Sri Lanka's ease of doing business ranking slipped to 111th place, and its global competitiveness ranking fell to 85th due to deteriorating institutions, lower goods market efficiency, and less developed infrastructure. Sri Lanka's household incomes increased by 15.8% from 2012-2016 while inequality decreased. However, Sri Lanka faces external pressures like high debt levels and reliance on foreign currency funding that constrain its credit profile. The country plans to attract more foreign direct investment by moving away from an overreliance on tax incentives and focusing on competitive advantages. Sri Lanka's growing informal hotel sector also threatens to squeeze hotel operating cash flows and margins over the medium term.

1. Economic Capsule
October 2017
250th Issue
Research & Development Unit

2. C O N T E N T S
ECONOMIC & BUSINESS NEWS
 Sri Lanka slips in the Ease of Doing Business 2018 rankings
 Sri Lanka drops to 85th in Global Competitiveness Index 2017-18
 Sri Lanka household incomes up, inequality down in 2016
 External pressures constrain Sri Lanka’s credit profile: Moody’s
 Sri Lanka to change current FDI policy
 World Bank loan for Sri Lanka financial sector reforms
 Sri Lanka’s growing informal hotel sector to pressure operating cash flows
 Average land prices in Colombo increased by 36-pct in 2016: Study
INTERNATIONAL NEWS
 India’s Efforts to Curb the Rupee are Getting Harder
 UK's £200bn consumer debt unsustainable, S&P warns
 China's red-hot property market may finally be set for sustained cooling
BANKING SECTOR
 Commercial Bank launches ‘Biz Club’ to empower SME customers
 Commercial Bank among Top Companies in Asia- recognised for leadership
and green efforts
 Commercial Bank receives Best Bank award from Global Finance
 Commercial Bank affirmed ‘Strongest Bank’ in Sri Lanka in 2017

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

4. Commercial Bank launches ‘Biz Club’ to
empower SME customers
Commercial Bank, the largest financier to Sri Lanka’s
small and medium enterprise (SME) sector, has launched
a business club to provide the sector’s entrepreneurs
extensive networking opportunities and a range of other
benefits.
< Research & Development Unit >
• The first of its kind in the country, the Commercial Bank Biz Club will focus on bringing SME customers
together in order to create new business opportunities, and to provide them support beyond lending.
• The Biz Club will entitle members to special bank concessions and a personalised VISA debit card.
Members will also receive economic updates and alerts on new business developments via email and
SMS and free registration for online banking facilities. Members would also enjoy the convenience of not
having to submit detailed project reports or credit proposals when applying for a loan.
• Additionally, Biz Club members will be entitled to free financial advisory services and invitations to
exclusive business seminars which would prove beneficial to the development of their businesses.

5. Commercial Bank among Top Companies in Asia-
recognised for leadership and green efforts
Commercial Bank was named among the ‘Top Companies
in Asia’ and the ‘Top Green Companies in Asia’ at the 2017
Asia Corporate Excellence & Sustainability (ACES) Awards
that honour and showcase Asia’s finest and most
responsible corporate leaders.
< Research & Development Unit >
• The candidates that qualified for these prestigious awards were judged on a
Leadership Matrix comprising of spirit of entrepreneurship, innovation &
sustainability, responsible practice, brand equity and revenue, and a
Sustainability Matrix that encompassed products & innovation, leadership value,
ethical compliance, diversity & inclusion and community empowerment.

6. Commercial Bank receives Best Bank
award from Global Finance
Commercial Bank received the Global Finance award for
Sri Lanka’s Best Bank in 2017 recently at an awards
ceremony at the National Press Club in Washington DC
during the IMF/World Bank Annual Meeting.
This is the 18th year that the Bank has won this
prestigious award.
< Research & Development Unit >
• Objective criteria considered included growth in assets, profitability, geographic
reach, strategic relationships, new business development and innovation in
products.
• Subjective criteria included the opinions of equity analysts, credit rating analysts,
banking consultants and others involved in the industry.

7. < Research & Development Unit >
Commercial Bank affirmed ‘Strongest Bank’
in Sri Lanka in 2017
• The Commercial Bank of Ceylon PLC has emerged the
Strongest Bank in Sri Lanka in 2017, according to the
prestigious Asian Banker magazine, and has once
again been ranked among the 500 strongest banks in
the Asia Pacific region on Balance Sheet evaluation.
• According to Asian Banker: “The bank had strong liquidity
and capital adequacy ratios, which demonstrated a
sustainable balance sheet for the financial year as compared to
other banks in the country. With a strength score of 3.08,
Commercial Bank the top spot for the banks in Sri Lanka.”
• The Asian Banker award is based on a detailed and transparent scorecard compiled and analysed
after an independent assessment of six areas of balance sheet financial performance – the ability
to scale, balance sheet growth, risk profile, profitability, asset quality and liquidity.

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

9. Sri Lanka slips in the Ease of Doing Business
2018 rankings
< Research & Development Unit >
Sri Lanka’s ease of doing business ranking
slipped one notch to the 111th place from last
year, according to the World Bank’s ‘Doing
Business 2018’ index, which measures the ease
of doing business in 190 countries.
Topics
DB 2018
Rank
DB 2017
Rank
Overall  111 110
Starting a Business  77 74
Dealing with Construction Permits  76 88
Getting Electricity  93 86
Registering Property  157 155
Getting Credit  122 118
Protecting Minority Investors  43 42
Paying Taxes - 158 158
Trading across Borders  86 90
Enforcing Contracts  165 163
Resolving Insolvency  88 75 Source: doingbusiness.org

10. Sri Lanka drops to 85th in Global
Competitiveness Index 2017-18
Sri Lanka slipped to 85th from 71st in
2016, in the recently released Global
Competitiveness Index prepared by
the World Economic Forum for
2017-18.
< Research & Development Unit >
Cont..
As per the report, deteriorating Institutional
environment, Lower goods markets efficiency and
Infrastructure that is assessed as less well
developed are identified as the main causes for
the drop in rankings.
Source: World Economic Forum

11. Sri Lanka drops to 85th in Global Competitiveness
Index 2017-18 (cont…)
• Macroeconomic stability needs to remain a priority for the government, as
the country continues to cope with high levels of debt and tries to restore a
sound macroeconomic environment.
• The government managed to decrease the deficit and stabilize debt after the
country entered the assistance program by the IMF in 2016. Yet, the burden
of interest on debt remains high and currently amounts to most of the
revenue collected by the government.
• Inflation also increased and forced the authorities to tighten monetary
policy, with negative effects on credit.
• Business confidence has been declining over the past two years.
< Research & Development Unit >
Source: World Economic Forum

12. Sri Lanka household incomes up, inequality
down in 2016
The survey conducted by Department of Census and Statistics
on Household Income and Expenditure (HIEU) in 2016 reveals
that the nominal mean (or average) household income per
month was Rs. 62,237 in 2016 in Sri Lanka.
The real mean (or average) household income per month has
been reported as Rs.43,320 based on 2009/10 (adjusted for
the inflation of prices using National Consumer Price Index
(NCPI)) showing an increase approximately 15.8 % from
2012/13 to 2016.
< Research & Development Unit >
Source: DCS
Household income refers to income received either in cash (Monetary income) or in-kind (Non-monetary income)
by all the residents in a household. This includes not only wages and salaries but also all the other sources such as
agricultural and non-agricultural activities, other monitory receipts such as pension, disability and relief payments,
regular rental and remittance receipts and returns from businesses or ventures , investments and any other
irregular gains such as compensations, lottery wins etc.
Mean (or Average) household income is a point estimate and it is calculated by dividing the estimated total
house-hold income in a domain by the estimated number of households in the same domain.

13. External pressures constrain Sri Lanka’s
credit profile: Moody’s
Source: Moody’s/LBO
< Research & Development Unit >
• According to Moody’s Investors Service, Sri Lanka’s significant
borrowing requirements and heavy reliance on external and foreign-
currency funding expose the sovereign to material liquidity and
external financing risk, which weighs on the sovereign’s credit profile.
• Moody’s stated that despite a recent increase in foreign exchange
reserves, reserve coverage of external obligations remains low.
• Reforms that continue to advance fiscal consolidation and exchange
rate flexibility, along with implementation of an effective external
liability management strategy, would mitigate external risks and help
support Sri Lanka’s credit profile.

14. Sri Lanka to change current FDI policy
< Research & Development Unit >
Source: Sunday Times
• A greater focus will be on maximizing the country’s competitive
advantages in location, skills base, and ongoing preparation work of
free trade agreements with both developed and emerging markets.
• Sri Lanka plans to attract USD 5 - 6 billion in FDI in the next three years,
with the government focusing on policy consistency to attract foreign
investors from the US, China and India.
• Sri Lanka is to change its Foreign Direct
Investment (FDI) policy moving away from an
over-dependence on tax holidays and other duty
concessions on imports of raw material and
machinery, Finance Ministry sources disclosed.

15. Sri Lanka’s growing informal hotel sector
to pressure operating cash flows: Fitch
< Research & Development Unit >
• Price Pressure over Medium Term: Sri Lanka’s hotels sector to face price
competition from the growing informal sector and alternative accommodation
models. *EBITDA margins could also be squeezed by the expanding marketing
budgets of hotel operators. This trend to continue over the medium term, and
cause margins to compress by 200bp–300bp over the next two to three years.
*EBITDA – Earnings Before Interest, Tax, Depreciation and Amortization
• More Regulated Hotel Rooms: Demand for rooms of
listed hotel operators has been sufficient to drive an
increase in average room rate (ARR) to USD87 from USD70
between 2014 and 2016, while occupancy stabilised at
around 75% during the same period.
The 11,645 rooms that the Sri Lanka Tourism Development
Authority (SLTDA) expects to come online by end-2018, will
support medium-term demand. However, a likely glut in
residential apartments and informal accommodation
establishments will keep formal-sector occupancy
pressured. Cont..

16. Sri Lanka’s growing informal hotel sector to
pressure operating cash flows: Fitch (cont…)
< Research & Development Unit >
• Listed Hotels – Stable Credit Profiles: The median credit metrics for listed hotel operators have remained
largely stable over the last four years. Large established operators to remain *free cash flow (FCF) positive over
the next two years as most will already have concluded their renovation cycles.
• Weaker Regional Competitiveness: Star-graded accommodation in the capital, Colombo, costs 10%-15% more
than regional competition. This will lead some tourists to choose cheaper destinations or lodging options.
However, the proposed removal of the regulatory price floor could mitigate this risk by offering some degree
of pricing liberty to graded city hotel operators.
*FCF = cash flow minus capital expenditures.
• Robust Tourist Arrivals: Tourist arrivals to grow by a compound annual growth rate (CAGR) of 15% over the
next four years (2016: 14%), driven primarily by the rapid increase in the inflow from Indian and Chinese
markets.
• Limited Growth in Tourist Spend: Fitch does not expect a considerable rise in earnings per tourist over the
medium term despite the widely anticipated growth in tourist arrivals. Sri Lanka’s earnings from tourism could
be hampered by a number of factors such as limited exposure to lucrative niche markets such as “MICE”, and
the rapidly growing influence of short-stay and low-spend tourists from emerging-Asian regions.
• Skilled Workers – Key Bottleneck: Shortage of skilled human resources a key issue, given the surge in the
number of hospitality establishments driving up demand for a trained workforce. Employment in the industry
recorded a CAGR of 9.8% over the last 10 years against a 17.1% growth in tourist arrivals. Source: Fitch Ratings

17. Average land prices in Colombo
increased by 36% in 2016
• Land values in Sri Lanka’s financial capital Colombo are growing at a
remarkable rate while overall land prices in the country have also shown
an accelerated growth within the last year, a recent study has found.
• According to the National House Price Index maintained by Lanka
Property Web, average land prices in Colombo has increased by 36%
within the last year alone, making it the biggest increase in the real estate
sector, when compared against house and apartment prices.
• A study by Candor Group which compared all investment options,
including share market, savings, bonds and property has also found that
lands in Colombo remained the best performing asset class.
< Research & Development Unit >
Source: LBO/ Lanka Property Web
Cont..

18. < Research & Development Unit >
•Colombo’s land prices heat map
shows that Colombo 1, 3 and 7
remains the most expensive,
while 9, 13, 14 and 15 are the
least expensive.
Average land prices in Colombo increased by 36% in
2016 (cont…)
Source: LBO/ Lanka Property Web

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

20. India’s Efforts to curb the Rupee are
getting harder
< Research & Development Unit >
• The U.S. Treasury recently stated that it will “closely monitor" the Reserve Bank
of India’s policies after a "notable increase in the scale and persistence" of
dollar purchases.
• While it refrained from adding India to its watch list for potential currency
manipulators, it noted that foreign-exchange buying had risen to 1.8% of gross
domestic product in the year through June, just below the Treasury’s 2% red
line.
• The glare of this spotlight may hamper Governor Urjit Patel’s freedom to curb
sharp gains in the rupee. Losing the ability to intervene could prove costly
though: an overvalued currency has been cited as keeping exports expensive,
hurting competitiveness at a time when global demand is recovering.
Source: Bloomberg

21. UK's £200bn consumer debt
unsustainable, S&P warns
< Research & Development Unit >
•The rapid rise in UK consumer debt to £200bn from
car finance, personal loans and credit cards is
unsustainable at current growth rates and should
raise “red flags” for the major lenders, ratings
agency Standard & Poor’s has warned.
•In a detailed analysis of the sector, S&P warned that
losses from this form of lending suffered by banks
and other financial institutions could be “sharp and
very sudden” in an economic downturn and may be
exacerbated if the Bank of England increased
interest rates. Source : Guardian
“Loose monetary
policy, cheap
central bank term
funding schemes
and benign
economic
conditions have
supported
consumer credit
supply and
demand,”
-S&P

22. China's red-hot property market may
finally be set for sustained cooling
Source : CNBC
< Research & Development Unit >
• China's escalating property prices have long been a concern for Beijing as it
balances growth targets with social stability. Now, economic signals are
giving the go-ahead to authorities for sustained efforts to cool off the real
estate market.
• China’s National Bureau of Statistics reported average new home prices in
the country's 70 major cities rose by 0.2% in September. That comes after
the last two years saw substantial increases. Compared with the year-ago
period, new home prices rose 6.3% in September, cooling from an 8.3%
increase in August.

23. 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 >