EXTERNAL ENVIRONMENT

During 2016

GDP growth during the first 09 months of 2016 was at 4.0% yoy propelled by growth in the industrial and service sectors by 5.7% and 4.8% respectively. Financial Services and Construction along with Wholesale & Retail Trade were key growth drivers during the period while the contraction in Tea and Rubber prices contributed to a decline in the Agriculture sector

Impact

Slowdown in GDP growth compared to the previous year coupled with tighter monetary policy resulted in the demand for private credit being relatively lower. Nevertheless, HNB’s loan book grew by 17.3% during the year.

Outlook

The IMF projects Sri Lanka’s GDP to grow by 4.8% in 2017 while the World Bank estimate is at 5.0%. The CBSL anticipates a 6.3% GDP growth in 2017 and a GDP growth of 7% in the medium term.

%

  • Agriculture 7%

  • Industry 27%

  • Services 58%

  • Taxes less subsidies on products 8%

During 2016

Inflation which rose during the early part of 2016 subsided towards the end of the year to read at 4.2% yoy as per the NCPI, unchanged from the level experienced at the end of 2015.

Impact

Despite inflation picking up during the year HNB was able to maintain controllable operations costs.

Outlook

The low inflation trajectory that has prevailed is expected to be sustained with the CBSL anticipating inflation to range between 4 – 6% in the medium term.

Inflation Rate

During 2016

The low interest rate regime which prevailed during 2014-2015 fuelled high growth in private sector credit creating inflationary pressure, thus prompting CBSL to respond with monetary tightening. However, despite the increase in lending rates, private credit disbursements by commercial banks continued to grow throughout the year before showing signs of slowing towards the latter part of 2016.

Impact

The slower growth in GDP and the tightening of the monetary policy led to a drop in credit growth compared to the previous year. Nevertheless the tighter monetary policy enabled to record a 30.5% growth in NII and a sound growth in the bottom line.

Outlook

The CBSL expects the intended effects of the tightened monetary policy stance to be lagged and become apparent in 2017 with credit growth slowing down. It seems likely that interest rates would moderate over the medium term but remain at current levels or increase slightly during the year.

Interest Rate Movement

Private Sector Credit Growth

Annual % change

During 2016

Fiscal policy measures in 2016 were primarily aimed at increasing tax revenue and strengthening fiscal consolidation to reduce the budget deficit and the Debt to GDP ratio

Impact

The increase in VAT during the year resulted in the VAT and NBT payment increasing by 54.7%. Total taxes paid by the Bank amounted to Rs 10.4 Bn for 2016

Outlook

Total Government Revenue is expected to improve by 2 percentage points to 15.5% of GDP while the Budget Deficit is expected to improve to 4.6% of GDP from 5.4% in 2016

Budget Deficit

as a % GDP

During 2016

Underperforming exports and an increase in investment imports led to the cumulative deficit in the trade account widening by 7.9% yoy in November. However growth in tourism and remittances enabled a contraction in the current account deficit. An agreement was also entered into with the IMF to borrow USD 1.5 Bn to support the BOP and economic reform agenda

Impact

Despite the overall drop in international trade, HNB grew trade related fee income by 9% and improved exchange income by 25%. The Bank also outperformed the industry in Remittances Growth

Outlook

The receipt of further tranches of funding from the agreement with the IMF is expected to boost the BOP in 2017. However sluggish global growth, continuation of weak global demand, low FDI’s and expected rate hikes by the US Fed present downside risks to the envisaged path of external developments

Imports and Exports

(USD Mn)

Worker Remittances

USD Mn


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