July 2017 FC Research ANALYST CERTIFICATIONS AND REQUIRED DISCLOSURES BEGIN ON PAGE 21
Monetary Policy Review..... 3 Rating Outlook: Moody s... 4 Inflation... 5 M2B & Sector Credit... 7 Reserves & Liquidity... 8 Currency Movement... 9 Government Securities... 10 Finance Sector Rate Movement... 13 External Sector... 14 Tourist Arrivals... 18 Global Markets... 19 FC Research July 2017 2
Policy rates unchanged Private sector credit growth decelerated gradually to 20.4% in March 2017 and 20.0% in April 2017. 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 2017. Gross official reserves improved to above USD 7.0 Bn by mid-june from 5.1Bn by end April 2017. 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 2017 3
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 2016 4
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 2017 5
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 2017. 2.0% 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 2017 6
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 +20.09%, YTD +6.02% State Credit & Private Credit MoM +0.4%, YoY +19.99%, YTD +4.51% LKR 6,000 3.03% 3.50% 5,800 3.00% 5,600 2.16% 5,400 2.50% 2.66% 1.68% 5,200 1.86% 1.44% 1.60% 2.00% 1.43% 1.59% 1.28% 1.40% 1.57% 2.26% 5,000 1.41% 2.00% 1.31% 1.36% 1.23% 1.50% 4,800 0.93% 0.94% 4,600 1.00% 0.59% 0.98% 4,400 0.86%0.19% 1.01% 0.50% 4,200 4,000 0.00% 200.00 150.00 100.00 50.00 0.00-50.00-100.00 27 2 60-16 76 35 63 14 45-125 60 79 81 22 17 12 79 38 18 164 71 96 82 41 19-4 -150.00 M2b MoM Growth Source: CBSL State Credit Private Credit FC Research July 2017 7
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 100.00 80.00 60.00 40.00 20.00 0.00-20.00-40.00-60.00-80.00 Market Liquidity CBSL Reserves Source: CBSL 1000 950 900 850 800 750 700 650 CBSL Reserves (LKR 'Bn) Gross Official Reserves (USD mn) Source: CBSL FC Research July 2017 8
YTD 2017 June 2017 USD:LKR Movement Sri Lankan Rupee vs Global Currencies Japan YEN 0.0% 153.40 India Rupee US Dollar -0.6% -0.7% China Renmiibi -1.9% 153.20 UK Pound Euro -3.0% -2.2% Aus Dollar -4.0% 153.00 Can Dollar -4.4% -5.0% -4.0% -3.0% -2.0% -1.0% 0.0% 1.0% 152.80 US Dollar China Renmiibi -5.4% -2.5% Can Dollar -6.4% 152.60 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 2017 9
350 300 250 200 150 100 50 0-50 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17-100 Excess Liquidity CBSL Holdings of Gov. Securities Source: CBSL FC Research July 2017 10
Week Ending Bills ('Mn) Bonds ('Mn) Total June 2017 YTD Maturities 185,931 1,041,177 02-Jun-17 29,500 29,500 09-Jun-17 28,970 28,970 16-Jun-17 25,629 45,000 70,629 23-Jun-17 30,276 30,276 30-Jun-17 5,405 5,405 Total Issued 164,780 New Issues 164,780 904,763 Excess/(Deficit) -21,151-136,414 CBSL Holdings of Gov. Securities YTD As at End May 2017 211,409 As at End June 2017 214,185 Increase/ (Decrease) 2,776 115,893 FC Research July 2017 11
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. 14.00% 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% -10 9.68% -13 6M 10.20% 10.23% 3 10.68% -45 1 Yr 10.65% 10.50% -15 11.03% -53 2 Yrs 10.80% 10.65% -15 11.58% -93 3 Yrs 11.05% 10.75% -30 11.95% -120 4 Yrs 11.45% 11.25% -20 12.55% -130 5 Yrs 11.55% 11.35% -20 12.75% -140 6 Yrs 11.68% 11.38% -30 12.80% -142 8 Yrs 11.73% 11.38% -35 12.80% -142 10 Yrs 11.70% 11.45% -25 12.83% -138 15 Yrs 11.95% 11.70% -25 12.95% -125 20 Yrs 12.00% 11.80% -20 13.18% -138 30 Yrs 12.08% 11.98% -10 13.25% -127 FC Research July 2017 12
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 2017 13
707 795 776 810 899 865 888 868 866 855 859 897 891 898 945 1,042 Exports improved 11.9%YoY during April 2017. 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 547.9 2,713.5 159.5 721.8 594.9 2,701.5 195.8 851.7 8.6 (0.4) 22.7 18.0 1,050 1,000 950 900 850 800 Mineral and other - Apr - YTD 2.9 14.3 4.0 15.8 37.0 10.9 750 700 650 Total - Apr - YTD 710.4 3,449.6 794.7 3,569.0 11.9 3.5 600 2016 2017 Source: CBSL FC Research July 2017 14
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 316.2 1,425.5 778.9 3,019.2 364.3 1,607.8 345.1 1,515.6 885.7 3,692.2 372.5 1,614.6 9.1 6.3 13.7 22.3 2.3 0.4 1,900 1,800 1,700 1,600 1,500 1,400 1,300 Total - Apr - YTD 1,460.9 6,055.4 1,603.9 6,883.3 9.8 13.7 1,200 2016 2017 Source: CBSL FC Research July 2017 15
Balance of Trade -1,051-934 -957-922 -809-828 -779-814 -754-824 -783-743 -691-645 -621-630 -1,200-1,000-800 -600-400 -200 0-542 -552 Source: Central Bank FC Research July 2017 16
USD 'Bn Balance of Payments remains negative 0-200 -400-600 -800-1,000-1,200 Tourism Earnings and Worker Remittances together reached USD 763Mn (-6.0%YoY). Dipping Worker Remittances depicts a concern on the BOP. 1,000 800 600 400 200 0-200 -400-600 -800-1,000 578 Jan-Apr-16-958 234 275 Apr-16-751 488 Apr-17 Jan-Apr-17-344 -809 April 2016 2017 Change USD Mn Nov (%) Trade Balance -750.5 Trade Balance -13.2% -809.2 +7.8% Earnings from Tourism 234.0 274.9 17.5% Workers Remittances YTD USD Mn 578.0 487.9-15.6% 2016 2017 Change (%) Trade Balance -2,605.8-3,314.3 +27.2% Earnings from Tourism Workers Remittances 1,237.3 1,312.8 +6.1% 2,371.4 2,221.7-6.3% Trade Balance Earnings from Tourism Workers Remittances FC Research July 2017 17
'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 17,205. 240 220 200 180 160 140 120 100 80 60 40 20 2015 2016 2017 Source: SLTDA FC Research July 2017 18
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 51.2. The median forecast of analysts surveyed by Market News International projected a decline to 51.1. 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% https://www.marketnews.com 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. http://asia.nikkei.com 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. http://www.reuters.com Source: Bloomberg FC Research July 2017 19
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