The document provides an economic update from Sri Lanka with the following key points: 1) S&P revised Sri Lanka's outlook to stable from negative while affirming its credit ratings, citing the government's continued reform momentum and expectations it will smooth upcoming debt redemptions. 2) Business confidence in Sri Lanka crawled up in October but remains below historical averages, with concerns over the economy and business climate persisting. 3) The ADB extended $350 million in loans to Sri Lanka to improve roads and boost renewable energy through a 100MW wind power project.

1. Economic Capsule
November 2017
251st Issue
Research & Development Unit

2. C O N T E N T S
ECONOMIC & BUSINESS NEWS
 Budget 2018
 S&P revises Sri Lanka Outlook to Stable from Negative; ‘B+/B’ ratings affirmed
 Business confidence crawls up in October
 ADB extends USD 350mn to boost roads, energy
 Colombo District Land Prices up 12.6% in First Half of 2017
 FDIs to double to USD 1.5bn by end-2017: BOI
 The Orion City Towers are declared open for bookings
INTERNATIONAL NEWS
 “Rising debt and low interest posing greatest market risks” –IMF Dep. Managing
Director
 Euro zone to grow fastest in decade in 2017, to slow slightly in 2018, 2019
 Aussie Housing Market is Four Times the Size of Economy
BANKING SECTOR
 CBC Results as of 30.09.2017
 Commercial Bank wins dual honours at International Finance awards
 Commercial Bank - Branch Openings
 Commercial Bank commissions landmark 700th ATM in Sri Lanka

3. Condominium Industry
in Sri Lanka
October, 2014
Research & Development Unit
Banking Sector

4. Commercial Bank Results as of
30.09.2017
< Research & Development Unit >
Profit after Tax
Loans and Receivables to
other Customers Due to other Customers
Cont…

5. < Research & Development Unit >
Assets Gross NPA
Commercial Bank Results as of 30.09.2017
(cont…)

6. Commercial Bank wins dual honours at
International Finance awards
< Research & Development Unit >
Commercial Bank has been adjudged
‘Best Green Bank’ and ‘Best Private Bank’
in Sri Lanka by International Finance
Magazine (IFM) of the UK, which is read in
over 185 countries worldwide.
• The Best Green Bank award recognises the catalytic role Commercial Bank has played in
promoting environmental sustainability through its lending for renewable energy projects
and other initiatives that help reduce the environmental footprint of its clients, as well as
the Bank’s own efforts to make its operations eco-friendly.
• Best Private Bank award is presented to the banks which have introduced innovative
banking products and offer a wide range of services to its customers, regardless of size,
public or private status.

7. Commercial Bank commissions landmark 700th ATM in Sri Lanka
< Research & Development Unit >
The automated teller machine (ATM) network of
the Commercial Bank of Ceylon achieved a
milestone with the commissioning of its 700th
ATM terminal at MAS Intimates Vidiyal in
Kilinochchi.
Commercial Bank - Branch Openings
257th – Katana (23/11/17)
258th – Rabukkana (30/11/17)
259th – Yatiyanthota (7/12/17)

8. Condominium Industry
in Sri Lanka
October, 2014
Research & Development Unit
Economy & Business

9. Budget 2018
< Research & Development Unit >
Revenue Proposals 2018
The budget as a whole has been designed with the intention of gathering tax revenue of Rs.
110 Bn.
22% of the revenue is expected from
taxes on motor vehicles by way of excise
duty and luxury tax.
Revisions to VAT and NBT are expected to
contribute another 22%.
34% of total revenue is expected from
four new taxes i.e. Cellular Tower Levy,
SMS Advertising Levy, Debt Repayment
Levy and Carbon Tax.
Cont…

10. Budget 2018 (cont…)
< Research & Development Unit >
Some of the key budget proposals and their implications are analyzed below. However, it
should be noted that this analysis has been based on information that is currently available.
It is important to be constantly on the lookout for subsequent amendments that may be
effected in relation to the budget proposals.
• Environmentally friendly proposals: With a view to inducing people to switch from
petrol/diesel vehicles to environmentally friendly electric vehicles excise duties
applicable on all electric vehicles including three wheelers and buses have been
lowered while duties applicable on petrol/diesel vehicles have been revised upward.
• This proposal is supplemented with incentivizing the use of ‘off grid solar power’ for
establishing electric car charging stations and also for agro processing, poultry and
the hotel industry. Perhaps the incentive for ‘off grid solar power’ should also be
extend to households with a view to encouraging motor vehicle users to switch from
fuel based to electric vehicles. The minimal cost of charging electric vehicles at their
homes, at their convenience would inspire the vehicle users for the switch.
Additionally, these measures will help in realizing the Government’s vision of total
elimination of petrol/diesel vehicles by 2040 and conversion of all Government
vehicles to hybrid or electric by 2025.
Cont…

11. Budget 2018 (cont…)
< Research & Development Unit >
• Removal of VAT exemption on sale of condominium housing units: The
sale of condominium housing units which were made exempt from 01
November 2016 has been made liable again after the lapse of a year.
This will pose several challenges to apartment developers who had
gone through a significant change from a liable regime to an exempt
regime (in November 2016) and they would now have to revert back to
a liable regime from 01 April 2018.
• Removal of para-tariffs: Proposed to remove 1,200 para-tariffs (within a
time frame of 3 years) on import items that at present do not carry any
customs duties. Moreover, CESS will also be removed from 253 items to
facilitate emerging sectors such as tourism and value adding industries.
This is in line with efforts to liberalize trade, reduce border
inefficiencies, and capitalize on Sri Lanka’s locational advantages as a
trading hub. Cont…

12. Budget 2018 (cont…)
< Research & Development Unit >
• Enabling 100% foreign ownership in shipping and freight forwarding:
Currently foreign ownership in companies engaged in shipping agency
business and freight forwarding agencies is limited to 40%. This restriction is
proposed to be lifted, enabling 100% foreign ownership.
• By enabling 100% foreign ownership, the government is anticipating them to bring in
investments, create more jobs and generate more cargo volume.
• However, some analysts have questioned the benefit of this proposal. They have pointed
out that there are currently in excess of 750 local shipping and freight forwarding and
clearing agents employing over 12,000 direct staff most (indirectly-linked staff would be
much higher) of whose jobs would be at risk as would the enterprises themselves.
• Further, these analysts have also questioned the validity of the contention that the
shipping lines and logistics operators will base their operations in Sri Lanka as a result of
implementing this budget proposal due to the fact that currently there is no restriction on
shipping lines or logistics operators setting up their 100%-owned headquarters or regional
offices in Sri Lanka. Cont…

13. Budget 2018 (cont…)
< Research & Development Unit >
• Debt repayment levy: This levy will be imposed on all transactions
entered in to by a commercial bank. It is expected that the revenue
collected from this levy will be utilized for the repayment of the
government debts. The rate of tax is Rs.2/- per transaction worth
Rs.10,000/- (i.e. 0.02%). The levy should be paid by the financial
institutions according to the budget speech.
‘Repetitions’: The Budget Speech also contains ‘repetitions’ of certain proposals that were
presented in previous budgets, such as listed companies with foreign shareholders being
permitted to acquire freehold title, removal of restriction on foreigners acquiring
condominium properties below the 4th floor and the VAT refund scheme for tourists.
The Debt Repayment Levy of 0.02 per cent applicable on all transactions entered in to by a
commercial bank is also akin to the “Financial Transaction Levy” proposed in the Budget
2017, but was not legislated.

14. S&P revises Sri Lanka Outlook to Stable
from Negative; ‘B+/B’ ratings affirmed
< Research & Development Unit >
S&P Global Ratings revised its outlook on Sri Lanka to Stable from Negative.
At the same time, it affirmed its ‘B+’ long-term and ‘B’ short-term sovereign
credit ratings on Sri Lanka.
The Sri Lankan Government has maintained its reform momentum, as shown by the passage
of the Inland Revenue Act.
Expects the Government to implement additional measures to smooth the approaching debt
redemption spike in 2019.
The Stable Outlook reflects the expectation that the Government will maintain the reform
momentum over the next 12 months and smooth the upcoming surge in debt redemptions,
particularly in 2019
According to S&P

15. Business confidence crawls up in October
< Research & Development Unit >
• The LMD-Nielsen Business Confidence Index (BCI) has recovered
marginally following its crash in the previous month to reach 106
basis points in October, the latest edition of business magazine
LMD reports.
• The BCI recovered from its crash to 99 basis points in the previous
month to record 106 in October. Nevertheless, the index remains
well below both its 12 month and all-time averages of 120 and 130
respectively – and a year ago, it was as high as 165.
• Nielsen’s Managing Director cautions in LMD that “large-scale
concerns on the economy and business climate still persist.”
• “While Vision 2025 has been welcomed by stakeholders, business
leaders and consumers are looking for more on the ground and
immediate action to rebuild lost confidence.” he said.
Source: LMD

16. ADB extends USD 350mn to boost roads,
energy
< Research & Development Unit >
The Ministry of Finance and Mass Media has entered
into two loan agreements with Asian Development
Bank (ADB) to borrow USD150mn for the
development of roadways and USD 200mn for the
implementation of a 100 MW Wind Power
Generation Project in Mannar Island.
• Under the first phase, 3,108 km of rural access roads and 248km of national roads
in Southern, Central, Sabaragamuwa, North Western, North Central Provinces and
Kalutara District in Western Province are being improved and maintained.
• The total investment cost of the first tranche of this project is USD 172.1mn. ADB
provides USD 150mn and the Government Contribution will be USD 22.1mn.
Cont..

17. < Research & Development Unit >
• Implementation of the Wind Power Generation Project will support the
Government’s objective of achieving 20% of the total power generation
through non-conventional power generation by 2020 by enhancing clean
power generation.
• The total investment cost of this project is USD 256.7mn of which USD
200mn will be provided by ADB as a direct loan to CEB under a Treasury
Guarantee. The balance USD 56.7mn will be financed by CEB.
ADB extends USD 350mn to boost roads,
energy (cont..)
Source: Daily FT

18. Colombo District land prices up 12.6% in
1H, 2017
Source: CBSL < Research & Development Unit >
Colombo district *Land Price Index (LPI), compiled by the CBSL
recorded an increase of 12.6% (yoy) for the period ending June
2017. All three sub-indices of LPI (Residential, Commercial and
Industrial) contributed to this increase.
*In the compilation of the LPI, CBSL uses the land price data collected by the Valuation Department of Sri Lanka
covering around 50 centers of five Divisional Secretariat (DS) divisions (Colombo,Dehiwala,Homagama,Kaduwela
and Kesbewa) in the Colombo District.
In view of the diverse nature of the land use and to maintain homogeneity, three indices for residential,
commercial and industrial lands are computed separately.
The overall LPI is computed by taking the average of these three sub-indices.

19. FDIs to double to USD 1.5bn by end-2017:
BOI
< Research & Development Unit >
• According to BOI Chairman , the total FDIs for 2017 (year-to-date) amount to
USD 1bn and will reach USD 1.5bn by the end of this year with a few projects in
the pipeline.
• Outlining the FDI trends in 2017, he noted that vigorous investment facilitation,
ironing out various bottlenecks that hampered the realization of investments,
the withdrawal of land lease tax and the introduction of online submission of
FDI survey were key reasons for the increased investments.
The Board of Investment (BOI) revealed Foreign
Direct Investments (FDIs) in 2017 would double
to USD 1.5bn from last year whilst expressing
confidence of a USD 5bn figure by 2020.

20. The Orion City Towers are declared open
for bookings
< Research & Development Unit >
The Orion City Towers complex is now open for
bookings, according to Orion City CEO Jeevan
Gnanam. The building is part of the master plan of
the Orion City IT Park- Sri Lanka’s largest one-stop
hub for innovation and collaboration.
• Orion City Towers complex is located at Baseline Road,
Colombo 09 with total rentable area of 350,000 square feet,
with 22 floors.
• The completed Orion City Towers will also include an executive
club with a business center, lounge areas, meeting venues and
private dining facilities.
• The Executive Lounge at the top-most floor hosts a fully
equipped gymnasium, meeting facilities and an exclusive
rooftop terrace garden. The complex will also include a
boutique hotel with B&B, ideal for hosting corporate visitors.

21. Condominium Industry
in Sri Lanka
October, 2014
Research & Development Unit
International

22. “Rising debt and low interest posing greatest
market risks” –IMF Dep. Managing Director
< Research & Development Unit >
• The prolonged period of low central bank interest rates and rising debt in developed
economies poses the greatest risk to financial markets in the medium-term, according
to an IMF executive.
• "In financial markets, there are risks that come from having low interest rates for a
very long time," he said. That's affecting risk-taking behavior - it's affecting the market
risk that capital market participants have” according to David Lipton the IMF’s first
deputy managing director.
• "We are seeing some greater leverage in the corporate world, in some countries for
households, so that rising indebtedness and that increase in market risk really is
something that policymakers should keep an eye on”.
According to the Bank for International Settlements, global corporate and household debt
reached 138% as a share of GDP in 2016, compared to 115% in 2007, before the start of
the economic downturn. The 2016 figure for advanced economies was 195%.

23. Euro zone to grow fastest in decade in
2017, to slow slightly in 2018, 2019
< Research & Development Unit >
•The euro zone economy will grow at its fastest pace
in a decade this year, according to the European
Commission forecast, sharply increasing its
projections from earlier this year, but the expansion
will slow somewhat next year and in 2019.
Source Reuters
In its regular forecasts for all
European Union economies, the
Commission said the economy of
the 19 countries sharing the euro
would grow 2.2% this year, up
from 1.8% in 2016.
•The European economy has performed
significantly better than expected this year,
propelled by resilient private consumption,
stronger growth around the world, and falling
unemployment.

24. Aussie Housing Market is Four Times the Size
of Economy
Source : Bloomberg
< Research & Development Unit >
• Australia’s housing market dwarfs its economy
after five years of red-hot price growth. The value
of the nation’s homes has ballooned to AUD 7.3tn
(USD 5.6tn) - or more than four times gross
domestic product.
• Not even the U.S. and U.K. markets achieved such
heights at their peaks a decade ago before prices
spiraled lower and dragged their economies with
them.
• “The risk is that it leaves the Australian economy
extremely exposed, and a minor shock could
become far more significant,” said Daniel Blake,
an economist at Morgan Stanley in Sydney.

25. The views expressed in Economic Capsule are not necessarily those of the Management of Commercial Bank of Ceylon PLC
The information contained in this presentation has been drawn from sources that we believe to be reliable. However, while we have taken reasonable care to maintain accuracy/completeness of the information,
it should be noted that Commercial Bank of Ceylon PLC and/or its employees should not be held responsible, for providing the information or for losses or damages, financial or otherwise, suffered in consequence
of using such information for whatever purpose.
< Research & Development Unit >