Economic Capsule May 2012

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ECONOMIC CAPSULEMay 2012

FINANCIAL SECTOR NEWS Commercial Bank’s 1Q, 2012 PBT up 40% to Rs 4.145 bn

Commercial Bank named ‘Best Sri Lankan Trade Bank 2012’ by Trade Finance

MoneyGram Honors Commercial Bank as the "Most Productive Network in South Asia"

Commercial Bank first Sri Lankan Bank to Link its ATMs to China UnionPay

Commercial Bank in tie up with Ria Financial Services for Remittances

Commercial Bank Opens Islamic Banking Unit at Akkaraipattu

Commercial Bank Opens Seventh Agriculture and Micro Finance Unit

Service Points Openings

ECONOMIC & BUSINESS NEWS Sri Lanka's 1Q GDP Expands to 7.9 %

External Sector – Jan- April 2012

Inflation – May 2012

Private Sector Credit up 34% (yoy) – April 2012

Tourist Arrivals up in May 2012

BOI gets Rs. 96,317 mn Investment in 1Q, 2012

Sri Lanka's April Tea Output Slips After Bad Weather

Sri Lanka’s First-ever Maize Export Takes Off

ANALYSIS & FORECAST Sri Lanka’s Prospects and Challenges

Economic Data of Sri Lanka

IMF Views on Sri Lanka


BOI Inks Biggest-ever FDI Deal of USD 4 billion

Alam Steel to Start Operations in Sri Lanka

India’s South City Announces Colombo’s Tallest Residential Tower

World Bank Says its Lending to Sri Lanka Will More Than Double

Reserve Bank of India Announces SAARC Swap Arrangement

Fitch Says Europe Debt Crisis May Hurt Emerging Asia Ratings

GLOBAL UPDATE India’s Slowdown

2011 - Tumultuous Year for Oil Markets

C O N T E N T S

FINANCIAL SECTOR NEWS


Commercial Bank’s 1Q, 2012 PBT up 40% to Rs 4.145 bn (Bank Results)

Growth in interest income on loans and advances, complemented by gains in foreign exchange income continued to underpin financial performance at Commercial Bank of Ceylon PLC, enabling the country’s benchmark private bank to post strong results for 1Q, 2012.

The Bank has reported Profit Before Tax of Rs 4.145 bn for the three months ended 31st March 2012, an increase of 40 % over 1Q 2011 while Profit After Tax for the three months grew 38 % to Rs 2.843 bn.

Interest Income improved by Rs 2.422 bn or 27.43 % to Rs 11.25 bn, mainly as a result of the interest income on loans and advances growing by a noteworthy 42.44 % to Rs 9.075 bn.

The total deposits of the Bank stood at Rs. 351.040 bn as at 31st March 2012, reflecting a growth of 10.23 % from Rs.318.461 bn as at 31st December 2011.

Gross loans and advances of the Bank too increased and stood at Rs. 308.670 bn, reflecting a growth of 7.19 %.

Total assets of the Bank reached Rs. 474.952 bn as at 31st March 2012, recording a growth of 7.67 % compared to Rs. 441.099 bn as at 31st December 2011.


Commercial Bank named ‘Best Sri Lankan Trade Bank 2012’ by Trade Finance

The Commercial Bank’s status as a leading service provider to the business community has been reiterated by the United Kingdom’s authoritative ‘Trade Finance’ magazine, which has adjudged the Bank the ‘Best Sri Lankan Trade Bank’ for 2012.

The prestigious award, the second major accolade received by the Commercial Bank in the past two months, is to be presented at the magazine’s 2012 Awards for Excellence gala in Hong Kong on 5th July.

This is the third occasion that Commercial Bank has been honoured with the Trade Finance Award since the introduction of an award for this category in 2009.

MoneyGram Honors Commercial Bank as the "Most Productive Network in South Asia" Commercial Bank had been selected by MoneyGram International as its Agent with

the "Most Productive Network" in the whole of South Asia at its Regional Conference held recently in Goa, India.


Commercial Bank first Sri Lankan Bank to Link its ATMs to China UnionPay

Holders of UnionPay credit and debit cards can now withdraw money from more than 500 ATM terminals of the Commercial Bank, under a partnership between the Bank and China UnionPay.This partnership between the Commercial Bank and one of the world’s largest payment card schemes, will facilitate visits to Sri Lanka by tourists and business people from China.Commercial Bank is the first Sri Lankan bank to link its ATMs with UnionPay, enabling Sri Lanka to offer wider acceptance of UnionPay cards, which are accepted in 125 countries and regions besides China.

Commercial Bank in tie up with Ria Financial Services for RemittancesCommercial Bank has tied up with Ria Financial Services, the third largest money transfer company in the world, substantially enhancing its offering in the sphere of remittances.This paves the way for Sri Lankans to collect from Commercial Bank branches monies remitted from any of the 140,000 locations of Ria’s global network in 140 countries on six continents. Some of the locations covered by Ria’s network include key corridors such as USA, Canada, Italy, Cyprus, Australia France, UK, Germany & Switzerland, and the agreement will also open up new corridors for remittance offering, the Bank said.

Commercial Bank commences this service with Ria deploying web service connectivity using the latest communication technology, becoming the first to do so in the entire South Asian region for Ria. This unique system will enable the bank to payout remittances routed from Ria’s large network of agents on a real time basis and will also enable the bank to process payments to accounts as well.

Commercial Bank’s Islamic Banking Unit ‘Al Adalah’ has opened a dedicated service point for ‘Sharia Compliant Banking’ at its branch in Akkaraipattu in the Eastern Province to meet the growing demand for financial products based on Islamic principles.

An officer has been assigned to the counter to serve the needs of customers in relation to the many Islamic Banking products it offers


Commercial Bank Opens Islamic Banking Unit at Akkaraipattu

Commercial Bank Opens Seventh Agriculture and Micro Finance Unit

Commercial Bank opened its seventh Agriculture and Micro Finance Unit (AMFU) at Hingurakgoda, stepping up its support to farmers and micro level entrepreneurs.

Six such units established previously are located in Narammala, Kandy, Anuradhapura, Kilinochchi, Bandarawela and Wellawaya.

These units help the bank to identify specific needs of people who require assistance either to start new businesses or to expand existing ones. In addition to fulfilling the financial requirements of entrepreneurs, these units also take care of nurturing Micro entrepreneurs, enabling them to be competitive in all aspects.


Service Points Openings

Commercial Bank

Godakawela

Middeniya

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ECONOMIC & BUSINESS NEWS


Sri Lanka's 1Q GDP Expands to 7.9 %

Sri Lanka's economy expanded by 7.9% in 1Q, 2012, compared with 8.0% in corresponding period a year ago.

Sector

1Q

2011 2012

Share (%)

Growth (%)

Share (%) Growth (%)

Agriculture, Forestry & Fishing 12.3 -4.3 12.7 11.5

Industry 29.2 11.1 30.0 10.8

Services 58.5 9.5 57.3 5.8

GDP 100.0 8.0 100.0 7.9


External Sector – Jan- April 2012

CategoryJan. – Apr.

2011USD mn

Jan. – Apr.2012

USD mn

Growth -Jan. – Apr.

(%)Exports 3,419.4 3,313.8 -3.1Agricultural 815.9 719.6 -11.8 of which, Tea 476.8 421.1 -11.7Industrial 2,588.7 2,477.6 -4.3 of which, Textiles and garments 1,361.6 1,323.0 -2.8Mineral 11.9 24.1 102.9Imports 5,928.2 6,633.6 11.9Consumer Goods 1,179.6 1,115.1 -5.5Intermediate Goods 3,552.1 3,849.1 8.4 of which, Petroleum 1,333.6 1,791.5 34.3Investment Goods 1,179.6 1,657.3 40.5Balance of Trade -2,508.9 -3,319.9 -32.3Workers’ Remittances 1,688.5 1,968.1 16.6FDI (c) 226.0 238.0 5.3Portfolio Investments (Net) (d) -59.7 182.0 404.7Commercial Bank Foreign inflows 549.0 1,078.0 96.4Earnings from Tourism 270.6 340.0 25.7Inflows to the Government 727.3 1,162.5 59.8

By end April 2012, gross official reserves amounted to USD 5,835 mn.

In terms of months of imports, gross official reserves were equivalent to 3.3 months.

Source: CBSL


Inflation – May 2012

Month

CCPI (%) *CCPI Core (%)

Year on

Year

(Y-o-Y)

Annual

Average

(A.A)

Year on

Year

(Y-o-Y)

Annual Average

(A.A)

April 2012 6.1 5.7 5.2 6.3

May 2012 7.0 5.6 4.8 6.0

*The price movement excluding Fresh Food, Energy, Transport, Rice and Coconut in the CCPI basket.

The rate of inflation based on CCPI, increased to 7.0% in May, 2012 from a year earlier.The contribution to the monthly increase in the Index came mainly from price increases in the Food and Non-Alcoholic Beverages category (by 2.5 %) followed by the Non-Food category (by 0.6 %). The upward revision of the prices of wheat flour, bread and milk powder and the rise in the prices of vegetables, lime, green chilli, red onion, potato and fresh fish and sea food owing to seasonal factors, contributed to the increase in the CCPI.


Private Sector Credit up 34% (yoy) – April 2012

Year-on Year credit to private sector at end April,2012 rose 34 % from a year earlier to Rs. 2,179.8 mn but the monthly growth reduced to Rs. 18.7 bn significantly lower than the average monthly growth of Rs. 51.8 bn in the first quarter 2012.

In April, credit to government rose Rs. 32 bn to Rs. 1,028 bn, up 47.4 % from a year earlier. Loans to state corporations rose another Rs. 10.1 bn to 257.2 bn, up 105.8 % from a year earlier.

Meanwhile, market interest rates, which had increased substantially so far in 2012 as a result of tight monetary conditions, have started to stabilise in recent weeks.


Tourist Arrivals in May 2012

Sri Lanka’s tourist arrivals grew 17.5 % in May to 57,506 from a year earlier, latest data released by the Tourism Development Authority showed.

So far total tourist arrivals for 2012 stand at 387,622, which is an 18.2 % increase over last year’s numbers up to May.

Tourists from South Asia in May continued to form the largest component of travelers with 15,888 arrivals from India. However, as a region arrivals dropped by 0.9% when compared with last year.


BOI gets Rs. 96,317 mn Investment in 1Q, 2012

According to the Sri Lanka Board of Investment (BOI), in 1Q 2012 the BOI received 72 new applications compared to the 28 received in the corresponding period of the previous year. There were also 5 applications for expansions of existing projects.

The BOI has granted approval for 54 new projects in 1Q, 2012, against 27 in 1Q, 2011.

The estimated investment of those approved projects was Rs. 96,317 mn of which a total of Rs. 49,169 mn is expected as foreign investment and the balance Rs. 47,148 mn as domestic investments.

During the review period 23 new projects have been implemented with an estimated income of Rs. 75 bn.

Sri Lanka exported its first consignment of maize on May 22, filling a part of a 10,000 tonne order to Taiwan and Canada as domestic production picks up pace.

Sri Lanka is already self-sufficient in maize. The country’s maize demand is 180,000 MT per year and during harvesting of the first season a yield of 200,000 MT have been obtained.

Sri Lanka's tea production fell 2.1 % in April 2012 from a year earlier due to bad weather and unrest in key market.

Sri Lanka's April tea output was 29.33 mn kg compared with 29.97 mn kg in April 2011. Production in the first four months dropped 3.9 % to 104.15 mn kg from 108.37 mn in the same

period last year, mainly due to the continued drought. Revenue from Tea exports fell 15.5 % to USD 209 mn in the first two months of 2012 compared to

a year ago. According to analysts the earnings outlook for 2012 is still unclear due to a possible dip in

exports to Iran, which buys a fifth of Sri Lanka's tea directly. Other countries in the Middle East are also major buyers, but political turmoil may limit their

appetite for Sri Lanka tea, traders say.


Sri Lanka's April Tea Output Slips After Bad Weather

Sri Lanka’s First-ever Maize Export Takes Off

Alam Steel, one of the oldest steel distributors in the Gulf with its name among the top 20 largest steel dealers in Gulf Corporation Council (GCC), has plans to launch its business in Sri Lanka with an initial investment of USD 4 mn. Expected to start within a few months, the ground work for the project is now complete.

Chairman of the Group Shyam Bhatia was in Sri Lanka to further explore business opportunities in the country and to check on the progress of the business, which would be set up as a joint venture program with Aknalirs Holdings Pvt. Ltd.


Alam Steel to Start Operations in Sri Lanka

BOI Inks Biggest-ever FDI Deal of USD 4 billion

The Board of Investment (BOI) signed an agreement with Sri Lanka Gateway Industries (Private) Ltd., a venture by India to spearhead Sri Lanka’s highest-value-ever Foreign Direct Investment project, for the development, operation and management of a special industrial zone for heavy industries, in the Trincomalee District. The project master plan includes the development of a deep water jetty, bulk commodities terminal with stockpiling and

blending capabilities, power generation plant, and a host of other heavy industries and complementary industries. The project will be delivered in three phases, with a total investment exceeding USD 4 bn. This project will open

opportunities for many export/import markets in the Asian, African, Australian and American continents, and provide a strategic access gateway to satisfy the growing demands of the Indian market.


India’s South City Announces Colombo’s Tallest Residential Tower

Indocean Developers (Pvt) Ltd, a company backed by India's South City Projects (Kolkata) Ltd, will begin work in September 2012 on a 400-apartment tower that will have a project value of USD 250 mn.

According to Director, Jugal Khetawat the tower will have 69 stories with two basements, making it the tallest tower so far planned in Colombo.

The Indian developers bought a two-acre, land facing Colombo's 'Beira Lake' for USD 23 mn from Sri Lanka's urban development agency which is creating a lakefront promande as part of its efforts to beautify the city.

The 400-apartment project is slender and tall, with the front section facing the lake leaning against a tall column behind it, with a gap between the two blocks. The ground floor will have restaurants and a retail area. The firm is to start piling by September and hopes to complete the project in five years.


World Bank Says its Lending to Sri Lanka Will More Than Double

The World Bank stated its lending to Sri Lanka will more than double in the year starting July 2012 to help spur investment and sustain economic expansion.

Sri Lanka will receive USD 500 mn in the period under a recently endorsed new country partnership strategy and USD 527 mn in the 12 months ending June 2014, according to Susan Razzaz, a senior country economist at the World Bank. The country currently borrows about USD 200 mn annually under concessionary terms.

“Sri Lanka needs to ensure it keeps growing and change the structure of the economy for middle-income country status” according to Susan Razzaz .


Reserve Bank of India Announces SAARC Swap Arrangement

With a view to strengthening regional financial and economic cooperation, Governor of Reserve Bank of India (RBI) Dr. D. Subbarao has announced that the RBI will offer Swap arrangement of USD 2 bn both in foreign currency and Indian rupees. The facility will be available to all SAARC member countries, viz., Afghanistan, Bangladesh, Bhutan, Maldives, Nepal, Pakistan and Sri Lanka. With launching of this facility, member countries can now approach RBI for availing of the facility.

The swap will be offered in US dollar, Euro or Indian Rupee against the domestic currency or domestic currency denominated government securities of the requesting country. The SAARC Swap Arrangement will have a corpus of USD 2 bn. India will contribute the entire fund.

The swap amount available to various member central banks has been arrived at broadly based on two months import cover subject to a floor of USD 100 mn and a maximum of USD 400 mn per country.

Under the facility, the requesting member countries can make withdrawals of US dollar, Euro or Indian rupee in multiple tranches.

Each withdrawal is of three months tenor and can be rolled over twice. The first rollover will be at the normal rate of interest, while the second one attracts 50 bps interest more than the normal interest rate. For this purpose, the normal interest rate agreed upon is the LIBOR (for three months) plus 200 basis points.

The normal interest rate for INR swap is RBI Repo Rate minus 200 basis points. For availing of the facility, the central banks of requesting countries will need to enter bilateral swap agreements, which need final approval from the Government of India.


Fitch Says Europe Debt Crisis May Hurt Emerging Asia Ratings

Europe’s sovereign debt crisis may pressure ratings of Asian countries such as Sri Lanka, India and Indonesia by disrupting global funding markets, according to Fitch Ratings.

Sri Lanka is most at risk due to its high external-funding needs and weak balance sheet, stated Andrew Colquhoun, head of Asia-Pacific sovereign ratings at Fitch. The same issues also make India and Indonesia vulnerable compared to similarly graded peers.

The European crisis is likely “the single biggest” external issue that may affect credit ratings in emerging Asian economies. “If the pressures coming from overseas or from other parts of the world were to intensify, the countries that could most quickly see negative pressure develop on sovereign credit profiles include Sri Lanka, India and Indonesia”, according to Colquhoun. “This is not to say that we are about to take rating action on any country mentioned here.”

Sri Lanka’s gross external financing requirements this year equate to 95 % of the country’s reserves, according to Fitch projections. Indonesia and India both need outside funds totaling at least 30 % of their sovereign reserves.

India and Indonesia are rated BBB- by Fitch, its lowest investment grade. Sri Lanka is ranked three levels lower at BB-.

Source: Bloomberg

GLOBAL NEWS


India’s Slowdown

Indian GDP growth slides to 5.3% India became the latest developing economy to see its once breakneck growth slow sharply as it

recorded its slowest expansion in almost a decade thanks in large part to political paralysis that economists fear could yield a bigger crisis.

The economy expanded at an annual rate of 5.3 % in the three months to March, 2012 from 9.2 % in the same period last year, as the agricultural and manufacturing sectors were hit by sharp slowdowns.

Source: The Economist


Fitch cuts India rating outlook to negative Fitch Ratings cut its credit outlook for India to negative from stable, nearly two months after rival

Standard & Poor's made a similar call, citing risks that India's growth outlook could deteriorate if policymaking and governance don't improve.

The Outlook revision reflects heightened risks that India's medium- to long-term growth potential will gradually deteriorate if further structural reforms are not hastened, including measures to enhance the effectiveness of the government and create a more positive operational environment for business and private investments. The Negative Outlook also reflects India's limited progress on fiscal consolidation and, in particular, on reducing the central government deficit despite improvement in the financial health of state governments.

Fitch estimated general government debt for India of 66 % of GDP at the end of the most recent fiscal year, compared with a median of 39 % for BBB-rated countries.

The rupee weakened further to 56 per dollar (on 18 June) from around 55.82 before the Fitch statement. Cont…


India’s Slowdown (cont…)

Fitch cuts India rating outlook to negative (cont…)

Fitch maintained India’s BBB- rating, the lowest investment grade.

Fitch stated it expects the Indian economy to grow just 6.5 % in the fiscal year that ends in March, down from its earlier forecast of 7.5 %, while it expects wholesale price index inflation to average 7.5 %.

Earlier, S&P stated India could become the first of the BRIC economies, which also include Brazil, Russia and China, to lose its investment-grade status, prompting an angry response from the government.

Rating Outlook

Fitch BBB- Negative (18 June 12)

S&P BBB- Negative

Moody’s Baa3 Stable

Source: Reuters


2011 - Tumultuous Year for Oil Markets

It was a "turbulent year" for global oil markets according to BP's Statistical Review of World Energy, published on June 13th.

Libya's civil war and the Arab spring played a part in crimping supplies and prices rose by 40%. Brent crude reached its highest-ever average price at USD 111 a barrel for the year. Saudi Arabia and other OPEC members pledged to plug the gap but did so slowly output hit pre-disruption levels, but only by the end of the year.

High prices weighed on consumption, which grew by just 0.7% compared to the ten-year average of 1.2%.

In rich countries the long-term trend of declining demand left oil use at its lowest level since 1985. In the developing world China led the way, getting though another half a million barrels a day, two-fifths of the global increase.



ANALYSIS & FORECAST


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tSri Lanka’s Prospects and ChallengesReleasing the 2011 Annual Report of the Ministry of Finance and Planning, Dr. P.B. Jayasundera had highlighted several challenges and issues for public debate. According to Dr. Jayasundera, Sri Lanka's economy will expand around 7.0 % in 2012, but a drought can hit agricultural output which may undermine growth.Touching on the need for more credit to filter into the real economy Dr. Jayasundera called on banks to reduce consumer loans and provide more long-term credit to agriculture, dairy and fisheries sectors. He pointed out that despite an increase in bank credit the bulk of the loans were on vehicle imports and other goods that did not result in overall economic benefits. “We found that only 1% of loans are for agriculture and 0.5% for fisheries. This is too low and I believe we should set aside 10%-20% in loans for these sectors.”Import substitution was also another key focus of the Government.The treasury secretary had expressed concerns regarding the widening trade deficit.He had also stated that one of the reasons for the high amount of imports was that basics such as milk, sugar and other foods were being imported at high cost. He had insisted that it was time for companies to consider investment to reduce the USD 2 bn imports on food.Out of 74 state-owned enterprises (SOEs) only 36 had reported profits to contribute Rs. 34 bn to government coffers in 2011. "This is an increase of 10 % over the previous year but underperforming in terms of potential," the annual report pointed out. Governance issues continue to plague the SOEs and this is placing a heavy burden on the public, with the Treasury infusing Rs. 102 bn in 2010 and 2011 to keep these institutions afloat.


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Targets Unit 2000 2005 2010 2011 2016 (P)

GDP USD bn 16.5 24.4 49.6 59.2 98.0

Per Capita Income USD 899 1,241 2,400 2,836 4,470

Inflation GDP Deflator % 6.7 10.4 7.3 7.8 4.0

Exports USD bn 5.5 6.3 8.6 10.6 18.0

Earning from Tourism USD bn 0.25 0.36 0.58 0.83 2.75

Remittances USD bn 0.9 2.0 4.6 5.1 7.0

Source: Ministry of Finance & Planning - Annual Report 2011 (P) - Projection


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t According to John Nelmes the head of the International Monetary Fund mission to Sri Lanka, Sri Lankan authorities are

successfully implementing a bold package of policy measures to curb the current account deficit and safeguard reserves, and these measures are yielding fruit.

Credit growth has slowed and imports have declined. Given the new policy framework in particular the pursuance of exchange rate flexibility as well as continued strength in remittances and success in attracting capital inflows, international reserves at the central bank have now stabilized.

Government revenue collections and interest expenditures are under pressure, but the authorities remain committed to meeting their deficit targets.

According to IMF, Sri Lankan economy should grow by around 6.75 % in 2012, as tighter macroeconomic policies work to ease demand to a more sustainable pace. The uncertain global environment poses a downside risk, but the rupee depreciation should provide a boost to the economy going forward.

Inflation is likely to rise to the upper single digits, and we thus see the need to keep monetary policy focused on inflation pressures for the time being. While the transition has caused difficulty for many segments of society, we share the authorities’ assessment that the new policy framework will strengthen the fundamentals of the economy and lay the basis for sustained economic growth.

Source: IMF

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.

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Economic Capsule May 2012