Economic Capsule May 2012

ECONOMIC CAPSULE
May 2012

< Research & Development Unit >

CONTENTS
 BOI Inks Biggest-ever FDI Deal of USD 4 billion
FINANCIAL SECTOR NEWS 
 Alam Steel to Start Operations in Sri Lanka
 Commercial Bank’s 1Q, 2012 PBT up 40% to Rs 4.145 bn  India’s South City Announces Colombo’s Tallest Residential Tower
 Commercial Bank named ‘Best Sri Lankan Trade Bank 2012’ by Trade Finance  World Bank Says its Lending to Sri Lanka Will More Than Double

 MoneyGram Honors Commercial Bank as the "Most Productive Network in South Asia"  Reserve Bank of India Announces SAARC Swap Arrangement
 Fitch Says Europe Debt Crisis May Hurt Emerging Asia Ratings
 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
GLOBAL UPDATE
 India’s Slowdown
 Service Points Openings
 2011 - Tumultuous Year for Oil Markets

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

 External Sector – Jan- April 2012
ANALYSIS & FORECAST
 Sri Lanka’s Prospects and Challenges
 Inflation – May 2012
 Economic Data of Sri Lanka
 Private Sector Credit up 34% (yoy) – April 2012  IMF Views on Sri Lanka
 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


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 Remittances
Commercial 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 Opens Islamic Banking Unit at Akkaraipattu

 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 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.

< Research & Development Unit >

Service Points Openings

Commercial Bank

217 Godakawela

218 Middeniya


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.

1Q

2011 2012
Sector
Share Growth Share Growth (%)
(%) (%) (%)

Agriculture, Forestry & 12.3 -4.3 12.7 11.5
Fishing
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
Jan. – Apr. Jan. – Apr. Growth -
Category 2011 2012 Jan. – Apr.  By end April 2012, gross official
USD mn USD mn (%)
reserves amounted to USD 5,835 mn.
Exports 3,419.4 3,313.8 -3.1
Agricultural 815.9 719.6 -11.8  In terms of months of imports, gross
of which, Tea 476.8 421.1 -11.7 official reserves were equivalent to 3.3
Industrial 2,588.7 2,477.6 -4.3 months.
of which, Textiles and garments 1,361.6 1,323.0 -2.8
Mineral 11.9 24.1 102.9
Imports 5,928.2 6,633.6 11.9
Consumer Goods 1,179.6 1,115.1 -5.5
Intermediate Goods 3,552.1 3,849.1 8.4
of which, Petroleum 1,333.6 1,791.5 34.3
Investment Goods 1,179.6 1,657.3 40.5
Balance of Trade -2,508.9 -3,319.9 -32.3
Workers’ Remittances 1,688.5 1,968.1 16.6
FDI (c) 226.0 238.0 5.3
Portfolio Investments (Net) (d) -59.7 182.0 404.7
Commercial Bank Foreign inflows 549.0 1,078.0 96.4
Earnings from Tourism 270.6 340.0 25.7
Inflows to the Government 727.3 1,162.5 59.8
Source: CBSL

Inflation – May 2012

CCPI (%) *CCPI Core (%)

Month Year on Annual Year on
Annual Average
Year Average Year
(A.A)
(Y-o-Y) (A.A) (Y-o-Y)

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's April Tea Output Slips After Bad Weather
 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 First-ever Maize Export Takes Off
 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.

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.

Alam Steel to Start Operations in Sri Lanka
 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.

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


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


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.
Source: Reuters

Rating Outlook

Fitch BBB- Negative (18 June 12)

S&P BBB- Negative

Moody’s Baa3 Stable


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.



Sri Lanka’s Prospects and Challenges
Releasing 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
Analysis & Forecast

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.


Targets Unit 2000 2005 2010 2011 2016 (P)

GDP USD bn 16.5 24.4 49.6 59.2 98.0
Analysis & Forecast

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


 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,
Analysis & Forecast

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


“Innovation distinguishes between a leader and a follower”

Steve Jobs

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

Research & Development Unit

Economic Capsule May 2012

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Viewers also liked

Viewers also liked (7)

Similar to Economic Capsule May 2012

Similar to Economic Capsule May 2012 (20)

More from Commercial Bank of Ceylon PLC

More from Commercial Bank of Ceylon PLC (20)

Recently uploaded

Recently uploaded (20)

Economic Capsule May 2012