Economic Capsule - April 2013

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April 2013Economic Capsule

FINANCIAL SECTOR NEWS 
 Banking Sector Performance - Highlights 2012
ECONOMIC & BUSINESS NEWS 
 Fitch Affirms Sri Lanka at 'BB-'; Stable Outlook
 External Trade Performance – February, 2013
 Inflation- April, 2013
 Sri Lanka Tourist Arrivals up 7.7 % in March
 China: World’s No. 1 Tourism Source Market
 News Snippets – Local
 News Snippets – International
Analysis & Forecast
 Sri Lanka Inflation a Risk, Warns Against Policy Easing –
IMF
 Easing Monetary Policy will not Bring Sustainable Growth - Dr. Saman
 Sri Lanka: Medium Term Macroeconomic Framework
 Latest IMF Projections
C O N T E N T S

Banking Sector Performance - Highlights 2012
Cont…
Source: CBSL Annual Report 2012

 Despite the slower growth, the share of loans and advances of the banking sector increased marginally from
61.2 % to 61.6 % by end 2012, while the share of investments declined from 24.9 % to 23.5 % by end 2012.
 The increase in lending during 2012 was concentrated in four major economic sectors, namely, trading (19
%), agriculture (14 %), infrastructure (14 %) and construction (12 %).
 Liabilities: Deposits continued to be the main funding source in the banking sector, despite the marginal
decline from 72 % of total liabilities of the banking sector as at end 2011 to 71 % by end 2012 due to the
lower growth in deposits.
 The resultant funding gap was bridged with borrowings which increased by 27 % during 2012 compared to
the growth of 25 % in 2011.
Banking Sector Performance - Highlights 2012 (cont…)
 The banking sector continued to maintain its dominant role in the financial sector with its assets increasing from 55.1 % of the total assets of the
financial sector in 2011 to 56.4 % by end 2012.
 Outreach: by end 2012, 33 banks, comprised of 21 domestic banks (including 09 licensed specialised banks) and 12 branches of foreign banks
continued operations. The banking network expanded with 190 banking outlets and 153 automated teller machines (ATMs) being added to the network
during 2012. Of these, 168 branches and 86 ATMs were established outside the Western Province. Accordingly, by end 2012, the banking sector was
operating with 6,374 banking outlets and 2,390 ATMs.
 Assets: The growth in assets of the banking sector during 2012 remained unchanged at 20 %.
Source: CBSL Annual Report 2012

Fitch Affirms Sri Lanka at 'BB-'; Stable Outlook
 Sri Lanka's ratings balance the strength of the country's
resilient growth performance, healthy level of human
development and strong payment record against the
weaknesses of its fiscal and external balance sheets and
moderate domestic savings relative to investment needs.
 The Stable Outlooks acknowledge the stabilisation of the
overall economy over the past year, following the
introduction of a series of monetary, exchange rate and
fiscal measures in early 2012, which helped to reverse the
deterioration in the balance of payments that took place in
2011.
 Although the current account deficit fell short of the
authorities' original target of 3.8% of GDP, it narrowed to
6.6% in 2012 from 7.8% in 2011. Fitch projects that the
current account deficit should decline further to about
5.2% in 2013 and 4.5% in 2014 due to a combination of
stronger global growth and lower oil imports.
BB - Affirmed
 Persistence with tighter monetary and fiscal policies
should help improve Sri Lanka's external liquidity
position. Official foreign exchange reserves, excluding
gold, rebounded to USD6.9bn (3.7 months of current
external payments) at end-January 2013. This is up from
a recent low of USD5.5bn at end-February 2012.
 Sri Lanka's external debt refinancing schedule, however,
remains quite heavy as an average of USD1.9bn per
annum in sovereign debt is projected to mature from
2013 to 2015 (versus USD1.3bn in 2012).
 This may not only limit Sri Lanka's ability to rebuild
foreign exchange reserves to a much higher level, but it
also means that the country's external finances will
remain vulnerable to any spike in global risk aversion.
Key Rating Drivers
Cont…

Fitch Affirms Sri Lanka at 'BB-'; Stable Outlook (cont…)
Key Rating Drivers (cont…)
Fitch projects real GDP growth to average 6.5%-7% in 2013 and 2014, compared with the government's forecasts of 7.5% and 8%
in 2013 and 2014 respectively. Fitch believes the government's forecasted growth could once again lead to overheating risks.
Following the successful completion of an IMF stand-by arrangement in July 2012, Sri Lanka has decided not to seek an extended
fund facility. A new IMF programme would have provided some comfort that Sri Lanka would stick with the reform measures
implemented in early 2012. However, Fitch does not view a successor programme as essential, provided that the authorities remain
vigilant and maintain appropriate policy settings to ensure overheating risks and renewed strains on the balance of payments do
not re-emerge.
Sri Lanka has continued to make limited progress on fiscal consolidation as the budget deficit fell to 6.4% of GDP in 2012 (versus
6.9% in 2011). This was, however, partially achieved through an accumulation of arrears. Sri Lanka's general government debt-to-
GDP ratio remained elevated at 79.1% in 2012, which was significantly higher than the 'BB' peer rating group median of 32.6%. Low
fiscal revenues weigh on the credit profile. The revenue take of 13.9% of GDP in 2012 was well below the 'BB' range median of
26.6% and was down from 16.7% in 2008.
Source: Fitch Ratings

External Trade Performance – February, 2013
Month
CCPI (%) *CCPI Core (%)
Year on Year
(Y-o-Y)
Annual Average
(A.A)
Year on Year
(Y-o-Y)
Annual Average
(A.A)
MAR 13 7.5 8.8 6.8 6.4
APR 13  6.4 8.8  6.1  6.5
*The price movement excluding Fresh Food, Energy, Transport, Rice and Coconut in
the CCPI basket.
Inflation- April, 2013
Category
Jan-Feb
2012
USD mn
Jan-Feb
2013
USD mn
Growth
Jan-Feb
(%)
Exports 1,709.2 1,526.2 -10.7
Agricultural Products 366.8 341.5 -6.9
Industrial Products 1,333.5 1,180.5 -11.5
Mineral Products 6.7 2.4 -64.5
Imports 3,495.7 2,950.5 -15.6
Consumer Goods 538.7 455.5 -15.4
Intermediate Goods 2,043.9 1,698.1 -16.9
Investment Goods 903.0 795.8 -11.9
Balance of Trade -1,786.5 -1,424.3 -20.3
Workers’ Remittances 943.1 1,014.1 7.5
Earnings from Tourism 173.8 209.7 20.6
Source: CBSL
Source: CBSL

 Sri Lanka's tourist
arrivals rose 7.7 %
to 98,155 in March
2013 with strong
growth from key
Western markets
and China, but
arrivals from India
plunged.
Sri Lanka Tourist Arrivals up 7.7 % in March
 In February 2013, arrivals from
China rose 57.9 % to 6,145
compared to a growth of 12.2 %
to 4,724 by Japan.
 Japan has been Sri Lanka's top
generating market in East Asia in
the past, but from around
September 2012 China has
tended to generate more tourists
than Japan.
China overtakes Japan as Sri Lanka's top tourist market in East Asia
China: World’s No. 1 Tourism Source Market
 Thanks to rapid urbanisation, rising disposable incomes
and relaxation of restrictions on foreign travel, the volume
of international trips by Chinese travellers has grown from
10 mn in 2000 to 83 mn in 2012.
 Expenditure by Chinese tourists abroad has also increased
almost eightfold since 2000. Boosted by an appreciating
Chinese currency, Chinese travellers spent a record US$
102 bn in international tourism in 2012, a 40% jump from
2011 when it amounted to US$ 73 bn.
Source: LBO
Source: UNWTO
Source: Chinanews.net

News Snippets - Local
Ceylon Chamber Fires Warning Over New
CEB Tariff
The Ceylon Chamber of Commerce is up in arms over the steep
rise in electricity profitability in addition to impacting exports and
services sectors.
According to the Ceylon Chamber of Commerce, the new tariffs will
entail a significant increase in electricity costs for all industry sectors.
On average, the increase is estimated at around 20%-30%.
Sri Lanka-China Conclude Fifth Joint
Talks on Trade, Economic Cooperation
The fifth joint committee meeting on trade and economic
cooperation between Sri Lanka and China was held in Colombo
recently. The two parties conducted discussions on the promotion of
trade, tourism and investment between the two counties.
An agreement on economic and technical cooperation for USD 16
mn and a loan agreement on provision of a concessional loan of USD
147 mn by China to Sri Lanka for Hambantota Port Development
Phase I project for ancillary works and supply of equipment were
signed between the two countries.
Sri Lanka Moves up Two Notches in Global Network Readiness Index
Sri Lanka has improved its position by two places in the recently published Global
Network Readiness Index (NRI) which measures a nation’s or community’s degree
of preparation, to participate in and benefit from ICT developments which happen to
be the driving force in today’s world.
With the two-place improvement, Sri Lanka at 69th place out of 144 countries
surveyed trails its neighbor India by just one rank although the score
remained the same as last year at 3.88. Sri Lanka and India are the only
two countries in the SAARC group to rank higher than the 100th
mark
Sri Lanka's Northern Rail Rebuilding on Track
A 43 kilometre stretch of Sri Lanka's Northern Railway line has been re-built to
allow trains to be run up to a speed of 120 kilometres, according to Ircon, an Indian
state-run transport engineering firm.
India is funding the rebuilding of 252 kilometres of rail track, which had been
destroyed during the 30-year war, through a USD 800 mn credit line.
Laugfs Group Enters Financial Services Industry
The Laugfs Group will be entering the financial services sector through its
newest subsidiary, Laugfs Capital. Laugfs is to look into the fields of leasing,
business loans, hire purchase, personal loans and factoring.
Cont…

News Snippets – Local (Cont…)
SL's Royal Ceramics Gains Control of Tile
Industry
Sri Lanka's Royal Ceramics Plc, a unit of Sri Lanka's
Vallibel group has bought control of Lanka Ceramics
group for Rs. 2.9 bn, according to group chief
Dhammika Perera.
A controlling 79 % stake in Lanka Ceramic and four
subsidiaries (Lanka Walltiles, Lanka Tiles, Swisstek-an
aluminum company and Horana Plantations) was
bought for Rs. 2.9 bn.
With these acquisitions the Royal Ceramics group
now have a monopoly in the tile market.
Dabur Lanka’s State-of-Art USD16 mn Fruit
Beverage Plant Opens
Dabur Lanka Ltd., a wholly-owned subsidiary of India’s
leading consumer goods maker Dabur India Ltd., opened
its state-of-the-art packaged fruit-based beverage
manufacturing facility at Meerigama.
 The country’s tea exports in
the 1Q saw an increase
value wise though in terms
of quantity shipped was
lower.
 Total tea exports amounted
to Rs. 42.28 bn in the first
three months of this year,
up by near 6% from Rs. 40
bn a year earlier.
 Volume wise, exports
amounted to 71 mn kilos,
down by 4.9 mn kilos or 6%
in comparison to first
quarter of 2012.
SL’s First Quarter Tea Exports Value up, Volume down
Source: DailyFT

News Snippets - International
Gold Prices Drop
Gold fell to a two-year low and took its biggest ever one-day drop on 15 April,
2013, contributing to huge losses in gold reserves.
Although it rallied slightly on 16 April, the recent struggles by commodities have
been triggered by weak data from China and the US sparking fresh concerns
about the global economy’s recovery.
According to
a Reuters
poll, Gold
prices are
expected to
end 2013 at
USD 1,450-
1,550 per
ounce, only
partly
recovering
from a recent
brutal selloff
that shook
investor
confidence
after 12
unbroken
years of
gains.
Fitch Downgrades UK Credit Rating
 The Fitch credit ratings agency has downgraded the UK to AA+
owing to a weakened economic outlook. The move, came after
Moody's downgrade in February.
 Fitch stated its downgrade "primarily reflects a weaker
economic and fiscal outlook" but returned its outlook to
"stable", removing the threat of further rate action in the near
term.
Commodity prices
Cont…Source: Reuters
Source: The Economist

News Snippets - International
Source: CNN Money

Sri Lanka Inflation a Risk, Warns Against Policy Easing
International Monetary Fund
 According to Sri Lanka’s Central Bank, the monetary policy stance for this year will be toward easing to help drive growth, and Treasury
Secretary P. B. Jayasundera had stated that he expected interest rates to fall as early as May or June.
 But according to IMF inflationary pressures were building up as the impact of higher power tariffs feeds through the economy.
 “Inflation came down quite a bit. But IMF expect that inflation figure to rise once again as the impact of electricity tariff hike is fully
reflected,” Koshy Mathai, the IMF resident representative for Sri Lanka, stated.
 “As a result we think the monetary policy should remain on hold for now as it has for quite some time and shouldn’t be changed
prematurely. It’s hard to say how long (the rates should be maintained).”
 The central bank cut both repurchase and reverse repurchase rate by 25 basis points in December but has since held steady.
Inflation eased to 6.4 % in April compared to 7.5 % a month ago and it is likely to accelerate in May due to the electricity tariff hikes, the
Department of Census and Statistics has stated.
Sri Lanka must not loosen monetary conditions as inflation remains a concern, the International
Monetary Fund stated, even though prices had risen at a lower pace in April than the previous month.
Source: Reuters

Easing Monetary Policy will not Bring Sustainable Growth
Dr. Saman Kelegama
According to respected senior economist, Dr. Saman Kelegama easing monetary policy and bringing down
interest rates would not help the country sustain high economic growth unless measures were taken to
address long-standing structural deficiencies in the economy.
 "The euphoria of the war victory and commencement of the USD 2.6 bn IMF standby facility arrangement prompted a relaxation of fiscal and monetary policy
to stimulate economic growth which saw economic growth average 8 % in 2010/11, but could not be sustained due to structural problems in the economy
which saw growth slip to 6.4 % in 2012," Institute of Policy Studies Executive Director Dr. Saman Kelegama stated.
 A balance of payments problem emerged during the second half of 2011.
 In February 2012 a much delayed stabilisation package with a flexible exchange rate and higher interest rates capped by higher tariffs on a number consumer
durables came into effect. This managed to reduce the current account deficit of the balance of payments from 7.8 % of GDP in 2011 to 6.6 % in 2012.
 "But exports faired badly in 2012. While imports fell by 5.8 % in 2012, exports fell by 7.3 %, which could not reduce the current account deficit further despite
the remittances inflows of USD 6 bn and tourism earnings of USD 1 bn.
 Gross reserves, amounting to USD6.9 bn as at end 2012 was comprised of borrowed funds and not net earnings, he pointed out.
 "Given this scenario there is limited space for relaxing monetary policy in 2013. Easing monetary policy would bring down interest rates and boost economic
growth, but growth will not be sustainable without structural macroeconomic reforms," Dr. Kelegama said.
 "We need to improve competitiveness of our exports and increase productivity in the agriculture and public sectors.“

Sri Lanka: Medium Term Macroeconomic Framework
Indicator Unit 2011(b) 2012 (c)
Projections
2013 2014 2015 2016
Real Sector
GDP @ Market Prices Rs. bn 6,544 7,582 8,722 9,985 11,356 12,939
Real GDP Growth % 8.2 6.4 7.5 8.0 8.3 8.5
GDP Deflator % 7.9 8.9 7.0 6.0 5.0 5.0
Per Capita GDP USD 2,836 2,923 3,348 3,790 4,267 4,814
Total Investment % of GDP 30.0 30.6 31.0 32.0 32.5 33.0
Domestic Savings % of GDP 15.4 17.0 19.1 23.4 25.7 28.4
National Savings % of GDP 22.0 24.0 26.9 30.1 32.0 34.2
External Sector
Trade Gap USD mn -9,710 -9,409 -9,813 -10,010 -10,384 -10,113
Exports USD mn 10,559 9,774 10,799 12,890 15,210 17,605
Textiles and Garments USD mn 4,191 3,991 4,010 4,530 5,180 5,955
Gems, Diamonds and Jewellery USD mn 532 559 594 745 895 1,090
Imports USD mn 20,269 19,183 20,612 22,900 25,595 27,718
Textiles USD mn 2,321 2,266 2,547 2,929 3,368 3,671
Project Related (Public and Private Sector) USD mn 3,821 4,300 4,743 5,237 5,876 6,550
Services (net) USD mn 1,099 1,250 2,213 3,263 4,318 5,379
Export of Goods and Services USD mn 13,643 13,562 15,949 19,558 23,696 28,093
Export of Goods and Services % of GDP 23.1 22.8 23.2 24.9 26.5 27.6
Workers' Remittances USD mn 5,145 5,985 6,664 7,453 8,223 9,059
Current Account Balance USD mn -4,615 -3,915 -2,766 -1,439 -411 1,277
Current Account Balance % of GDP -7.8 -6.6 -4.0 -1.8 -0.5 1.3
Overall Balance USD mn -1,061 151 725 2,063 3,235 6,110
External Official Reserves (d) (e) USD mn 5,958 6,877 7,146 8,486 11,166 16,773
Cont…

Sri Lanka: Medium Term Macroeconomic Framework (cont…)
Indicator Unit 2011(b) 2012 (c)
Projections
2013 2014 2015 2016
Fiscal Sector
Total Revenue and Grants % of GDP 14.5 13.2 14.7 14.9 15.2 15.4
Total Revenue % of GDP 14.3 13.0 14.5 14.8 15.1 15.3
Grants % of GDP 0.2 0.2 0.2 0.1 0.1 0.1
Expenditure and Net Lending % of GDP 21.4 19.7 20.5 20.0 19.8 19.9
Current Account Balance % of GDP -1.1 -1.4 0.1 0.8 1.4 1.7
Overall Budget Deficit % of GDP -6.9 -6.4 -5.8 -5.2 -4.7 -4.6
Domestic Financing % of GDP 3.5 2.7 4.1 3.7 3.6 3.5
Government Debt % of GDP 78.5 79.1 75.0 71.1 67.7 64.3
Financial Sector (f)
Reserve Money Growth % 21.9 10.2 16.5 15.0 14.0 14.0
Broad Money Growth (M2b) % 19.1 17.6 15.0 15.0 14.0 14.0
Change in Net Credit to the Government Rs. bn 206.4 211.6 70.0 55.0 20.0 15.0
Change in Credit to the Private Sector Rs. bn 514.8 352.6 435.0 517.5 613.0 690.0
Growth in Credit to the Private Sector % 34.5 17.6 18.5 18.5 18.5 17.6
a. Based on information available by mid March 2013
b. Revised
c. Provisional
d. Excluding Asian Clearing Union balances
e. Includes receipts under the Stand-by Arrangement facility of the International Monetary Fund obtained in 2009
f. Year-on-Year growth in end year values
Sources: Department of Census and Statistics, Ministry of Finance and Planning - Central Bank of Sri Lanka

Latest IMF Projections
Source: The Economist
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.
Research & Development Unit

Economic Capsule - April 2013

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Economic Capsule - April 2013