The document provides an economic capsule with the following key points: 1) It summarizes Sri Lanka's external sector performance from January to May 2012, noting declines in exports and a widening trade deficit. 2) It reports on selected economic indicators for Sri Lanka from 2010 to 2013 projected by the IMF, including GDP growth, inflation, and the fiscal deficit. 3) It outlines Fitch's affirmation of Sri Lanka's credit rating at BB- with a stable outlook, citing policy steps to address macroeconomic imbalances.

1. ECONOMIC CAPSULE
July 2012
< Research & Development Unit >

2. CONTENTS
ECONOMIC & BUSINESS NEWS   ANALYSIS & FORECAST
 External Sector Performance – Jan-May 2012  IMF Latest Projections on World Economy
 Sri Lanka: Selected Economic Indicators  Roubini Predicts a Perfect Storm in 2013...
 Fitch Affirms Sri Lanka at 'BB -'; Outlook Stable
FINANCIAL SECTOR NEWS 
 Commercial Bank Wins Euromoney’s “Best Bank in Sri Lanka” Award
 Commercial Bank Wins Finance Asia’s “Sri Lanka’s Best Bank” Award
 Commercial Bank Among the Top 1000 Banks in the World Again…
 RAM & Fitch affirms CBC ratings…
 New operational measures for transfers between Non-Resident Foreign Currency
(NRFC) and Resident Foreign Currency (RFC) Accounts
< Research & Development Unit >

3. ECONOMIC & BUSINESS NEWS

4. External Sector Performance – Jan-May 2012
A Summary of External Sector Performance (Jan-May) 2011 2012 Growth
 Gross Official Reserves (GOR) USD mn USD mn %
amounted to USD 5,815 mn by Exports 4,255.5 4,023.9 -5.4
end May 2012. Agricultural 1,012.7 893.7 -11.8
of which, tea 594.3 530.1 -10.8
 In terms of months of imports, Industrial 3,225.0 3,011.2 -6.6
GOR were equivalent to 3.4 of which, Textiles and garments 1,683.3 1,601.2 -4.9
months of imports by end May Mineral 14.1 25.9 83.9
2012. Imports 7,611.5 8,208.1 7.8
Consumer Goods 1,481.3 1,383.5 -6.6
 It is estimated that with the Intermediate Goods 4,632.9 4,821.0 4.1
receipt of the final tranche of of which, Petroleum 1,802.8 2,168.1 20.3
USD 414 mn under the Stand- Textile and textile articles 954.6 903.8 -5.3
Investment Goods 1,477.6 1,989.2 34.6
by Arrangement (SBA) facility
Balance of Trade -3,356.0 -4,184.2 -24.7
and the proceeds of the fifth Workers’ Remittances 2,103.0 2,475.2 17.7
international sovereign bond FDI (c) 437.0
of USD 1 bn, GOR to have Portfolio Investments (Net) (d) -66.8 186.5 379.2
risen to around US dollars 7.1 Commercial Banks’ Long-term FC Borrowings (e) 927.5
billion by end July 2012, which Earnings from Tourism 318.1 397.1 24.9
is equivalent to an import Inflows to the Government 952.9 1,746.1 83.2
cover of 4.2 months (c)Estimated FDI inflows to major projects (including loans) are for the period January-May 2012. This
estimate may be revised based on the survey conducted by the BOI.
(d)Net Portfolio investments are recorded for June and cumulative figures are for January- June of respective
years.
< Research & Development Unit > (e)Commercial Banks’ Long-term Foreign Currency Borrowings during the period January- June 2012.

5. Sri Lanka: Selected Economic Indicators
GDP and inflation (in percent) 2010 2011 2012 P 2013 P
Real GDP growth 8.0 8.3 6.8 6.7
Inflation (end-of-period) 6.8 4.9 9.5 7.0
Core inflation (end-of-period) 8.9 5.3 7.2 6.5
Public finances (as a % of GDP)
Total revenue (including grants) 14.9 14.5 14.3 14.7
Expenditure 22.8 21.4 20.5 20.5
Budget deficit -8.0 -6.9 -6.2 -5.8
Govt. debt (domestic and external) 81.9 78.5 80.9 79.4
Money and credit (% chg. end of period)
Reserve money 18.8 21.9 17.8 20.0
Broad money 14.9 20.1 17.8 18.1
Private sector credit 24.7 34.5 20.3 14.8
Balance of payments (in USD Mn)
Exports 8,626 10,559 10,482 11,010
Textiles & garments 3,356 4,191 4,100 4,160
Tea 1,440 1,492 1,401 1,437
Imports -13,450 -20,213 -20,199 -21,292
Oil imports 3,019 4,686 4,732 5,012
Current account balance -1,076 -4,543 -3,201 -3,053
Current account balance (in percent of GDP) -2.2 -7.7 -5.4 -4.7
FDI Inflows (USD Mn) 435 900 1,449 1,870
Gross official reserves (end of period)
In millions of U.S. dollars 6,410 5,734 6,680 7,206
In months of imports 3.5 3.1 3.4 3.4
< Research & Development Unit >

6. Fitch Affirms Sri Lanka at 'BB -'; Outlook Stable
 Fitch Ratings has affirmed Sri Lanka's Foreign- and Local-Currency IDRs at 'BB-'. The
Outlook for both ratings is Stable. The Country Ceiling has also been affirmed at 'BB-', and
the Short-Term Foreign Currency IDR at 'B'.
 According to Fitch's ratings, authorities have taken appropriate action to correct recent
pressure on the balance of payments and place it on a more sustainable trajectory.
 Given the weakened state of Sri Lanka's external finances and a heavy external debt
refinancing schedule through to 2013, the authorities' ability to persist with policies that
address existing macroeconomic imbalances and improving external liquidity is crucial.
 Although Sri Lanka was able to record real GDP growth over 8% for the second
consecutive year in 2011, such economic performance, coupled with policy missteps,
resulted in the current account deficit rapidly widening to 7.8% of GDP from 2.2% in 2010.
This, in conjunction with deterioration in the external economic environment and limited
currency flexibility, led to balance of payment pressures and in turn a sharp depletion of
foreign exchange (FX) reserves to USD 5.8 bn (3.4 months of imports) in January 2012 from
USD 8.1 bn (equivalent to 5.7 months of imports) in July 2011.
 The pace of deterioration in external buffers, rather than their level, is Fitch's main focus.
The level of FX reserves meets with international conventions and does not indicate an
immediate risk of substantial balance of payments stress. However, Fitch believes the rapid
depletion of FX reserves in H211 has heightened the vulnerability of the Sri Lankan
sovereign credit profile to a spike in global risk aversion.
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7. Fitch Affirms Sri Lanka at 'BB -'; Outlook Stable (cont…)
 Therefore, the resumption of IMF tranche disbursements following the implementation of
policy measures aimed at macroeconomic rebalancing is a positive development.
 More importantly, measures implemented by the Central Bank of Sri Lanka and the
government since February 2012 have tightened monetary conditions and could help Sri Lanka
to return to a more sustainable GDP growth trajectory over the long-term.
 In the near-term, certain policy measures have resulted in adverse risks to both growth and
inflation that have the potential to impact policy consistency. Due to the authorities' pro-
growth bias and the fragile balance of payments, Fitch believes developments in the coming
months warrant close monitoring.
 Fitch notes that the government has been able to rationalise expenditure and continue
consolidation efforts despite lower-than-expected fiscal revenues. As a result, the fiscal deficit
(including grants) narrowed to 6.9% of GDP in 2011 from 8% in 2010 and public debt declined
to 78.5% of GDP from 81.9%.
 Further simplification of the tax system could bolster measures announced in previous
budgets and aid in the attraction of greater foreign direct investment inflows.
< Research & Development Unit >

8. FINANCIAL SECTOR NEWS

9. Commercial Bank Wins Euromoney’s “Best Bank in Sri Lanka” Award
 Euromoney, a leading international
financial magazine, has adjudged the
Commercial Bank “The Best Bank in Sri
Lanka”, for 2012.
 The selection criteria for these awards
involves an in-depth analysis by
Euromoney editors based on qualitative
and quantitative criteria such as market
position, volume of business
transacted, new product development,
management system, credit ratings,
efficiency ratios and annual key
performance indicators.
< Research & Development Unit >

10. Commercial Bank Wins Finance Asia’s “Sri Lanka’s Best Bank” Award
 Euromoney, a leading international
financial magazine, has adjudged the
Commercial Bank “The Best Bank in Sri
Lanka”, for 2012.
 The selection criteria for these awards
involves an in-depth analysis by
Euromoney editors based on qualitative
and quantitative criteria such as market
position, volume of business
transacted, new product development,
management system, credit ratings,
efficiency ratios and annual key
performance indicators.
< Research & Development Unit >

11. Commercial Bank Among the Top 1000 Banks in the World Again…
 Sri Lanka is once again
represented in the top 1,000
banks in the world, with the
inclusion of the Commercial
Bank to this prestigious annual
ranking by the UK based „The
Banker‟ magazine.
 Commercial Bank is ranked 963
in the Top 1000, 2012 ranking,
rising from 986 in 2011.
< Research & Development Unit >

12. RAM & Fitch affirms CBC ratings…
RAM Confirms Commercial Bank‟s AA+ Rating
 RAM Ratings Lanka has reaffirmed Commercial Bank ‟s long- and short-term financial
institution ratings at AA+ and P1, respectively; the long-term rating has a stable outlook.
 The ratings are premised on the Group‟s strong market position as Sri Lanka‟s largest
privately owned licensed commercial bank (LCB) and third-largest overall LCB. The ratings
also reflect the Bank‟s strong franchise and healthy financial performance, funding and
liquidity, as well as good capitalisation levels.
Fitch Affirms Commercial Bank of Ceylon at 'AA(lka)'/Stable
 Fitch Ratings Lanka has affirmed Commercial Bank of Ceylon PLC's (CBC) National Long-Term
rating at 'AA(lka)' with a Stable Outlook.
 The agency has also affirmed CBC's subordinated debentures at 'AA-(lka)'.
< Research & Development Unit >

13. New operational measures for transfers between Non-Resident Foreign Currency (NRFC) and
Resident Foreign Currency (RFC) Accounts
i. New operational measures for transfers between Non-Resident Foreign Currency (NRFC) and Resident Foreign
Currency (RFC) Accounts:
a. The following transactions in relation to NRFC and RFC accounts held in the same bank or different banks irrespective of
the holder of account or currency type in which accounts are maintained, will be permitted:
i. Fund transfers between NRFC accounts.
ii. Fund transfers between RFC accounts.
iii. Fund transfers from NRFC accounts to RFC accounts.
b. Opening of NRFC/RFC accounts by minors will be permitted through the credit of inward remittances received from their
guardians/parents who are non-residents, or through the transfer of funds from existing NRFC accounts of such
guardians/parents.
c. Debits to NRFC accounts are freely allowed.
d. In respect of fund transfers between NRFC/RFC accounts, the bank which transfers funds should issue a confirmation to
the receiving bank that the funds so transferred were originated from NRFC/RFC accounts.
Cont.…
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14. New operational measures for transfers between Non-Resident Foreign Currency (NRFC) and Resident
Foreign Currency (RFC) Accounts (cont…)
ii. New operational measures for “Foreign Exchange Earners‟ Accounts” (FEEA):
 A single foreign currency account, unifying several existing foreign currency accounts maintained in the banking system by
foreign exchange earners will be introduced.
 Such new account, titled “Foreign Exchange Earners‟ Account” (FEEA) will replace the following:
a. Exporters‟ Foreign Currency (EFC) Account;
b. Indirect Exporters‟ Foreign Currency Account (IEFCA);
c. Foreign Currency Account for Suppliers of Inputs (FCASI);
d. Foreign Currency Account for Professional Services Providers (FCAPS);
e. Non Resident Foreign Currency Accounts for Foreign Employment Agencies;
f. Foreign Currency Account for Gem and Jewellery dealers, and temporary/ special foreign currency accounts authorized
by the Controller of Exchange.
Accordingly, exporters, indirect exporters, suppliers of inputs, professional services providers, entrepot traders,
gem and jewellery dealers, insurers, insurance brokers, travel agents, hoteliers, bunker suppliers and other
residents who undertake foreign projects would be permitted to execute their current international transactions
through this new FEEA.
< Research & Development Unit >

15. ANALYSIS & FORECAST

16. IMF Latest Projections on World Economy
 According to IMF, an already sluggish global recovery shows signs of
further weakness, mainly because of continuing financial problems in
Europe and slower-than-expected growth in emerging economies.
 The latest IMF Outlook projects that the global economy will grow 3.5 %
this year, down 0.1 % points from the April forecast, and 3.9 % in 2013, 0.2
percentage points lower.
 These forecasts, however, are predicated on two important assumptions:
that there will be sufficient policy action to allow financial conditions in
the euro area periphery to ease gradually and that recent policy easing in
emerging market economies will gain traction.
 Growth momentum has also slowed in various emerging market
economies, notably Brazil, China, and India. This partly reflects a weaker
external environment, but domestic demand has also decelerated sharply
in response to capacity constraints and policy tightening over the past year.
Many emerging market economies have also been hit by increases in
investor risk aversion and perceived growth uncertainty, which have led
not only to equity price declines, but also to capital outflows and currency
depreciation.
< Research & Development Unit >

17. Roubini Predicts a Perfect Storm in 2013...
A Perfect Storm in 2013...
 Nouriel Roubini, the New York University professor dubbed "Dr Doom", stated a
number of unpleasant factors would combine to derail the global economy in
2013.
 Escalation of the eurozone crisis.
 Further tax increases and spending cuts in the US that may drive the world's
largest economy into recession;
 A hard landing for China's economy;
 A further slowdown in emerging markets;
 War with Iran.
 "Next year is the time when the can becomes too big to kick it down [the
road]...then we have a global perfect storm”.
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18. “The greatest failure is the failure to try…”
- William Arthur Ward
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