, company located outside of the United States (a non-us Group Company ). This report is distributed in the U.S. by LXM LLP USA, a U.S. registered broker dealer, on behalf of First Capital Equities (Pvt) Ltd only to major U.S. institutional investors (as defined in Rule 15a-6 under the U.S. Securities Exchange Act of 1934 (the Exchange Act )) pursuant to the exemption in Rule 15a-6 and any transaction effected by a U.S. customer in the securities described in this report must be effected through LXM LLP USA. Neither the report nor any analyst who prepared or approved the report is subject to U.S. legal requirements or the Financial Industry Regulatory Authority, Inc. ( FINRA ) or other regulatory requirements pertaining to research reports or research analysts. No non-us Group Company is registered as a broker-dealer under the Exchange Act or is a member of the Financial Industry Regulatory Authority, Inc. or any other U.S. self-regulatory organization. FC Research July

22 Analyst Certification. Each of the analysts identified in this report certifies, with respect to the companies or securities that the individual analyses, that (1) the views expressed in this report reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly dependent on the specific recommendations or views expressed in this report. Please bear in mind that (i) First Capital Equities (Pvt) Ltd is the employer of the research analyst(s) responsible for the content of this report and (ii) research analysts preparing this report are resident outside the United States and are not associated persons of any US regulated broker-dealer and that therefore the analyst(s) is/are not subject to supervision by a US broker-dealer, and are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with US rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. FC Research July

23 Important US Regulatory Disclosures on Subject Companies. This material was produced by Analysis First Capital Equities (Pvt) Ltd solely for information purposes and for the use of the recipient. It is not to be reproduced under any circumstances and is not to be copied or made available to any person other than the recipient. It is distributed in the United States of America by LXM LLP USA and elsewhere in the world by First Capital Equities (Pvt) Ltd or an authorized affiliate of First Capital Equities (Pvt) Ltd. This document does not constitute an offer of, or an invitation by or on behalf of First Capital Equities (Pvt) Ltd or its affiliates or any other company to any person, to buy or sell any security. The information contained herein has been obtained from published information and other sources, which First Capital Equities (Pvt) Ltd or its Affiliates consider to be reliable. None of First Capital Equities (Pvt) Ltd accepts any liability or responsibility whatsoever for the accuracy or completeness of any such information. FC Research July

24 All estimates, expressions of opinion and other subjective judgments contained herein are made as of the date of this document. Emerging securities markets may be subject to risks significantly higher than more established markets. In particular, the political and economic environment, company practices and market prices and volumes may be subject to significant variations. The ability to assess such risks may also be limited due to significantly lower information quantity and quality. By accepting this document, you agree to be bound by all the foregoing provisions. FC Research July

25 LXM LLP USA assumes responsibility for the research reports content in regards to research distributed in the U.S. LXM LLP USA or its affiliates has not managed or comanaged a public offering of securities for the subject company in the past 12 months, has not received compensation for investment banking services from the subject company in the past 12 months, does not expect to receive and does not intend to seek compensation for investment banking services from the subject company in the next 3 months. LXM LLP USA has never owned any class of equity securities of the subject company. There are not any other actual, material conflicts of interest of LXM LLP USA at the time of the publication of this research report. As of the publication of this report LXM LLP USA, does not make a market in the subject securities. FC Research July

26 CONTACT FC Research Dimantha Mathew Atchuthan Srirangan Amanda Lokugamage Michelle Weerasinghe Hansinee Beddage