Economic Capsule October 2011

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C o n t e n t s

Economic & Business N e w s Sri Lanka Moves up 09 Places in the Doing Business Ranking

The World Travel Market 2011 Industry Report: After BRICs, Sri Lanka Included Amongst the Best for Tourism

Sri Lanka’s Nano Tech Sector Poised for Growth

External Sector Performance

Sri Lanka GSP Benefits Extended by USA

37 Companies to be Acquired Through New Bill

Price Hikes

Southern Expressway to be Opened in November

Thomas Sargent and Christopher Sims win 2011 Economics Nobel Prize

Financial Sector N e w s Commercial Bank Launches Software Escrow Services

Service Points Openings

CSE to Introduce New Global Index

Analysis & ForecastReduction in the Excess Liquidity Position of the Banking Sector

Budget 2012

Trade Forecast

Key Sri Lanka Economic Forecasts: HSBC



ECONOMY & BUSINESS

NEWS

Sri Lanka Moves up 09 Places in the Doing Business Ranking 2012


According to the Doing Business Rankings by the World Bank, IFC, Sri Lanka had implemented the most business reforms among eight economies in South Asia

Sri Lanka rose nine places in the global ranking to 89, partly by strengthening investor protections and reducing taxes on business

Sri Lanka: Topic Rankings DB 2012 Rank

DB 2011 Rank

Change in Rank

Ease of Doing Business 89 98 +9

Starting a Business 38 35 -3

Dealing with Construction Permits 111 110 -1

Getting Electricity 95 97 +2

Registering Property 161 158 -3

Getting Credit 78 75 -3

Protecting Investors 46 74 28

Paying Taxes 173 171 -2

Trading Across Borders 53 53 0

Enforcing Contracts 136 136 0

Resolving Insolvency 42 44 +2

Doing Business Rankings of Selected Countries

Country DB 2012 Rank DB 2011 Rank Change in Rank

Singapore 01 01 0

Hong Kong 02 02 0

Thailand 17 16 -1

Malaysia 18 23 +5

Taiwan 25 24 -1

Maldives 79 78 -1

Sri Lanka 89 98 +9

China 91 87 -4

Vietnam 98 90 -8

Brazil 126 120 -6

India 132 139 +7

Philippines 136 134 -2

Note: All Doing Business 2011 rankings have been recalculated to reflect changes to the methodologySource: doingbusiness.org

The views expressed in Economic Capsule are not necessarily those of the Management of Commercial Bank of Ceylon PLC

The World Travel Market 2011 Industry Report: After BRICs, Sri Lanka Included Amongst the Best for Tourism


The World Travel Market 2011 Industry Report has included Sri Lanka among a group of countries which are second best for tourism in terms of attraction and growth whilst BRICs have been rated the best.

The grouping carries the acronym SLIMMA with WTM experts choosing SL of Sri Lanka for it. Others nations are Indonesia, Malaysia, Mexico and Argentina.

According to the WTM Report, these five countries are the five next emerging markets which the travel and tourism industry should focus its attention hot on the heels of BRICS – Brazil, Russia, India, China and South Africa for tourism.

In selecting Sri Lanka the WTM report listed three key reasons: ‘Re-emerging after the civil war’; ‘Investing in infrastructure’ and ‘Beauty of destination’.

The WTM report highlights China as the most important of the BRICS markets from an inbound tourism perspective.

SLIMMA – THE NEW BRICS?The travel and tourism industry has highlighted Sri Lanka, Indonesia, Malaysia, Mexico and Argentina as the five emerging counties behind the BRICS.

Sri Lanka

•Re-emerging after the civil war

•Investing in infrastructure

•Beauty of destination


Sri Lanka’s Nano Tech Sector Poised for Growth


According to Professor Veranja Karunaratna, the science team leader at Sri Lanka Institute of Nanotechnology, Sri Lanka’s state and private sector should invest more to develop human resources to aggressively expand into fast growing nano technology sector that will help boost value added exports and bring costs down.

However, for many, Nanotechnology still remains relatively unknown; while in reality products made from Nanotechnology is used by consumers on a daily basis.

It is trillion dollar market and about 75 countries globally are developing nanotechnology for future commercialization.

Currently there's about 350 Nano tech related products sold worldwide. The US, EU and Japan are the market leaders, while Asia headed by China and India has taken a keen interest.

Nanotechnology is the design, fabrication and manipulation of materials in the nano scale which is the material within the range of one nanometer to 100 nanometers.

A nanometer is one-billionth of a meter, smaller than the wavelength of visible light and a hundred-thousandth the width of a human hair.


External Sector Performance


Jan – Aug 2010

USD mn

Jan – Aug 2011

USD mn

Growth Jan – Aug

%

Exports 5,416.5 6,966.1 28.6

Imports 8,580.8 12,926.0 50.6

Balance of Trade -3,164.3 -5,959.9 - 88.4

Workers’ Remittances 2,658.7 3,380.5 27.2

Earnings from Tourism 350.1 521.7 48.9

Inflows to the Govt. 1,829.2 3,113.2 70.2

In the eight months to August, 2011 exports rose 28.6 % to USD 6.9 bn with industrial exports up 33.5 % to USD 5.3 bn and apparel up 27.4 % USD 2.77 bn.

Imports rose 50.6 % to USD 12.96 bn with consumer goods growing 50.6 % to USD 2.7 bn, intermediate goods rising 51.5 % to USD 7.2 bn and investment goods rising 56 % to USD 2.8 bn.

Gross official reserves, increased to USD 8,051 mn by end August 2011 from USD 6,610 mn by end 2010.

In terms of months of imports, gross official reserves and total external reserves by end August 2011 were equivalent to 5.4 months and 6.3 months, respectively.


Sri Lanka GSP Benefits Extended by USA


President Barak Obama has signed a law extending temporarily halted generalized system of preferences (GSP) trade concessions to Sri Lanka till July 31, 2013 the US embassy stated.

The concessions will become effective from November 05 and GSP benefits will also be available retroactive from January 2011.

As the GSP program was renewed retroactively, Sri Lankan exporters will be reimbursed for tariffs paid during the gap period.


37 Companies to be Acquired Through New Bill


The 37 companies and properties highlighted in the bill are: Hotel Developers Lanka PLC Charmers Granaries (Pettah) Colombo Commercial Company (Badulla) Lanka Tractors Ltd (Pettah and Narahenpita) Pelwatte Sugar Industries (Moneragala and Uva Province) Sevanagala Sugar Industries Sinotex Lanka Jaqalanka Ltd Plymouth Industries Cosmos Macky Industries Kabool Lace Former Cashew Corporation land

The Bill titled ‘the Revival of Underperforming Enterprises and Underutilized Assets’ was passed in Parliament on the 9 November 2011. The Bill gives power to the state to take over these assets or appoint a competent authority to manage them.

Intertrade Lanka Suchir Neb Projects Ceylinco Leisure Properties Seetha’s Fashion D. C. Apparel Needle Craft HY Fashion Garments Collins Garments Ruhunu Putha Apparels Sanjaya Garments Macfa Apparels Yobeedha Associates

Dynamic Clothing, Polymers Exports Cosco Polymer Lanka Great Well Thread Manuacturing Adamjee Extractions Data Food Tendon Lanka Rican Lanka Composite Tower Solutions Health Food Products Sri Chirag Royale Exporters Continental Vanaspathi


Price Hikes


Previous Price (Rs) Current Price (Rs) Increased by (Rs)

Petrol 90 Oct. - per litre 125.00 137.0012.00

Petrol 95 Oct. - per litre 143.00 155.00

Auto Diesel - per litre 76.00 84.008.00

Super Diesel - per litre 98.30 106.30

Lanka Kerosene - per litre 61.00 71.0010.00

Industrial Kerosene - per litre 66.00 76.00

Liquor - per litre 60.00

Beer - per litre 5.00

Cigarette 2.00


Southern Expressway to be Opened in November


The Kottawa-Galle section (96 Km) of the Southern Expressway (126 km) is scheduled to be declared open on the 27th of November, 2011.

The Southern Expressway is the first expressway in Sri Lanka and it is the longest expressway out of proposed expressway network. It runs from Kottawa to Matara. The Asian Development Bank (ADB) and Japan Bank of International Corporation (JBIC) are the main funding agencies for this project.

The maximum speed limit of the expressway is 100kmh and the travel time between Colombo and Matara is to be reduced from 04 hours to 1.5 hours

The collection of toll will be under four categories (for full distance). Rs. 400 for light vehicles or motor cars, Rs. 800 for mini buses small lorries, Rs. 1,200 for lorries and six wheelers and Rs. 2,000 for heavy vehicles (for full distance).


Thomas Sargent and Christopher Sims win 2011 Economics Nobel Prize


Americans Thomas Sargent and Christopher Sims have shared the 2011 Nobel prize in economics for providing ways to understand the impacts of policy changes or shocks like surging oil prices on output, inflation or employment.

Sargent, 68, who is professor of economics and business at New York (Frankfurt: A0DKRK - news) University, developed a mathematical model in his work and described it in a series of articles in the 1970s.

Sims, professor of economics and banking at Princeton, wrote an article in 1980 which introduced a new way of analysing data using a model called vector-autoregression.



FINANCIAL SECTOR NEWS

Commercial Bank Launches Software Escrow Services


Commercial Bank, has begun the provision of Software Escrow services, the globally accepted practice to balance requirements of software vendors with the needs of users.

With the bank’s foray into the sphere to offer the service of providing Software Escrow services, software vendors and users can now employ services of the Bank as the neutral third party holding in safe custody their source codes.

Commercial Bank embarked on its first such transaction for software provided by OpenArc Systems Management (Pvt) Ltd. to Singer Finance PLC.

Software Escrow services provide the software user access to the source code, which is vital for maintenance purposes of the software, in an instance in which the vendor is unable to fulfil conditions of the maintenance agreement, ensuring the safety of the user’s investment and unhindered execution of the maintenance agreement.

Service Points Openings - Commercial Bank


207 Beliatta

206 Giriulla

208 Padukka

Commercial Bank launched 365-day banking service in Kurunegala

CSE to Introduce New Global Index


The Colombo Stock Exchange (CSE), in a bid to attract foreign investments, is looking at introducing a global index under the Standard & Poor’s (S&P) banner within a year, according to CSE Chairman, Mr. Krishan Balendra.

He highlighted the main reason to introduce such an index was to have a globally recognized brand which will give credibility to the index, in particular to large foreign investors.

Mr. Balendra stated that S&P, together with the CSE, will develop criteria for inclusion in this index and that the existing indices such as the Milanka and All Share Index will continue to be available.



ANALYSIS & FORECAST

Reduction in the Excess Liquidity Position of the Banking Sector


The excess liquidity position in the banking sector had been reduced to Rs 28 Bn by 17 November 2011 from a high of Rs. 75 Bn in end July 2011.This was mainly due to: Higher credit demand and slower deposits of the banking sector backed by the prevailing low interest ratesDollar sales by the CBSL Foreign debt repayments by the government etc.

As a result there is an upward pressure on market interest rates. However, the CBSL is in a view of keeping interest rates at lower levels to support the ongoing development process of the government and therefore the CBSL has increased its level of purchasing treasury bills to reduce the upward pressures on interest rates. CBSL injections of credit into the market results in higher money supply and therefore can create future inflationary pressures if the trend continues.


Budget 2012


The Government is aiming to reduce the budget deficit to 6.2% of GDP while maintaining an 8% GDP growth and an annual average inflation rate of 6-7% in 2012.

(Rs Bn) 2011 budget

2012 budget

Total revenue (incl. grants) 985.9 1,115.0

Total expenditure (excl. debt repayments) 1,419.7 1,640.0

Consolidated fiscal balance - 433.8 -525.0

% of GDP 6.8 6.2

Government debt 4818 5,564.0

% of GDP 80.5 75.0

Public investment 413.7 541.0

(Rs Bn) 2011 Budget 2012 Budget

Economic development 75.2 104.6

Defence (and urban development) 215.2 229.9

Health 62.3 74.0

Education 30.81 33.25

Ports, highways and aviation 130.6 144.6

Power and energy 79.6 33.0

Public administration 118.2 113.6

Key figures in the 2011 and 2012 budgets Fiscal spending by sector, 2011 and 2012 budgets

Source: Standard Chartered Research


Trade Forecast


World trade will grow by 73% in next 15 years Spotlight will be on - Egypt, India, China, Indonesia and Brazil World trade will grow annually at 2% until 2015 Sri Lanka’s trade to grow by 102% by 2025

HSBC Trade Connections: Trade Forecast Quarterly Update (October 2011)

Global trade outlookHSBC Trade Forecast is predicting that world trade will grow by 73% in the next 15 years and anticipates that the spotlight will be on Egypt, India, China, Indonesia and Brazil to drive world trade growth.

HSBC’s Trade Confidence Index which reveals that businesses around the world believe that China will continue to be a source of key trading opportunities over the next six months, with Latin America, South East Asia, and the Middle East also featuring strongly. Cont…


Trade Forecast: Sri Lanka


Sri Lanka accounted for 0.01% of world trade at the end of 2010, and is to increase to 0.07% by 2025.

Trade volumes expected to grow by 102% in the next 15 years from USD 19.7 bn to USD 36.0 bn in 2025.

Sri Lanka’s fastest growing trade corridors India, Singapore, China, Iran and the UK are Sri Lanka's top five trading partners and it is predicted trade

with all of them to grow in volume terms over the next 15 years.

For example, India, which represented USD 3.1bn in value terms in 2010 will represent USD 5.1 bn in 2025. Trade with China will grow from USD 1.3 bn in 2010 to USD 2.5 bn in 2025. Trade with Iran is set to grow, fuelled by exports of tea, and imports of petrol and oil.

In the near term trade with the Philippines, Brazil and Vietnam will grow the fastest. Of these, Brazil is the largest in terms of volume, representing just USD 0.6 bn now but growing to USD 1.0 bn in 2015.

Cont…


Trade Forecast: Sri Lanka (cont…)


Brazil, Singapore and China are core emerging trade corridors for Sri Lanka by 2025. Export trade with Brazil is primarily in textiles and clothing, and it is forecast to grow by 12% over the

period. What is interesting however, is that it is also predicted growth in exports of manufactured products at 12%, suggesting that Sri Lanka is developing supply chain links with Brazil as well.

Trade with China is import driven and the largest sector is agricultural commodities which it is forecast will grow by 7.99% annualised over the period.

However, exports of agricultural commodities and iron and steel to China from Sri Lanka are also forecast to grow, by 10.27% and 11.31% respectively.

Singapore is a major exporter of petrol and oil to Sri Lanka but it is predicted that imports of agricultural commodities through Singapore will increase by 12.22% while exports of clothing to Singapore will increase by 10.53%.

Business trends Sri Lanka’s post-crisis regeneration will be fuelled by trade and the Forecast predicts an annualised

growth of 5.8% over the next five years - faster than is average for the world as a whole. Source: HSBC Trade Connections: Trade Forecast Quarterly Update (October 2011)


Key Sri Lanka Economic Forecasts: HSBC


2010 2011 2012 2013

Real GDP (% Yr) 8.0 8.1 6.8 7.6

Private Consumption (% Yr) 12.0 9.7 7.3 8.2

Govt. Spending (% Yr) -3.71 1.1 10.2 6.4

Investment Spending (% Yr) 26.5 14.3 12.7 14.5

Industrial Production (% Yr) 8.6 8.5 7.0 8.0

CPI (Avg, % Yr) 6.2 6.9 5.8 7.6

CPI Core (Avg, % Yr) 7.0 7.1 7.4 6.9

Exports (% Yr) 16.1 32.0 23.9 30.1

Imports (% Yr) 32.4 35.0 14.0 20.1

Trade Balance (% of GDP) -11% -13% -11% -9%

Current Account Balance (% of GDP) -3.3 3.8 -3.1 -2.8

Budget Balance (% of GDP) -7.9 -7.1 -6.2 -5.5

LKR/USD (year end) 112.7 109.8 107.2 104.8

Official policy rate (% end) 9.00 8.50 10.00 10.25

Source: Mr. Leif Lybecker Eskeen - HSBC, Chief Economist for India and ASEAN



The information contained in this presentation has been drawn from sources that we believe to be reliable. However, while we have taken reasonable care to maintain accuracy/completeness of the information, it should be noted that Commercial Bank of Ceylon PLC and/or its employees should not be held responsible, for providing the information or for losses or damages, financial or otherwise, suffered in consequence of using such information for whatever purpose.

Research & Development Unit

We must use time as a tool, not as a crutch.

John F. Kennedy

John Fitzgerald Kennedy· (May 29, 1917 – November 22, 1963), often referred to by his initials JFK, was the 35th President of the United States, serving from 1961 until his assassination in 1963.