Monetary Policy Review – December 2015 - Policy rates unchanged

The year-on-year growth of broad money (M2b) continued to expand at a high rate of 17.0 per cent in October 2015 compared to 16.0 per cent recorded in the previous month, driven by the expansion of credit extended to both private and public sectors by the banking system. Amongst contributory factors, credit granted to the private sector by commercial banks increased by 26.3 per cent, year-on-year, compared to 22.2 per cent in the previous month. Tentative data for November 2015 also shows that credit flows to the private sector continue to expand at a high rate. 

Meanwhile, excess liquidity in the domestic money market continues to remain high, fuelling monetary expansion. Meanwhile, headline inflation, as measured by the Colombo Consumers’ Price Index (CCPI, 2006/2007=100), increased to 3.1 per cent, on a year-on-year basis, in November 2015 from 1.7 per cent in October 2015. On an annual average basis, headline inflation increased to 0.9 per cent in November 2015 compared to 0.7 per cent in the previous month. Following a similar trend, headline inflation based on the National Consumer Price Index (NCPI, 2013=100) also increased to 4.8 per cent, on a year-on-year basis, in November 2015 from 3.0 per cent in October 2015. Reflecting the firming up of aggregate demand conditions in the economy, the CCPI-based core inflation rate registered 4.3 per cent, on a year-on-year basis, in November 2015 vs. 4.4 per cent in the previous month and compared to its recent low of 0.8 per cent in February 2015. Meanwhile, core inflation measures, based on NCPI, also suggest rising underlying inflationary pressures in the economy.

On the external front, the decline in expenditure on imports in October 2015 was greater than the decline in earnings from exports, narrowing the deficit in the trade account by 6.8 per cent, on a year-on-year basis, to US dollars 791 million. However, on a cumulative basis, the trade deficit during the first ten months of the year widened by 2.5 per cent to US dollars 6,936 million reflecting the continued increase in non-oil imports. Meanwhile, earnings from tourism during the first eleven months of 2015 are estimated to have grown by 18.1 per cent, while workers’ remittances grew marginally by 0.8 per cent in the first eleven months of the year. Gross official reserves, which stood at US dollars 6.5 billion at end October 2015, are estimated to have increased to around US dollars 7.3 billion by end November 2015. Reflecting domestic and global developments, the Sri Lanka rupee has depreciated by 8.8 per cent against the US dollar so far in 2015. Notwithstanding these developments, the Monetary Board is of the view that external sector policies already implemented need to be further supported by some monetary policy tightening. 

If the current excess liquidity in the domestic money market continues to remain high for an extended period, it could lead to an undue expansion in monetary aggregates, fuelling future inflation in the economy. In that respect, the Monetary Board is of the view that it is appropriate to restrain the build-up of demand-side pressure on inflation to ensure continued monetary and price stability. Accordingly, the Monetary Board decided, at its meeting held on 30 December 2015, to raise the Statutory Reserve Ratio (SRR) applicable to all rupee deposit liabilities of commercial banks by 1.50 percentage points to 7.50 per cent to be effective from the reserve week commencing 16 January 2016. Furthermore, the Monetary Board decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank unchanged at their current levels of 6.00 per cent and 7.50 per cent, respectively.

Sri Lankan shares rise to one-week high ahead of cenbank rate decision

Reuters: Sri Lankan shares ended firmer at more than one-week high on Wednesday, led by financials, but trading was this ahead of the central bank's key monetary policy rate decision later in the day.

The main stock index rose 0.33 percent to finish 6,870.63, its highest close since Dec. 21.

"The market is waiting for clear direction on the interest rates and many investors are still on holiday," a stockbroker said asking not to be named.

Sri Lanka's central bank is expected to raise interest rates by 25 basis points from record lows at its December policy meeting on Wednesday, a Reuters poll found, a move that could relieve pressure on the fragile rupee. The central bank's policy decision is due at 1400 GMT.

Stockbrokers expect some investors to shift to fixed and risk free assets from stocks in the event of a rate hike.

Foreign investors sold a net 31.6 million rupees ($219,292) worth of equities, extending the net outflow to 4.45 billion rupees so far in the year.

Turnover stood at 271.2 million rupees, around a quarter of this year's daily average of 1.06 billion rupees.

Commercial Leasing and Finance Plc rose 5 percent, while Lanka Orix Leasing Co Plc gained 2.5 percent.

Top lender Commercial Bank of Ceylon, which saw net selling by foreign investors, ended flat, but accounted for around a third of the day's turnover. 

($1 = 144.1000 Sri Lankan rupees) 

(Reporting by Shihar Aneez; Editing by Anand Basu)

Ten Southeast Asian countries to launch single market

With over 600 million people, ASEAN's potential market is larger than the European Union or North America.

The center of global economic gravity is shifting toward Asia. Within Asia, it is shifting toward the two giant economies of the People's Republic of China and India. Their emergence as economic superpowers suggests that "economic size" bestows significant advantage in accelerating growth and fostering development.

The Association of Southeast Asian Nations (ASEAN) is in the process of creating a single market and production base, called the ASEAN Economic Community, which will allow the free flow of goods, services, investments, and skilled labor, and the freer movement of capital across the region. This is envisioned to be in place by 31 December 2015.

If ASEAN were one economy, it would be seventh largest in the world with a combined gross domestic product of $2.4 trillion in 2013. It could be fourth largest by 2050 if growth trends continue. Source: Speech by ADB Vice-President Stephen Groff. 2014. Berlin, Federal Republic of Germany.

With over 600 million people, ASEAN's potential market is larger than the European Union or North America. Next to the People's Republic of China and India, ASEAN has the world's third largest labor force that remains relatively young. Source: Speech by ADB Vice-President Stephen Groff. 2014. Berlin, Federal Republic of Germany. ASEAN is one of the most open economic regions in the world, with total merchandise exports of over $1.2 trillion - nearly 54% of total ASEAN GDP and 7% of global exports.

ASEAN is taking a more cautious approach to regional economic integration than Europe. In Asia, there is currently no serious consideration of a single currency.

The ASEAN Economic Community is founded on four basic initiatives: creating a single market and production base; increasing competitiveness; promoting equitable economic development; and further integrating ASEAN with the global economy.

ASEAN's physical infrastructure is critical to the ASEAN Economic Community's goal of establishing a single market and production base.

Cross-border roads, power lines, railways and maritime development will help propel the community forward. This will boost existing and new value chains or production networks.

One of the challenges to the ASEAN Economic Community is bridging the perceived "development divide" between the older and economically more advanced members - Brunei, Indonesia, Malaysia, Philippines, Singapore, and Thailand, known as the ASEAN-6, and the four newer members - Cambodia (1999), Lao People's Democratic Republic (1997), Myanmar (1997), and Viet Nam (1995). Some analysts believe that the ASEAN Economic Community will miss its December 2015 deadline because of the challenging requirements of economic integration, including changes to domestic laws and in some cases constitutional changes.

The flexibility that characterizes ASEAN cooperation, the celebrated "ASEAN way," may hand member states a convenient pretext for noncompliance, according to one ADB report. How to enforce the accords remains an issue. Currently, the economic integration commitments lack sufficient mechanisms to ensure compliance.

ASEAN needs a plan beyond the ASEAN Economic Community to achieve the long-term development aspirations of its 10 member countries, according to an ADB study. This includes introducing structural reforms nationally and taking bold actions regionally to further deepen economic integration. ADBI. 2014

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Colombo city hotels record high occupancy

Colombo city hotels have increased occupancy by 10% from 2014 to record 75% in 2015, Colombo City Hotels Association Chairman M. Shanthikumar told to Daily News Business yesterday. He said that in 2015 December, the average occupancy too has increased by around 20% in comparison to December 2014 . He said that the current devaluation of the rupee too is helping the industry and it's adding into their revenue.

Shanthikumar said unclassified hotels are eating into their revenue and this is a major issue.They are not paying any taxes and are also under cutting us by offering low rates. "We have brought this up with the government which has now responded. These unclassified hotel rooms which we estimate to be around 1,000 will soon be made accountable,"he said.

Commenting on the increase of rooms in Colombo city, he said around 250 star class rooms were added in 2015. This number will significantly increase with new hotels like Mövenpick opening next year.
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Abans Finance to raise Rs 185 mn in rights issue

Abans Finance PLC will raise Rs 185 million.

This is by way of a rights issue, the company said in a stock exchange filing.

Subject to the necessary approvals, the company is to issue 7,400,000 ordinary shares at Rs 25.00 each in the ratio of 1 for every 5 shares.

The proceeds will be utilized to expand the lending activities of the company and the capital adequacy requirements that have arisen as a result of business expansion.
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Janashakthi eager for more buys : Bouyant after AIA General acquisition

Janashkthi Insurance over the years has grown through acquisitions and are bullish on more in this direction, Janashakthi Insurance Managing Director Prakash Schaffter said.

Speaking to Daily News Business he said that this was the logic that came into play when the company decided to acquire AIA Insurance’ General Business recently.

He recalled that in 2001 too they made a similar investment to purchase Sri Lanka Insurance. “We are on the lookout for more similar acquisitions.”

Janashakthi Insurance, a company established in 1994, paid Rs.3.2 billion to AIA Insurance Lanka to seal off its acquisition of AIA General Insurance Lanka Limited in October. With the financial aspects of the transaction now complete, Janashakthi will commence amalgamation of AIA General Insurance Lanka Limited with Janashakthi General Insurance Limited.

Janashakthi received the go ahead from its shareholders to raise over Rs.3.357 billion by way of a Rights Issue of over 181.5 million new ordinary shares at its Extraordinary General Meeting (EGM) to raise capital for this acquisition.

“In line with our long term growth plans and to be the number one in the industry, the acquisition of AIA General Insurance Lanka Limited marks a significant milestone in Janashakthi’s history. With the combined strengths of the two entities as we strive to deliver greater value to our customers, employees and shareholders,”Schaffter said.

“Currently we are overstaffed but with the opening of new branches this will be resolved.”

Currently Janashakthi is the third largest general insurer in Sri Lanka, the resulting entity will account for an estimated Gross Written Premium (GWP) of Rs.11 billion with a market share of approximately 17.5%. Commenting on the industry he said they see lot of potential since the insurance penetration levels are very low. “In India it’s at around 3% and back in Sri Lanka it’s around 5.6%”

He said that the 2016 budget proposals saw an increased of NBT which he said would have a negative impact on them. “We hope that the new taxes would not be detrimental to the industry.”

He said looking back at 2015 the Easy Claim product (Solution that enables a fast claim payment via ATMs up to Rs.100,000 paid through from any Sampath Bank ATM) was very popular. In addition the Premier Medical (International health insurance plan provides a global coverage for Sri Lankans and expatriates) and the Janashakthi Green Light (Only life cover available to those who have been diagnosed with HIV) are very popular.

Janashakthi General Insurance is the third largest general insurer in Sri Lanka with an estimated Gross Written Premium of Rs. 7.5 bn (market share of approximately 11.4%).

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