ECONOMIC UPDATE - NOVEMBER 17

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EIU-November 2017

   The SNAPSHOT   

Sri Lankan Economy

Exports: Earnings from exports registered a double digit growth (12.6% on a Y-o-Y basis) in September 2017, surpassing the USD 1bn mark of monthly exports for the third consecutive month. The growth was mainly led by higher earnings from the increase in textiles and garments exports as a result of improved garment exports to both the USA and EU market.

Imports: Expenditure on imports increased by 10.5% Y-o-Y in September 2017, recording a double digit growth for the third consecutive month. This was as a result of higher expenditure incurred on intermediate goods, particularly on fuel due to the combined effect of high prices in the international market and higher volumes of fuel imported for thermal based power generation. The trade deficit as a result widened by 8% Y-o-Y in September 2017.

Budget 2018: As announced in the budget statement, the government is aiming to increase tax revenue to 14.3% of GDP in 2018 (from an estimate of 13.5% in 2017) while reducing the budget deficit to 4.8% of GDP (from an estimate of 5.2% in 2017).

Inflation: During October 2017, CCPI inflation increased to 7.8% (from 7.1%) while CCPI core inflation declined to 5.8% (from 6.0%). During the same period, NCPI inflation increased to 8.8% (from 8.6%) and NCPI core inflation decreased to 4.1% (from 4.6%). The reason for this uptick of headline inflation is from the rise in prices of food and beverages.

Credit Growth: Credit to the private sector by commercial banks continued to moderate in September 2017 and recorded a 17.5% growth on Y-o-Y basis.

Policy Rates: The Monetary Board of the Central Bank of Sri Lanka decided to keep key policy rates unchanged during their 7th policy review of 2017.

Outlook Upgrade: Standard & Poor’s Global Ratings revised its outlook on Sri Lanka from ‘Negative’ to ‘Stable’ citing the strengthening of Sri Lanka’s institutions and governance practices while expecting the reform momentum to continue over the next 12 months.

 

The Global Economy

Oil Prices:  As per OPEC’s monthly oil market report, the OPEC Reference basket averaged $55.50 per barrel in October 2017, gaining $2.06 over the previous month and reaching the highest value in more than two and a half years. The report stated that prices were supported by rising global demand and expectations that OPEC and other participating non-OPEC producing countries would extend the agreement to adjust output while help bring the oil market towards a rebalance.

Trade: The global merchandise trade growth is expected to moderate during the fourth quarter of 2017, as per the recent update of the World Trade Outlook Indicator of the World Trade Organisation. The recent update is slightly lower than the forecast released in August 2017.

Energy Outlook: As per the World Energy Outlook 2017 report of the International Energy Agency, over the next 25 years the world’s growing energy needs are to be met by renewable sources of energy supported by fast declining costs of clean energy technologies.

Growth of China, US and EU
China:
Economic growth during the third quarter of 2017 was recorded at 6.8%, topping the government target               and accelerating for the first time in seven years.
US:  During the third quarter of 2017, GDP expanded by 3% driven by business investment and consumer spending. This was the second straight quarter of growth above 2%, a pace that has persisted during the economic recovery.
EU: European Commission has forecasted a 2.2% growth in 2017 which is up from 1.8% in 2016. The previous forecast made in May 2017 was revised upward.

 

   External Sector Performance – September 2017   

Exports

Imports

   Key Macroeconomic Indicators   

   Further Insights – Sri Lankan Economy   

Stock Market Continues Encouraging Performance in 2017

As announced by the Colombo Stock Exchange (CSE) recently, the Sri Lankan stock market has continued its encouraging performance in 2017 with positive returns of both market indices (All Share Price Index and S&P SL 20 Index). The positive growth of the indices mark a reversal of the declining trend recorded in 2015 and 2016. The performance of the market has resulted in an improvement in market activity with daily-average turnover (year-to-date as at end October) increasing 28% compared to 2016.

Capital raised through rights issues during the year recorded the highest since 2007, displaying the confidence placed by listed companies in the capital market when addressing their additional capital requirements. The market continued to attract foreign investments throughout 2017 with the first half of the calendar year recording an all-time high for foreign investor buying.

According to the CSE, encouraging performance among listed entities, capital gains tax exemptions offered to share transactions, attractive market valuation are some of the factors in attracting the level of foreign investor interest so far in 2017.


Though the Economy Expanded, the Female Labor Force Participation Rate has declined

As per a recent report by the World Bank (“Getting to Work: Unlocking Women’s Potential in Sri Lanka’s Labor Force”), the Female Labor Force Participation (FLFP) rate in Sri Lanka declined from 41% in 2010 to 36% in 2016  even as the economy expanded. This report states that, women’s experiences in Sri Lanka’s labor market remain characterized by low participation, high unemployment and persistent wage disparities between men and women. It all adds up to a human-capital mismatch, where women at all levels of educational attainments find it harder with each year to secure high skilled and high-paying jobs.

The study recommends four priority areas to focus on to enable women gaining paid employment and then continuing to thrive in the workplace, which encompasses on starting young career development initiatives, women entrepreneurship and improving child care services.

 

Sri Lanka is the Only Country in South Asia which has closed the Gender Gap in Health and Survival

As per the Global Gender Gap Report 2017 of the World Economic Forum, Sri Lanka is ranked 109 in the Global Gender Gap Index, out of 144 countries worldwide. Report found that, Sri Lanka is the only county in South Asia which fully closed the health and survival gender gap; ranked among the top countries under the health and survival sub-indices. In the economic participation sub index, Sri Lanka ranked 123 while the country ranked 86 and 65 in education attainment and political empowerment sub-indices respectively. Sri Lanka is at the fourth position in the South Asian region when considering the global index for gender gap where Bangladesh (47), Maldives (106) and India (108) are ranked higher than Sri Lanka.

 

Departures for Foreign Employment Drop Significantly in 1H of 2017

According to the recently released report on “Recent Economic Developments” by the Central Bank of Sri Lanka, departures for foreign employment has dropped by 14.6% during the first half of 2017 compared to the same period of 2016. As a result of this, inflows of workers’ remittances to the country declined by 7.2% during the same period under review.

Main contributors to this significant drop of departures stem from the geo-political environment in the Middle-East and slowdown in economic growth of major oil exporting countries. Measures taken to streamline departures under the housemaid category by local authorities is cited as a further reason for this drop in departures. 

Departures of workers under all skill categories declined in the first half of 2017 compared to the same period of 2016. This decline was led by the fall in departures in semi-skilled, Clerical and related and, Housemaid categories.

Land Prices in Colombo Continuing to Move High

The Land Price Index (LPI) of the Central Bank recorded an increase of 12.6% at the end of June 2017, continuing the recent trend in land price movements in the Colombo District. All three sub-indices of LPI contributed to this increase. The Industrial LPI increased by 14.6% while the Commercial LPI and Residential LPI increased by 11.6% and 11.9% respectively at the end of June 2017.

LPI is a bi-annual index which is compiled covering the Colombo District using the land price data of the Sri Lanka Valuation Department. Colombo, Dehiwala, Homagama, Kaduwela and Kesbewa are the five Divisional Secretariat Divisions considered in the LPI.

16% Y-o-Y Growth in Government Revenue during the First Eight Months of 2017, but Below Estimates

According to the Fiscal Management Report 2018 of the Ministry of Finance, the government revenue registered a growth of 15.7% (to Rs.1, 172bn) during the first eight months of 2017 on Y-o-Y basis. This is below than the estimated revenue of Rs.1, 310bn.  Tax revenue is the key contributor for the growth in government revenue and revenue collected from taxes rose by 17.5% (to Rs.1, 094.9bn) which is also Rs.92bn less than the estimate for the period under review.

Domestic consumption based tax revenue increased by 67.5% (to Rs.181.4bn) due to the increase in domestic VAT rate from 11% to 15% while revenue collected from liquor and cigarettes declined by 6.9% (to 128.3bn) due to decreased consumption resulting from increased excise duty rates. Revenue collected through imports increased by 16.3% (to Rs.552.1bn). Revenue generated from excise duty on motor vehicles increased by 8% (to Rs.129.5bn) due to increased vehicle imports, coupled with increased unit rates of excise duty rates on motor vehicles in the reference period along with the government policy towards discouraging high emission vehicle imports. Revenue from PAYE increased by 18.6% (to Rs.22.4bn) due to improved tax administration and enhanced high wage employment in high earnings categories such as professional services etc. Revenue generated from corporate and non-corporate income tax declined by 3% (to Rs.81.2bn).

Non-Tax revenue decreased by 5% (to Rs.77.4bn) due to combined effects of negative growth recorded from profits and dividends despite the positive growth recorded from rent income, sales and charges and, social security contribution.

Government expenditure registered a growth of 18% (to Rs. 1,694.9bn), but Rs.58bn less than the estimates. Recurrent expenditure increased by 11.6% (to Rs. 1,294.3bn) and expenditure on salaries and pension payments increased by 3.6% and 5.9% respectively due to increase of basic salary from 2016.

Interest payments grew robustly by 25.1% due to the high interest rates during the period. Capital expenditure increased by 17.9% (to Rs.400.5bn), reflecting enhanced implementation of infrastructure projects.

The overall budget deficit increased by 7.3% (Rs. 520bn) during the first eight months of 2017 compared to the same period of 2016. It’s estimated to maintain a deficit of 5.2% of GDP for 2017.

   Further Insights - Global Economy   

WTO Expects Moderate Global Trade Growth in Q4 2017

The latest reading of the World Trade Outlook Indicator of the World Trade Organisation, suggested that global merchandise trade growth will likely be moderate during the fourth quarter of 2017. The latest reading of 102.2 is slightly lower than the reading issued in August 2017 (102.6), which signals continued trade expansion in volume terms, although the pace of growth should be slower than earlier in the year.

These results are broadly consistent with the upgrade forecast for world merchandise trade growth by WTO in September 2017, which predicted 2017 trade expansion at 3.6% following a stronger expected trade growth in the first half of the 2017. (The Economic Update-September 2017 of the Ceylon Chamber of Commerce contains more information on WTO trade growth forecast issued in August 2017)

 

US Economy Grew by 3% in the Q3 of 2017

As per the US Commerce Department, GDP expanded by a robust 3% in the third quarter of 2017 after increasing at a 3.1% in the second quarter.

Major contributors to the growth are business investments and consumer spending which rose by 2.4% and 3.9% respectively compared to the second quarter. But, investment in structures slumped 5.2% and residential investment slipped 6% during the review period. Further to that, personal disposable income rose just 0.6% after adjusting for inflation.

India to Cut Sales Taxes on Most Goods

In order to reduce the burden of the new nationwide tax on business, India is considering to cut the sales tax on most goods subject to the highest bracket at 28%. The Indian GST council have decided to move 178 everyday items from 28% tax bracket to 18%. Only 50 items will be subjected to the highest rate with most of the items being white goods such as refrigerators, washing machines etc. and other items such as tobacco and fizzy drinks.

The new Nationwide Goods and Services Tax (GST) was launched in July, transformed India’s 29 states into a single custom union. Traders and small businesses have made highlighted the administrative and financial burden in the implementation of this tax.

 

ASEAN-Hong Kong, China Signed a Free Trade and Investment Agreement

The ASEAN and Hong Kong, China signed a Free Trade Agreement and an Investment Agreement recently. This was as a result of negotiations that took place since July 2014. This Free Trade Agreement (FTA) is the sixth FTA of ASEAN with external parties, which covers market access liberalization, trade facilitation, rules to promote confidence in trade and co-operation aimed at facilitating trade in goods and services in the region. The Investment Agreement stated above covers the protection, promotion and facilitation of investment.

 

32% Average Gender Gap remains to be Closed Worldwide

According to the Global Gender Gap Report 2017 of the World Economic Forum, the average progress on closing the global gender gap stands at 68% which means, an average gap of 32% remains to be closed worldwide. On average, the 144 countries covered in the report have closed only 58% of the economic participation and 23% of the political empowerment gap. These countries have closed more than 95% of the health and survival gap and education attainment gap. Iceland remains world’s most gender-equal country followed by Norway and Finland.

 

FDI flows in ASEAN Remained at a High Level in 2016

According to the recently released ASEAN Investment Report 2017, FDI inflows in ASEAN remained at a healthy level in 2016 despite a decline to USD 96.7bn. FDI flows to the region dropped by 20%, reflecting the general decline in global FDI flows and inflows to developing economies. Inflows from a number of major source countries rose; FDI from EU rose by 46% while FDI from China and Australia rose by 44% and 77% respectively. Intra-ASEAN investments increased to a record level in 2016 and accounted for a quarter of total FDI flows in the region. 

 

   Annexures   

1.External Sector performance-September 2017

(a) Provisional
(b) Revised
(c) This provisional estimate may be revised once the SLTDA releases its survey results for 2017
(d) Include secondary and primary market transactions
(e) Data available for the first six months of each period and includes foreign loans to Direct Investment Enterprises as recorded by the BOI and net direct investments to the CSE.
(f) EIU Calculations based on Central Bank Data

 

2.Tourist Arrivals

3.Interest Rates

4.Inflation

3.1 Colombo Consumer Price Index (CCPI) Base Year 2013

3.2 National Consumer Price Index (NCPI)

4.Credit Growth

The Ceylon Chamber of Commerce

Economic Intelligence Unit

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