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					Sri Lanka’s Economic Prospects and Challenges:
   Positioning for Global Recovery in 2010 and beyond
                                                 (
                                         ICASL/RAM CEO
                                        Breakfast Meeting



                          Sri Lanka’s Economic
                              Prospects and
                               Challenges
                            Positioning for Global
                        Recovery in 2010 and Beyond


                                             Yeah Kim Leng,   PhD
                                            Group Chief Economist
                                            RAM Holdings Berhad



                                          4 November 2009
Economics Research
                     Outline

    I.               Global Economic Recovery: How
                     sustainable and different post-crisis?
    II. Impact on the Sri Lanka’s Economic
        Performance and Outlook:
                     A.    Current performance
                     B.    Short term expectations for 2010 and 2011
                     C.    Medium-to-long term forecasts up to 2020
    III. Positioning for Global Recovery: Key
                     issues and challenges
    IV.              Increasing Private Sector Financing:
                     Lessons from the Malaysian experience
    V.               Concluding Remarks
                                                                       2
Economics Research
                     PART I

                     Global Economic Recovery:
                     How sustainable and different
                     post-crisis?

                        Current state of the world economy
                        Short term outlook
                        Implications for developing economies
                        and emerging markets

                                                                3
Source: Bloomberg
                     I. Global Economic Recovery: How sustainable and different post-crisis?

Economics Research
                     Current state of the global economy

    Near-collapse averted; recovery gathering pace, but
    global growth over the next few years is expected to be
    uneven, weak and vulnerable to a relapse.
                                          15.0




                                          10.0

                                                                              China
         Quarterly                                                            India
         GDP                                5.0
                             % yoy (sa)




         growth                                                               Sri Lanka

                                            0.0
                                                                              EU


                                                                              US
                                           -5.0

                                                                              Japan

                                          -10.0




                              Source: Bloomberg, CEIC                                          4
                     I. Global Economic Recovery: How sustainable and different post-crisis?
                     Short-term Outlook – Growth Forecast
Economics Research
                     for 2010 and 2011
    Large Asian economies are ahead in the recovery cycle;
    however there are significant risks to growth in crisis-hit
    advanced economies, suggesting prolonged weakness.
                                              12.0
                                                        9.8           10.6
                                              10.0
                                                                                                               8.1
                                                                                  7.6                  7.3
   Developing                                  8.0
                                                                                            6.2
   Asian                                       6.0      5.1           5.2
                                                                                                               4.2
   economies
                                  Per cent




                                               4.0      2.7           2.7         3.0                  3.1     2.8
   leading the                                 2.0      2.9                       0.7
                                                                                                       1.5

   global recovery                             0.0
                                                                      2.1
                                                                                           -1.1
                                                                                                               1.3
                                                                                  0.4                  0.3
                                              -2.0                                         -2.7

                                              -4.0
                                                                                           -4.2
                                              -6.0
                                                       2006       2007            2008     2009e      2010f   2011f

                                                              World          US     Euro    Developing Asia

                                             Source: IMF WEO October 2009                                             5
                     I. Global Economic Recovery: How sustainable and different post-crisis?
                     Short-term Outlook – Risks to 2010-11
Economics Research
                     Growth Forecasts
             High unemployment and ”jobless” recovery:
             High and still-rising unemployment rates in the crisis-
             hit American and European countries.
             Continued deleveraging by banks: Weak balance
             sheets and further stresses on loan asset quality,
             along with the constrained capital bases of financial
             institutions, will hamper lending activities.
             Wearing out of fiscal stimuli’s effects: One-off
             fiscal measures, such as auto-scrapping schemes
             (sometimes known as “cash for clunkers”) and
             spending vouchers, only have one-time effects.
             Weak final demand: Consumer and investor
             confidence is weighed down by concerns over the
             broader economy.
                                                                                               6
                     I. Global Economic Recovery: How sustainable and different post-crisis?

Economics Research
                     Implications for Developing Economies

             Ongoing deleveraging of banks in developed
             economies:
              Reduced lending from developed economies.
              Increased focus on domestic financing.
              Stricter regulatory oversight for financial
               institutions. 1200
                                                                1,025 bn
                                                                 (39.3%)
                                                         1000
               American, UK                                                                       813 bn

               and European                                                371                    (31.2%)
                                                         800
               banks hit by
                                          USD billions




                                                                                 604 bn
                                                                                                            333
               large write-
                                                                                 (23.2%)
                                                         600                                                                    Securities
                                                                                           107
               downs on loans                                                                                                   Loans
               and securities
                                                         400
                                                                           654                                    166 bn
                                                                                           497              480   (6.4%)
                                                         200
                                                                                                                           69
                                                                                                                           97
                                                           0

                                                                  US              UK             Euro Area        Asia

                                              Source: IMF Global Financial Stability Report October 2009                                     7
                            I. Global Economic Recovery: How sustainable and different post-crisis?
                            Implications for Developing Economies
                                                                                                                                                                 (cont’d)
Economics Research




                       Rebalancing of global demand, trade and
                       investment flows:
                           Asian imports outpacing those of other regions
                           Asian exports to North America projected to decline gradually
                            while intra-regional trade is expected to rise by 1-2% points
                            to account for 51% of total world imports by 2012.
         Asian imports outpacing those of                          Steady fall in Asian exports to North
                  other regions                                    America while intra-regional trade is
                      30                                                     expected to rise
                                                                    100%
                                                                               4.0        4.4           5.2      5.7       5.7       6.3       7.0       7.1
                      20                                                       1.8        2.1       2.4          2.7       2.7       2.9
                                                                     90%                                                                       3.2       3.5
                                                                               21.8       21.6      19.9                             17.3
                                                                                                                 18.9      18.9                16.1      15.0
                                                                     80%
                      10                                                                                                             4.8       5.2
    Annual change %




                                                                                                                 4.4       4.4                           5.4
                                                                     70%       3.2        3.4           4.0
                                                         Asia                                                                        18.9      18.5      18.0   Rest of world
                       0                                             60%           17.9      18.4                19.1      19.1
                                                                                                        18.8                                                    S & Ctrl America
                                                         Europe
                                                         North America50%                                                                                       North America
                      -10                                World                                                                                                  Middle East
                                                                     40%
                                                                                                                                                                Europe
                                                                     30%
                      -20                                                                 50.1                                                 50.0      51.0   Asia
                                                                               51.2                 49.7         49.2      49.2      49.8
                                                                     20%
                      -30
                                                                     10%

                                                                      0%
                                                                            2005      2006       2007         2008     2009f     2010f     2011f     2012f
    Source: WTO                                                                                                                                                                    8
Economics Research
                     PART II

                     Impact on Sri Lanka’s
                     Economic Performance and
                     Outlook:
                        Current performance
                        Short term expectations for 2010 and
                        2011
                        Medium-to-long term forecasts up to
                        2020


                                                               9
                     II. Impact on the Sri Lanka’s Economic Performance and Outlook

Economics Research
                     Current Growth Performance

         Recession averted but economy decelerated sharply in
         1Q 2009, with gradual improvement expected from 2Q
         2009 onwards.


                                                 Quarterly change (% yoy)                   % of GDP
                                  GDP
                                              Agriculture Industry Services     Agriculture Industry Services
                     1Q2008        6.2                5.9      6.0        6.4          13.3       28.4  58.3
                     2Q2008        7.0                7.4      6.9        6.9          12.0       27.7  60.4
                     3Q2008        6.3               12.4      5.6        5.5          12.8       28.2  59.0
                     4Q2008        4.3                4.0      5.2        3.8          10.2       29.5  60.3
                     1Q2009        1.5                3.0      1.9        1.0          13.5       28.5  58.0
                     2Q2009        2.1                4.4      3.0        1.1          12.2       27.9  59.8
                     3Q2009f       4.5                6.9      3.3        4.6          13.1       27.9  59.0
                     4Q2009f       4.7                7.2      4.5        4.4          10.5       29.4  60.1

                     Source: CBSL; CEIC; f=forecasts by RAM Economics


                                                                                                                10
                                               II. Impact on the Sri Lanka’s Economic Performance and Outlook
                                              Current Growth Performance
                                                                                                                                         (cont’d)
Economics Research




                                         Export-oriented industries will lead rebound but
                                         growth not expected to be robust given the fragile
                                         global economic recovery.
                                       Agriculture rebounding more strongly                                         Recovering food and non-fuel
                                                 than other sectors                                                      commodity prices
                                     14.0%                                                                   50%
                                                                                                             40%
 Quarterly change (% year-on-year)




                                     12.0%                                                                   30%
                                                                                                             20%




                                                                                              % yoy change
                                     10.0%
                                                                                                             10%
                                                                                                              0%
                                      8.0%
                                                                                                             -10%

                                      6.0%                                                                   -20%
                                                                                                             -30%
                                      4.0%                                                                   -40%


                                      2.0%


                                      0.0%                                                                          Index of Non-Fuel Primary Commodities (2005=100)
                                                                                                                    Food Index: Cereals, veg oils, protein meals, meats, seafood, sugar, bananas & oranges
                                                                                                                    Index of Beverages: Coffee, Cocoa & Tea


                                                   GDP    Agriculture   Industry   Services


                                      Source: CBSL; CEIC; f=forecasts by RAM Economics
                                                                                                                                                                                                             11
                     II. Impact on the Sri Lanka’s Economic Performance and Outlook

Economics Research
                     Industrial Production

         The major impact from the global recession on Sri
         Lanka’s economy has been a sharp slowdown in
         industrial output.
                                                             10.0

      Industrial                                              8.0
                                                                            6.4   6.4            IPI
      production                                              6.0
                                     % year-on-year change




      dragged down                                            4.0
                                                                    5.1     6.0

      by contraction                                                  3.7          3.4
                                                                                                 Food, Beverages
                                                                                                 & Tobacco
                                                              2.0
      in export-based                                                                      0.2
      industries                                              0.0
                                                                                                 Textile, Wearing
                                                             -2.0                                Apparel &
                                                                                                 Leather
                                                             -4.0                                Chemicals,
                                                                                         -3.7
                                                                                                 Rubber, Plastic &
                                                             -6.0
                                                                                                 Petroleum




                                                   Source: CBSL; CEIC
                                                                                                                     12
                     II. Impact on the Sri Lanka’s Economic Performance and Outlook

Economics Research
                     Export Performance

         Sri Lanka’s exports hit by slumping demand in
         recession-hit advanced nations, but not as bad as
         those of more open East Asian economies.
                                                                           60.0



      Industrial and                     Monthly change (% year-on-year)   40.0

      agricultural
      exports
                                                                           20.0

      recorded
                                                                            0.0
      pronounced                                                                      All exports
                                                                                      Industrial exports
      monthly                                                              -20.0      Agric exports
      declines
                                                                           -40.0


                                                                           -60.0




                                                             Source: CBSL; CEIC                       13
                     II. Impact on the Sri Lanka’s Economic Performance and Outlook

Economics Research
                     Improvement in trade balance

         Trade deficit narrows as imports contracted more
         sharply than exports.
                                     200


                                     150
                                                                   Imports

                                     100
                       LKR billion




                                                                                                              Exports
                                      50


                                       0


                                      -50
                                                                                                                                                 Trade deficit

                                     -100
                                                       Apr-2007




                                                                                                   Apr-2008




                                                                                                                                                      Apr-2009
                                            Jan-2007




                                                                                        Jan-2008




                                                                                                                                      Jan-2009
                                                                  Jul-2007




                                                                                                                Jul-2008




                                                                                                                                                                 Jul-2009
                                                                             Oct-2007




                                                                                                                           Oct-2008




Source: CBSL; CEIC                                                                                                                                                          14
                     II. Impact on the Sri Lanka’s Economic Performance and Outlook

Economics Research
                     Exports hit by global recession

         Exports to Emerging Asia have been picking up
         gradually since the beginning of 2009; exports to the
         US and EU trend have been trending downwards.

                                             350


      Trade deficit                          300
      narrows as
      imports                                250

      contracted
                               USD million




                                             200
      more sharply                                                                EU
      than exports                           150
                                                                                  US

                                             100                                  Emerging Asia


                                              50


                                               0




                                             Source: CBSL; CEIC                                   15
                           II. Impact on the Sri Lanka’s Economic Performance and Outlook

Economics Research
                           Aggressive monetary loosening

                  Aggressive monetary loosening, as undertaken by
                  most non-crisis-hit countries, to shield against
                  contagion from the global turmoil.
               Private sector credit remained                                                               Gradual upturn in the growth of
               relatively stable while government                                                           narrow and broad money since
               borrowings rose significantly                                                                the beginning of 2009
               1,800,000                                                                                 30%

                                                                                                         25%
               1,600,000




                                                                         Monthly change (year-on-year)
                                                                                                         20%
               1,400,000
                                                                                                         15%
               1,200,000
                                                                                                         10%
 LKR million




               1,000,000
                                                                                                          5%
                800,000                                Government Credit                                  0%

                600,000                                Private Credit                                    -5%

                400,000                                                                                  -10%

                200,000

                      0

                                                                                                                   M1   M2   Broad Money

                                                                        Source: CBSL; CEIC                                                 16
                     II. Impact on the Sri Lanka’s Economic Performance and Outlook

Economics Research
                     Price disinflation rather than deflation

         Disinflation as price level stabilises due to sharp fall
         in commodity prices and weak demand amidst
         economic slowdown.
                                         215                                                   30.0
                                         210
                                                                                               25.0
                                         205




                                                                                                      % yoy change
                                         200                                                   20.0
                              2002=100




                                         195
                                                                                               15.0
                                         190
                                         185                                                   10.0
                                         180
                                                                                               5.0
                                         175
                                         170                                                   0.0




                                               CCPI (2002=100) (LHS)   % annual change (RHS)

                                  Source: CBSL; CEIC                                                                 17
                     II. Impact on the Sri Lanka’s Economic Performance and Outlook

Economics Research
                     Short-term Outlook for 2010 and 2011

         Sri Lanka’s economy is forecast to expand 5.6% in
         2010 and pick up more strongly to 6.3% in 2011.
                                             (% annual change, constant 2002 prices)
                                         Real GDP      Private  Government        Gross    Exports    Imports
                                                    consumption consumption     domestic
                                                                                 capital
                                                                               formation
                            2006            7.7              6.5         9.6        13.3        3.8        6.9
                            2007            6.8              3.9         7.4         8.2        7.3        3.7
                            2008            6.0              7.6         9.8         4.7        0.4        4.5
                            2009f           3.5              3.0         8.2         4.3        1.7        2.4
                            2010f           5.6              5.8         7.1         5.5        4.9        3.5
                            2011f           6.3              6.0         5.9         5.9        6.2        3.8
                       Period average
                          2011-15f          5.5              5.8         2.8         5.8        5.8        4.0
                          2016-20f          6.0              6.0         1.0         6.7        5.0        3.2
                        Share to GDP
                            2010f         100.0             66.6        15.5        26.7       31.3       40.1
                            2015f         100.0             67.6        13.6        27.1       31.8       37.4
                            2020f         100.0             67.5        10.6        28.0       30.3       32.6
                     Source: CBSL; CEIC; f=forecasts by RAM Economics
                                                                                                                 18
                     II. Impact on the Sri Lanka’s Economic Performance and Outlook
                     Short-term Outlook for 2010 and 2011
                                                                                                       (cont’d)
Economics Research




         Stronger domestic and external demand is anticipated
         to underpin growth in all sectors.
                                    (% annual change, constant 2002 prices)
                                            GDP         Agriculture      Industry     Services
                              A. Annual change %
                               2007          6.8                3.4             7.6              7.1
                               2008          6.0                7.5             5.9              5.6
                               2009f         3.5                5.6             3.3              3.1
                               2010f         5.6                7.9             5.5              5.2
                               2011f         6.3                4.1             6.4              6.7

                              B. Contribution to GDP growth (% points)
                                2007          6.8               0.4             2.1              4.2
                                2008          6.0               0.9             1.7              3.4
                               2009f          3.5               0.7             0.9              1.9
                               2010f          5.6               1.0             1.6              3.1
                               2011f          6.3               0.5             1.8              4.0
                              C. Share of GDP (%)
                                2007        100.0              11.9            28.5          59.6
                                2008        100.0              12.1            28.4          59.5
                               2009f        100.0              12.3            28.4          59.3
                               2010f        100.0              12.6            28.4          59.0
                               2011f        100.0              12.3            28.4          59.3

                             Source: CBSL; CEIC; f=forecasts by RAM Economics                                     19
                     II. Impact on the Sri Lanka’s Economic Performance and Outlook

Economics Research
                     Medium-to-long term growth prospects
         Over the medium-term horizon (from 2010 to 2015), the
         economy is expected to expand 5.5% per annum. This is slightly
         above the current underlying potential output, estimated at 5.3%
         with another statistical technique.
         Medium-to-long-term growth prospects are likely to be enhanced
         by more efficient resource allocation, reduced macroeconomic
         imbalances and the expected re-direction of resources to
         economic development and reconstruction.
                                                               8.0
                                                                                                   7.2
                                                                                             7.0
                                                               7.0
                                                                                 6.0
                                                               6.0
                                                                           5.5
                         (% average                                  5.0               5.0               5.0
                                           Annual growth (%)




                                                               5.0
                         annual
                         growth,                               4.0                                                   3.7   2000-09a

                         constant 2002                                                                         3.0         2010-15f
                                                               3.0
                         prices)                                                                                           2016-20f
                                                               2.0

                                                               1.0

                                                               0.0
                                                                     Baseline          High case         Low case
                             Source: RAM Economics                                                                                    20
                     II. Impact on the Sri Lanka’s Economic Performance and Outlook
                     Medium-to-long term growth prospects
                                                                                      (cont’d)
Economics Research




         High case scenario of 2 percentage points above
         baseline forecast achievable with:
          Raising productivity growth by 10% per annum.
          Closing the human-capital development gap (as proxied by
           the average number of years of schooling).
          Raise employment level to 46% from the current 36% of
           the country’s population.
          Increase investments’ share of GDP increases to 35% from
           27% in 2008.
         For growth to be sustainable, there is a need to
         promote a shift in resources and production capacity
         to higher-value and productivity-driven industries
         within the manufacturing and services sectors.
                                                                                            21
                     II. Impact on the Sri Lanka’s Economic Performance and Outlook

Economics Research
                     Addressing macroeconomic imbalances

         Projected narrowing of Sri Lanka’s current-account
         deficit and improvement in the savings-investment
         balance.

                                                Current Account                Net Current
                                                    Balance                     Transfers
                                                  (% of GDP)                   (% of GDP)
                            2006                     -5.7%                         6.7%
                            2007                       -4.6%                      6.8%
                            2008                       -9.5%                      6.3%
                            2009e                      -7.6%                      7.1%
                            2010f                      -5.8%                      7.3%
                            2011f                      -3.9%                      7.4%

                            Source: CBSL; CEIC; f=forecasts by RAM Economics




                                                                                             22
                             II. Impact on the Sri Lanka’s Economic Performance and Outlook
                            Addressing macroeconomic imbalances
                                                                                                                                                           (cont’d)
Economics Research




Government spending cuts needed to reduce deficit
             0%                                                                  1600                                                  14%   Persistently
                                                                                                                                             large fiscal
                                                                                 1400                                                  12%
             -2%
                                                                                 1200
                                                                                                                                       10%
                                                                                 1000
                                                                                                                                             deficits must be

                                                                  LKR billions
             -4%
                                                                                                                                       8%
 % of GDP




                                                                                  800

                                                                                                                                             reined in to
             -6%                                                                                                                       6%
                                                                                  600
                                                                                                                                       4%


                                                                                                                                             restore the
                                                                                  400
             -8%
                                                                                  200                                                  2%



                                                                                                                                             country’s
            -10%                                                                    0                                                  0%
                                                                                        2000 2001 2002 2003 2004 2005 2006 2007 2008


                                                                                                                                             macroeconomic
            -12%
                                                                                 Government Expenditure (LHS)
                   2000 2001 2002 2003 2004 2005 2006 2007 2008
                                                                                 Military spending as a % of total government expenditure
                          Fiscal deficit (% of GDP)
                                                                                 (RHS)
                                                                                                                                             stability.
Gradual pace of fiscal consolidation projected                                                                                               Sri Lanka’s fiscal
                                        Year                                              Fiscal balance                                     deficit is projected
                                                                                            (% of GDP)                                       to gradually
                                       2006
                                       2007
                                                                                               -8.4%
                                                                                               -8.2%
                                                                                                                                             narrow to a more
                                       2008                                                    -8.0%                                         sustainable level.
                                       2009e                                                  -7.5%
                                       2010f                                                  -6.7%
                                       2011f                                                  -5.8%
                          Source: CBSL; CEIC; f=forecasts by RAM Economics                                                                                          23
                     II. Impact on the Sri Lanka’s Economic Performance and Outlook
                     Addressing macroeconomic imbalances
                                                                                                                                   (cont’d)
Economics Research




            Disinflation across Asia, but Sri Lanka’s CPI inflation
            likely to remain higher than regional averages.
                                          Sharp fall in consumer price inflation across the region
                                          25.0
                                                                                      22.6

                                          20.0
                                                                               15.8
                      CPI inflation (%)




                                                 14.2
                                          15.0
                                                                                                             South Asian Average
                                                        9.6             11.0
                                                              9.0 9.0          10.0                          Sri Lanka
                                          10.0
                                                                                                   6.8 7.4   Developing Asia
                                                                                             3.3             ASEAN-5
                                           5.0


                                           0.0



                                          Source: IMF WEO October 2009                                                                   24
                     II. Impact on the Sri Lanka’s Economic Performance and Outlook
                     Addressing macroeconomic imbalances
                                                                                                                                   (cont’d)
Economics Research




            Accommodative monetary policy expected to provide
            a more conducive environment for growth.
                                                          30.0


                                                          25.0

      Growth of quasi and
      broad money supply                                  20.0
                                        Annual change %



      projected to                                                                                                                  13.5
      stabilise to a more                                 15.0
                                                                                                                      12.3   13.0
      sustainable and                                                                                                 10.5   9.5     9.8
                                                          10.0
      non-inflationary
                                                                                                                                     6.0
      level of 10%-14%                                                                                                3.9    4.5
                                                           5.0


                                                           0.0




                                                                 Broad Money Supply (M2)   Narrow Money Supply (M1)    Quasi Money


                                                          Source: CBSL; CEIC; f=forecasts by RAM Economics                                 25
                     II. Impact on the Sri Lanka’s Economic Performance and Outlook
                     Addressing macroeconomic imbalances
                                                                                                                                  (cont’d)
Economics Research




            With inflation normalising, the directions of interest
            rates and exchange rates are expected to reflect the
            improving macroeconomic fundamentals.

                                                        500,000                                                                       120.0


            Improving                                   450,000
                                                                                                                                      100.0
            macroeconomic                               400,000

            fundamentals                                350,000
                                                                                                                                      80.0
            expected to                                 300,000
                                         LKR millions




                                                                                                                                              Index
            underscore rise in                          250,000                                                                       60.0

            foreign reserves and                        200,000

            currency                                    150,000
                                                                                                                                      40.0


            strengthening.                              100,000
                                                                                                                                      20.0
                                                         50,000

                                                             0                                                                        0.0




                                                                  Foreign Reserve (LHS)   USD/LKR (2006=100) (RHS)   NEER (2006=100) (RHS)
                                                        Source: CBSL; CEIC; f=forecasts by RAM Economics                                              26
Economics Research
                     PART III


             Positioning for Global
             Recovery:

             Key Issues and Challenges




                                         27
                     III. Positioning for Global Recovery
                     Key Challenges – Raising productivity
                     & efficiency
Economics Research




            Enhancing productivity and competitiveness


                                                                   1.00
                                                                                                                        Clothing
                                                                   0.50
     Improving                             Symmetrical RCA
                                                                                                                                Agricultural products

     macroeconomic                                                 0.00
                                                                                                                                      Textiles
     fundamentals                                                 (0.50)
     expected to
     underscore rise in                                           (1.00)


     foreign reserves and                                         (1.50)

     currency
                                                                           2001     2002     2003     2004     2005          2006            2007
                                                      Agri pdts            0.42     0.43     0.42     0.44     0.49          0.52                0.53

     strengthening                                   Fuels                 (0.92)   (0.94)   (1.00)   (0.97)   (1.00)        (0.98)          (1.00)
                                                     Iron & steel          (1.00)   (1.00)   (0.99)   (0.99)   (0.98)        (0.98)          (0.99)
                                                     Chemicals             (0.86)   (0.85)   (0.84)   (0.77)   (0.72)        (0.73)          (0.76)
                                                      Office & telco       (0.76)   (0.81)   (0.79)   (0.81)   (0.85)        (0.90)          (0.94)
                                                      Automotive pdts      (0.98)   (0.98)   (0.98)   (0.96)   (0.94)        (0.92)          (0.91)
                                                     Textiles              0.27     0.29     0.16     0.15     0.52          0.19                0.14
                                                     Clothing              0.88     0.88     0.88     0.89     0.89          0.90                0.90



                                        Source: International Trade Centre                                                                              28
                     III. Positioning for Global Recovery
                     Key Challenges – Sustaining
Economics Research
                     international competitiveness
            International ranking of Sri Lanka’s exports
                                                                                                                          Clothing (USD2,813 mn) (181)           9
                                                                                                                                                                              34




                                            Sector exports in USD mn (Total no. of countries in ranking)
    High ranking in                                                                                                    Fresh food (USD1,159 mn) (159)                      26
                                                                                                                                                                            29

    resource-based (fresh                                                                                                 Chemicals (USD311 mn) (140)                                               76
                                                                                                                                                             5
                                                                                                                                                                                                                    107
    food) and low-                                                                                                         Minerals (USD303 mn) (156)                               37
                                                                                                                                                                                                   71
    technology products                                                                                    IT & Consumer electronics (USD256 mn) (144)                19
                                                                                                                                                                                                              94
    (clothing)
                                                                                                                 Basic manufactures (USD256 mn) (124)                                              72
                                                                                                                     Processed food (USD189 mn) (145)                                                               105
                                                                                                                                                                           26
                                                                                                                            Textiles (USD164 mn) (144)                                   56
    Change index suggests                                                                                       Misc manufacturing (USD162 mn) (115)
                                                                                                                                                                                    37
                                                                                                                                                                                              60
    improved ranking in
                                                                                                                                                                          22
                                                                                                               Transport equipment (USD114 mn) (107)                                                     85
    Chemicals, IT &
                                                                                                                                                                           25
                                                                                                              Electronic components (USD108 mn) (147)                                      59
                                                                                                                                                                                                                    107
    Consumer Electronics,                                                                                             Wood products (USD45 mn) (126)                                                          94
                                                                                                                                                                                            60
    Transport equipment,                                                                                            Leather products (USD39 mn) (126)                                     58
                                                                                                                                                                                         54
    Non-electronic                                                                                          Non-electronic machinery (USD12 mn) (119)                          30
                                                                                                                                                                                                              92

    machinery and
                                                                                                                                                         0           20         40       60        80         100     120
    Miscellaneous
    Manufacturing                                                                                                           Rank in Current Index            Rank in Change Index
                                           Ranking of international competitiveness in terms of static indicators (current index based on net exports, per capita
                                           exports, share in world market, product diversification, market diversification) and the change in world market share
                                           (absolute change of world market share in % points per annum). Position 1 in the ranking refers to the best
                                           performance out of 189 countries.
                                           Source: International Trade Centre, 2008                                                                                                                                       29
                     III. Positioning for Global Recovery
                     Key Challenges – Promoting private
Economics Research
                     sector-led growth

            Promoting private sector’s dynamism and
            entrepreneurship
                                                           8.0

                                                           7.0
                                                                                      Ireland
       Strong correlation                                  6.0
       between income                                      5.0
                                                                                                              Singapore
                                             New density
       level and business                                                                                                            Sri Lanka

       formation                                           4.0                                                                       India
                                                                                                 Malaysia                            Pakistan
                                                           3.0
                                                                                                                                     Malaysia
                                                           2.0
                                                                                                                                     Singapore
                                                           1.0
                                                                                         Sri Lanka                                   Ireland
                                                           0.0
                                                                 2000   2001   2002   2003      2004   2005    2006   2007


                                                           "New density" is the number of newly registered corporations divided by
                                                           total working age population.


                                                   Source: World Bank Entrepreneurship Survey and Database 2008
                                                                                                                                                 30
                     III. Positioning for Global Recovery
                     Key Challenges – Enhancing private
Economics Research
                     sector financing
         Given the sizeable gap in financial intermediation,
         expanding Sri Lanka’s domestic credit to the private
         sector will help to unleash this private sector-led
         growth and dynamism.                                                       GDP per Capita (in/nal current $
                                                                                              PPP), 2007
                                                        Internet Users per 1000 People,       10                 Poverty Index, 2005
                                                                      2007                      9
                                              Mobile Phones per 1000 People,                    8                          Gr. Capital Formation as % of GDP,
                                                           2007                                 7                                       2003 -2007

           Financing is             Total Telephones per 1000 People,
                                                                                                6
                                                                                                5                                 Exports of Goods and Services as

           a key
                                                   2007                                         4                                          % of GDP, 2007
                                                                                                3
           constraint             Gender Development Index, 2005
                                                                                                2
                                                                                                1
                                                                                                                                       Domestic Credit to Private Sector

           to the
                                                                                                                                              as % of GDP, 2007
                                                                                                0

           private                  Employment to population ratio,
                                                                                                                                     Political Stability, 2007
           sector’s                        15+ (%), 2007


           growth                         Prof. and Tech. Workers as % of
                                                                                                                                Researchers in R&D, 2006
                                                  Labor Force, 2007

                                                                                                                       High-Tech Exports as % of Manuf.
                                                 Employment in Services (%), 2005
                                                                                                                                Exports, 2007
                                                          Adult Literacy Rate (% age 15 and
                                                                      above), 2007                          Private Sector Spending on R&D
                                                                                                                       (1-7), 2008


                                                                                            Sri Lanka           Malaysia

                                         Source: World Bank Knowledge Methodology Assessment 2009                                                                          31
                     III. Positioning for Global Recovery
                     Key Challenges – Enhancing private
Economics Research
                     sector financing              (cont’d)

         Vast scope for expanding financial intermediation and
         deepening of Sri Lanka’s financial system.
                                                    BANK DEPOSITS /
                                                        GDP
                                                      2.0

                                                      1.5

                        BANK CREDIT /                 1.0
                                                                              FINANCIAL SYSTEM
                        BANK DEPOSITS                                          DEPOSITS / GDP
                                                      0.5
                                                                                                               Sri Lanka
                                                      0.0
                                                                                                               India
                                                                                                               Korea, Rep.
                       STOCK MARKET                                           PRIVATE CREDIT BY                Malaysia
                      CAPITALIZATION /                                         DEPOSIT MONEY
                           GDP                                                  BANKS / GDP


                                                     PRIVATE BOND
                                                       MARKET
                                                    CAPITALIZATION /
                                                         GDP

                Source: World Bank: A New Database on Financial Development and Structure (updated May 2009)                 32
                     III. Positioning for Global Recovery
                     Key Challenges – Enhancing private
Economics Research
                     sector financing              (cont’d)

         Comparison of financial structures and performance
         for 2007.
                           BANK      BANK        LIFE     NET    REMITTANCE               BANK         BANK
                         CONCENT     COST-    INSURANCE INTEREST INFLOWS /                ROA           ROE
                          RATION    INCOME     PREMIUM   MARGIN     GDP
                                     RATIO     VOLUME /
                                                 GDP


    Sri Lanka              0.62       0.61       0.6%         5.2%         8.3%          1.2%         15.8%

    India                  0.33       0.48       4.0%         2.8%         2.3%          1.1%         17.0%

    Korea, Rep.            0.53       0.53       8.4%         2.7%         0.1%          0.9%         15.3%

    Malaysia               0.47       0.40       3.3%         2.0%         0.9%          1.4%         13.3%


     Thortsen Beck and Asli Demirgüç-Kunt, "Financial Institutions and Markets Across Countries and over
     Time: Data and Analysis", World Bank Policy Research Working Paper No. 4943, June, May 2009.




                                                                                                              33
Economics Research
                     PART IV


             Increasing Private Sector
             Financing:

             Lessons from the Malaysian experience




                                                     34
                     IV. Increasing Private Sector Financing
                     Malaysia’s experience in enhancing
Economics Research
                     private sector financing
            Policy- and institution-building initiatives undertaken
            by the Malaysian government to enhance the private
            sector’s liquidity and to broaden as well as deepen
            the corporate bond market include:
            Issue                                          Response
    Low level  Established a national mortgage corporation to purchase
     of liquidity   mortgage loans from banking institutions, using funds raised
     in the         from the issuance of bonds to finance the purchase, thereby
     banking        expanding banks’ lending capacity vis-à-vis the housing sector.
     system
                   Issuance of AAA-rated bonds by the national mortgage
                    corporation further enhances the integrity and attractiveness of
                    the domestic bond market.

                             Promoted Islamic banking as a complementary system to
                              savings mobilisation and established the Islamic bond (sukuk)
                              market to channel funds to the productive sectors based on
                              Islamic principles.
                                                                                          35
                     IV. Increasing Private Sector Financing
                     Malaysia’s experience in enhancing
Economics Research
                     private sector financing      (cont’d)

             Issue                                             Response
  Over-reliance              Enacted policy and regulatory reforms to develop the
   on banking                  corporate bond market, providing fiscal and financial
   sector                      incentives to issuers, investors and market intermediaries,
                               including rating agencies.

                              Government guarantee for bonds issued to finance infrastructure
                               projects undertaken by the private sector.
   Few             Encouraged the merging of small issues of government bonds
    investment-      into large ones.
    grade issuers
                    Promoted securitisation, such as collateralised bond obligations
    and relatively
                     (or CBOs), to facilitate small and medium-sized enterprises’ (or
    small debt
                     SMEs) access to the bond market.
    facilities
                              Established a financial guarantee institution to provide
                               guarantees to lowly rated debt issues, thereby enabling issuers
                               with low ratings to access the bond market despite investors’
                               poor appetite and risk-aversion, especially amid the current
                               global financial turmoil.                                     36
                     IV. Increasing Private Sector Financing
                     Malaysia’s experience in enhancing
Economics Research
                     private sector financing      (cont’d)

                       Issue                                   Response
     Highly concentrated   Liberalised institutional investment guidelines.
      investor base –
      dominated by pension  Provided incentives to foreign investors to invest in
      and contractual        local-currency bonds, by reducing withholding
      savings institutions   tax.

                                          Encouraged the establishment of bond funds for
                                           retail investors.


     Low degree of market  Enhanced efficiency of market information and
      transparency and       dissemination by upgrading the bond market
      inefficient price-     information system as well as electronic trading
      discovery mechanisms   and settlement system for bonds.

                                          Established a private-sector-driven bond-pricing
                                           agency.

                                                                                              37
                     IV. Increasing Private Sector Financing
                     Malaysia’s experience in enhancing
Economics Research
                     private sector financing      (cont’d)

                Issue                                          Response
   Illiquid market              Broadened the investor base by liberalising investment
                                  requirements and encouraging product innovation.

                                 Reduced transaction costs by streamlining fees.

                                 Established benchmark yield curves to facilitate price
                                  discovery.

                                 Facilitated the creation of a bond pricing agency to provide
                                  fair valuation of all traded and untraded bonds on a
                                  daily basis, thus aiding in price discovery and marking-to-
                                  market in accordance with ‘international best practices’ of
                                  risk management.




                                                                                                 38
                     V. Concluding Remarks
                     High sustained growth is possible with
Economics Research
                     appropriate policies and strategies
         Sri Lanka’s short- and medium-term growth prospects have
         brightened considerably after the end of the armed conflict.
         Expected improvement in macroeconomic stability will provide a
         conducive environment for private sector-led growth.
         We expect Sri Lanka’s economic outlook to show an improving
         trend, with growth picking up to 5.6% in 2010 and 6.3% in 2011:
         √ a rebalancing of government spending towards development
             projects.
         √ higher foreign and domestic investments in the construction,
             services and manufacturing sectors.
         √ a rise in consumer and investor confidence following the end
             of the armed conflict.
         Key risks include:
         Χ Slower-than-expected global recovery and risk of a relapse.
         Χ Overshooting of world oil and commodity prices.
         Χ Slower-than-expected reduction in political risk premium and
            reallocation of government expenditure to development.        39
Economics Research




                     Thank you....


                                             comments...questions?

                                                       Please email:
                                                  yeah@ram.com.my




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