EIU-September 2017 Economic Update

Transcription

1 EIU-September 217 Economic Update The SNAPSHOT Sri Lankan Economy Economic Growth: Sri Lanka's Q2-217 real GDP grew by just 4%, marginally up from 3.8% in Q1. Weak agricultural output, on account of an acute drought as well as floods, was the main contributor to this weak growth performance. The agriculture sector contracted sharply by 2.9% during Q2, meanwhile, industry and services sectors recorded robust growth of 5.2% and 4.5% (YoY) respectively. External Sector: Earnings from exports continuing its positive growth for the fifth consecutive month in July 217. However the cumulative trade deficit widened in July 217 as a result of the rise in import expenditure, partly attributed to weather related disruptions to power generation and food production. Inflation: In August 217, both CCPI and CCPI core inflation increased to 6% from 4.8% and 4.9% in July respectively. The NCPI inflation increased to 7.9% (from 6.3%) and NCPI core inflation increased to 4.8% (from 4.2%). Credit Growth: Growth in credit extended to the private sector has shown a gradual deceleration since July 216, responding to the prevailing high nominal and real interest rates in the domestic market. Interest Rates: At the latest Monetary Board meeting, the Central Bank decided to maintain the Standing Deposit Facility Rate (SDFR) and Standing Lending Facility Rate (SLFR) at their current levels of 7.25% and 8.75%, respectively. The Global Economy Economic Growth: As per the latest report on the state of the economy by the Organisation for Economic and Cooperation and Development (OECD) observed that, Economic performance is improving in most of the world s leading economies but is still short of a self-sustaining upswing". World growth should rise from a low of 3.1 per cent in 216, to 3.5 per cent this year and 3.7 per cent in 218, the OECD forecast, with the US, the Eurozone, Brazil and Russia contributing most to the improved global outlook. Global Oil Prices: Global oil prices moved higher for the second consecutive month in August, up about 6%, the highest monthly percentage gain for the year. Global crude oil prices improved on continued signs of market rebalancing and a further decline in US stocks. Trade: According to the latest report by the World Trade Organisation (WTO), global trade rebounded strongly in the first half of 217, but cautioned that risks of protectionism loom large. The WTO expects 217 trade to grow by 3.6%, well above last year s 1.3 percent. This is a sharp upward revision of its earlier estimate in April, when it indicated growth of 2.4% and in a range of percent, due to a high level of political and economic uncertainty. UK: According to the latest predictions of the OECD on the UK economic growth, the British economy will be the slowest growing in the in 218 among G7 economies, after having been near the top of the table in 216. China: OECD s latest forecast for China s growth rate is 6.8% in 217 and 6.6% in 218 has been higher by.2 percentage points in both years. 1

2 % % % USD Mn USD Mn External Sector Performance August 217 Latest available statistics on the Export and Import performance is for June 217 and we ve included them in our last monthly economic update. Tourist Arrivals Increased by 3% Y-o-Y (August) 25, 2, 15, 1, 5, 3% (Jan-Aug 217 Vs 216) J F M A M J J A S O N D Tourism Earnings Increased by 5% Y-o-Y (August) % (Jan-Aug 217 Vs 216) J F M A M J J A S O N D Workers Remittances Increased by 3% Y-o-Y (July) 8 6% (Jan-July 217 Vs 216) J F M A M J J A S O N D Legend Key Macroeconomic Indicators Interest Rates SDFR and SLFR remain unchanged at 7.25% and 8.75% respectively Credit to Private Sector 18.6%-June %-May 17 J F M A M J J A S O N D J M M J S N J M M J S N J M M J S AWDR AWPR AWLR AWFDR SDFR (Repo) SLFR (Rev.Repo) Inflation- CCPI (Base 213) CCPI Core CCPI August 217 CCPI 6.% CCPI Core 6.% J F M A M J J A S O N D J F M A M J J A CCPI Core CCPI August 217 NCPI 7.9% NCPI Core 4.8% July 217 CCPI 4.8% CCPI Core 4.9% J F M A M J J A S O N D J F M A M J J July 217 NCPI 6.3% NCPI Core 4.2% 2

3 % Further Insights Sri Lankan Economy Second Quarter GDP Growth Flat lines, H1 at 3.9% Sri Lanka's Q2 real GDP grew by just 4%, according to data released by the Department of Census and Statistics (DCS), marginally up from 3.8% in Q1. Weak agricultural output, on account of an acute drought as well as floods, was the main contributor to this weak growth performance. The agriculture sector contracted sharply by 2.9% during Q2. Due to severe drought condition in key rice-growing regions of the North Central Province, agri subsector of cereals and rice saw double-digit declines. Meanwhile, industry and services sectors recorded robust growth of 5.2% and 4.5% (YoY) respectively. Services sector growth in Q2 was driven by strong performance in the information and communication, as well as the financial and insurance services, sub-sectors. Figure 1-GDP Growth 217 (Q1 and Q2) Agriculture Industry Services GDP Q1 Q2 Source: Department of Census and Statistics The services sector was the key contributor to the GDP and contributed 56.6% followed by the industries sector, tax less subsidies and agriculture sector contributed 25.9%, 9.4% and 8.2% respectively at current market prices. Wholesale and retail trade was the strongest contributing area to the GDP growth of Q2 217, followed by other personal service activities, transportation and warehousing and construction. Figure 2-Top Ten Contributors to the GDP Growth of Q2-217 and Their Contribution to the Q1-217 GDP Manufacture of textiles, wearing apparel and leather related products Financial Service activities and auxiliary financial services Public administration and defense; compulsory social security Real estate activities, Including Ownership of dwelling Manufacture of food, beverages & Tobacco products Mining and quarrying 2.6 Q2 Q1 2.6 Construction Transportation of goods and passengers including Warehousing Other personal service activities Wholesale and retail trade Source: EIU Calculations based on Department of Census and Statistics

4 NCPI (Index Numbers) Y-o-Y Inflation (%) These ten sub sectors together contributed more than 67% of the GDP in Q2 of 217. According to the latest DCS data on the first half of the year, H1 217 GDP expanded at just 3.9% YoY, signally a substantial slowdown in the economy. It is expected that as the impacts of the multiple adverse weather events subside, growth would begin to pick up towards the latter part of H Sri Lanka s Nationwide Inflation up 7.9% in August 217, attributed to Lower Price Levels in August 216 According to the National Consumer price Index (NCPI), inflation in August 217 increased to 7.9% from 6.3% recorded in July 217 on year-on-year basis. The reason for this increase in inflation was attributed to the low price levels prevailed in August 216. Figure 3-Movements of the NCPI and the Year-on-Year Inflation (August 216-August 217) A S O N D J F M A M J J A NCPI Y-o-Y Inflation Source: Department of Census and Statistics The NCPI for all items for August 217 decreased marginally by.9% to from recorded in July 217. The decrease in the index point by was the expenditure value decreases of food category by.25% and increase of non-food category by.16%. Within the food category, prices of vegetables, red onions, garlic, fresh fish and rice decreased and prices of big onions, some fruits, coconuts and potatoes increased during the month. Prices in clothing, furnishing, household equipment and maintenances, health, transport, education and miscellaneous goods and services increased in August 217. Inflation of the food category recorded as 12.1% while non-food category inflation as 4.8% in August 217, on year-on-year basis. The NCPI core inflation, which reflects the underlying inflation in the economy increased to 4.8% in August 217 from 4.2% in July 217 on year-on-year basis. 4

5 GWh Lowest Hydro Power Generation (Year to date) for Last Four Years was Recorded in 217 The latest electricity generation statistics released by the Public Utilities Commission of Sri Lanka (as at August 217) shows that the lowest hydro power generation for last four years was recorded in 217. The prevailing drought condition resulted in lower reservoir levels and by 217 (as at August) reservoir levels were the lowest they have been in last four years. Due to lower reservoir levels, hydro power generation in the country sharply drops by 43% in August 217 on year-on-year basis. By dint of this, the cost of electricity generation is going up as the Ceylon Electricity Board (CEB) has to switch to higher cost thermal power generation. As a result, fuel oil and diesel consumption in thermal power plants increasing and imports of fuel to the country is increasing. This resulted in increasing the import bill of the country and widen the trade deficit. Figure 4-Cumulative Power Generation ( : January to August) , ,915 2,332 3,337 3,388 3,777 1, ,339 1,449 1, ,855 2,922 2,664 1, CEB Hydro CEB Thermal Oil CEB Coal IPP Thermal SPP Solar SPP Wind Source: Public Utilities Commission of Sri Lanka The International Monetary Fund (IMF) is predicting about ¼% loss on GDP of Sri Lanka, approximately USD 213 mn, due to the increase in thermal power generation by the CEB in 217. This was clearly stated in the staff report of the second review of the Extended Fund Facility Arrangement by the IMF. However, renewable energy generation of the country has increased remarkably in 217 (as at August). Solar energy generation recorded an output of 39 GWh in 217. Wind energy generation recorded 243 GWh, which is a 25% increase compared to the output of the previous year (as at August). This shows an increase in the share of renewable energy in the electricity mix of Sri Lanka. According to the recently published report by the United Nations Development Programme (UNDP) and the Asian Development Bank (ADB) on Assessment of Sri Lanka s Power Sector-1% Electricity Generation through Renewable Energy by 25 indicated that, Sri Lanka can meet its current and future electricity demand by judicial use of renewable energy by 25. According to the said report, by 25, the country s installed electricity generation capacity needs will increase from the current 3,7 MW to about 34, MW. Of this 15, MW will be wind energy and about 16, MW will be solar energy. The Balance capacity is expected to be met by hydro and biomass based power plants. 5

6 Latest Demographic and Health Survey Reveals Household Characteristics, Health and Education are Improving The Department of Census and Statistics recently released their latest Demographic and Health Survey Report 216 with the purpose of providing information for evidence-informed decision making in enhancing the effectiveness of health service delivery of the country. According to the report, 9% of the households have access to an improved source of drinking water with majority (8%) of having a water source on premises and 9% of households and population have access to improved sanitary facilities. The report revealed that, almost all households (97%) have access to electricity which was increased from 8% in 26 and 66% households use wood or solid fuel for cooking. 87% of households have access to television (increased from 77% in 26) and 91% have access to mobile phones (increased from 39% in 26). Report confirmed high levels of participation in education across the country with a median of 9.4 years of education (9.4 years for females and 9.2 years for males). 9% of ever-married women were currently married, 4% were living together,6% were widowed, divorced or separated. Fertility has continued to decline to values approaching replacement levels including in all sectors. The survey reports a total fertility rate of 2.2 children per women of reproductive age. The median age at first birth has also increased substantially to 25.6 years. Highest fertility rate was recorded from Kandy district (2.6) where lowest from Colombo, Gampaha and Ratnapala districts. 72% of the currently married women had a demand for contraception in 216 and 65% of these, were using contraception. Out of total demand, closely 9% is satisfied, mainly by modern contraception. The majority of ever married women (83%) had access to a bank account and 87% used a mobile phone Infant and child mortality has continued to decline during last ten years and under-five mortality of children were calculated as 11 per 1, live births in 216 (declined from 21 in 26). 91% of pregnancies in the country received antenatal care and almost all births had taken place in a health facility (95% in public and 5% in private). 9% of children were breasted almost immediately after birth. But, 16% of the births were low birth weight (under 25g) and in eight districts, this percentage was 18% or greater. 93% of ever-married women had heard about HIV/AIDS but only 33% has comprehensive knowledge (prevention and misconception) of AIDS. But, this value was only 24% among young adults aged years. 6

7 Further Insights - Global Economy OECD Says Global Economy in Promising Upturn, But Cautions against Complacency In its latest report on the state of the global economy, the Organisation for Economic Cooperation and Development (OECD) this month observed that, "Economic performance is improving in most of the world s leading economies but is still short of a self-sustaining upswing". The body of advanced economies noted that more private sector investment was needed for the expansion to endure, for wages to rise sustainably and for inequalities to be tackled. OECD s 'Interim Economic Outlook' shows upgrades to the 217 growth forecasts in China, Russia and Europe excluding the UK with the world outlook also appearing stronger in 218. World growth should rise from a low of 3.1%in 216, to 3.5% this year and 3.7% in 218, the OECD forecast, with the US, the Eurozone, Brazil and Russia contributing most to the improved global outlook. China s predicted growth rate of 6.8%in 217 and 6.6%in 218 has been revised higher by.2 percentage points in both years and although India s growth rate has been revised down, reflecting adjustment to its new goods and services tax, it is likely to remain the fastest growing large economy in the world. The Outlook further points out that the recovery of business investment and trade remain too low to sustain healthy productivity growth, while wage growth has been disappointing on average, and not equitable across workers. The short-term outlook is more broad-based and the upturn is promising, but there is no room for complacency, said OECD Chief Economist Catherine L. Mann and made the case for monetary policy to remain accommodative in some economies but with an eye on financial stability so as to remain supportive of further rebalancing towards fiscal and structural initiatives. UK Economy Growth Impacted by Brexit As British Prime Minister Theresa May postponed the latest round of 'Brexit talks' with EU authorities by a week, a new report from the OECD gives an indication of the costs the protracted negotiations could have on growth. In the OECD's 'Interim Economic Outlook' report released this month, it is only the UK that was given a deteriorating outlook. The report forecast that the British economy will be the slowest growing in the in 218 among G7 economies, after having been near the top of the table in 216. Responding to this forecast, the UK Treasury said in a statement that it was not complacent and the Government must continue our focus on restoring productivity growth which is the only sustainable way to deliver higher wages and higher living standards for people across the country. The UK unemployment rate has fallen to below 4.5%, but weak productivity and real wage growth persist. The depreciation of the sterling has modestly improved export prospects but has also pushed up inflation. The UK is projected to grow by 1.6% in 217 and 1% in 218. Moody s Investor Service has downgraded the UK s long-term issuer rating to Aa2 from Aa1 and changed the outlook to stable from negative. WTO Upgrades Forecast for 217 Trade Growth Amidst Strong H1 Pick Up, But Risks Remain. After a worrying 216, this year has proven to be much better for global trade than expected. 216 saw the sharpest slowdown in trade since the onset of the global financial crisis, and the economic recession that followed. It even led to the collapse of shipping lines like Hanjin, as trade flows slowed down substantially. Yet, 217 so far has showed positive signs. According to the latest report by the World Trade Organisation (WTO), global trade rebounded strongly in the first half of 217, but cautioned that risks of protectionism loom large. The apex trade body expects 217 7

8 trade to grow by 3.6%, well above last year s 1.3 percent. This is a sharp upward revision of its earlier estimate in April, when it indicated growth of 2.4% and in a range of percent, due to a high level of political and economic uncertainty. That range has now been narrowed to %, based on accelerating economic growth and rising import demand in China and the United States, which spurred trade within Asia. One of the noteworthy pieces of this latest WTO report as well as the recent OECD report is that growth appears to be rebounding in a synchronized manner - that is, it isn t a scenario of growth in one part of the world, while other parts are in recession. Nevertheless, risks do remain. WTO Director-General Roberto Azevedo said in a statement that, The improved outlook for trade is welcome news, but substantial risks that threaten the world economy remain in place and could easily undermine any trade recovery. He pointed to three such risks; 1. The possibility of protectionist rhetoric translating into trade restrictive actions 2. The rise in global geopolitical tensions 3. A rising economic toll from natural disasters. The ratio of trade growth to global GDP growth, which traditionally ran at about 2:1 but has slumped to about 1:1 in the decade since the financial crisis. But according to the WTO, it should rise this year to 1.3:1. 8

9 Annexures 1. Tourist Arrivals Country of Residence August January - August % Change % Change Western Europe of which UK Asia of which India China(P.R)* Other Total 65,949 64, , , ,93 2, , , ,66 77, ,48 611, ,22 24, ,12 224, ,57 27, ,696 19, ,913 43, ,195 32, , , ,46,854 1,359, Source: - Sri Lanka Tourism Development Authority 2. Interest Rates Commercial Bank Average Weighted Prime Lending Rate (AWPR) Treasury Bill Yield Week ending 22 nd Sep. 217 Week ago Year ago days days Commercial Bank Average Weighted Lending rate (AWLR) (July 216) Commercial Bank Average Weighted Fixed Deposit Rate (AWFDR) (Aug 217) Source: - Central Bank of Sri Lanka Latest available month Month before Year ago

10 3. Inflation 3.1 Colombo Consumer Price Index (CCPI) Base Year 213 Consumer Price Inflation August 217 July 217 Year ago Year -on -Year Month Moving Average (%) Core Inflation August 217 July 217 Year ago Year -on Year Month Moving Average (%) Source: - Department of Census and Statistics 3.2 National Consumer Price Index (NCPI) Consumer Price Inflation August 217 July 217 Year ago Year-on Year 12 Month Moving Average (%) Core Inflation August 217 July 217 Year ago Year-on Year 12 Month Moving Average (%) Source: - Department of Census and Statistics 4. Credit Growth Growth in Credit to Private sector (%) June 217 May 217 April 217 Year ago (June 216) Source: - Central Bank of Sri Lanka 1