Economic Capsule December 2011

ECONOMIC CAPSULE December 2011< Research & Development Unit >

C o n t e n t s

FINANCIAL SECTOR NEWS Commercial Bank to Open ATMs at Railway Stations

Commercial Bank Expands Country’s Largest ATM Network to 500

Commercial Bank - Service Points Openings

Relaxation of Regulations in Relation to Foreign Investments in Corporate Debentures of Local Firms and Foreign Borrowings by the Local Firms

Revision of the Composition of the Milanka Price Index (MPI)

Sri Lanka Firms Raise USD 400 mn from Equity Markets in 2011

Analysis & Forecast Exchange Rate

Inflation

Interest Rates

< Research & Development Unit >

ECONOMIC & BUSINESS NEWSSri Lanka’s Growth World’s Fourth Best !

Brazil Beats UK as World’s Sixth Largest Economy

Sri Lanka FDI’s Exceeds 2011 Targets

Sri Lanka Approves USD 1.8bn in Tourism Projects

Conde Nast Traveller Names Sri Lanka Among World’s Top Five Destinations for 2012 Travel

Sri Lanka’s Akbar Brothers - World’s Biggest Tea Exporter

Sri Lanka’s New Start-ups have Risen by 40.35% with 5,993 New Companies Incorporated

Inflation - December 2011

External Sector - October 2011

Sri Lanka Among Highest Risk Financial Systems: Fitch Ratings


FINANCIAL SECTOR NEWS

Commercial Bank to Open ATMs at Railway Stations


Railway commuters will have instant access to Sri Lanka’s single largest electronic cash dispensing facility following the commencement of an initiative by Commercial Bank to install ATM terminals at key railways stations in the country.

The Bank’s first ATM machine under this programme was installed at the Fort Railway Station. This is to be followed by the installation of ATMs at Maradana, Ganemulla, Ragama, Moratuwa and Panadura Railway Stations.

Commercial Bank Expands Country’s Largest ATM Network to 500

This landmark was reached with the opening of an ATM at Maradana Railway Station. Commercial Bank’s ATM network has grown rapidly, adding 100 terminals in the past five months.

The ATM network of the Commercial Bank of Ceylon has connected its milestone 500th terminal, further consolidating its status as the largest electronic cash dispensing system owned by a single bank in Sri Lanka.

Commercial Bank - Service Points Openings


211 Divulapitiya

212 Panadura (Extension Office)

213 Kattankudi

Relaxation of Regulations in Relation to Foreign Investments in Corporate Debentures of Local Firms and Foreign Borrowings by the Local Firms


The Central Bank of Sri Lanka (CBSL) has, with immediate effect, relaxed the regulations in relation to foreign investments in corporate debentures of local firms and foreign borrowings by local firms as follows:

In the case of corporate debentures raised by local companies:

I. the ceiling imposed on the interest rate of the debentures has been removed.

II. the requirement for the maintenance of a sinking fund by the issuing company has been removed.

III. the minimum tenor of the debentures has been reduced from the current level of five years to two years.

In the case of foreign borrowing:

I. the current limit on borrowing applicable to a local firm has been increased from USD 20 mn to USD 50 mn., and

II. local firms have been permitted to raise foreign loans against corporate or bank guarantees.

Other borrowing arrangements of a short-term nature and those by newly incorporated firms would also be considered for approval by the CBSL, based on the merits of each case.

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

Revision of the Composition of the Milanka Price Index (MPI) - 1st January to 30th June 2012


Other firms in the index are:Commercial Bank, HNB, LB Finance, NTB, Sampath Bank, Aitken Spence, John Keells Holdings, Richard Pieris, Softlogic Holdings, Ceylon Grain Elevators, Piramal Glass, Royal Ceramics, Laugfs Gas, Lanka Hospitals, Browns and Environmental Resource Holdings.

New Additions Dropouts

Central Finance Dialog Axiata

DFCC Bank Hemas Holdings

Union Bank Janashakthi Insurance

Lanka Orix Leasing Company John Keells Hotels

Free Lanka Capital Merchant Bank of Sri Lanka

Colombo Land Nawaloka Hospitals

Vallibel One Pan Asia Banking Corporation


Sri Lanka Firms Raise USD 400 mn from Equity Markets in 2011


According to the Colombo Stock Exchange, Sri Lankan firms had raised Rs. 47.1 bn (USD 414 mn) from initial public offers and cash calls in 2011, up 64 % from a year earlier.

In 2011 companies had raised Rs. 19.1 bn through initial stock offers and Rs. 28.0 bn from rights issues, where additional shares were sold to existing shareholders.

In 2010, Rs. 4.3 bn were raised from IPOs and Rs. 24.3 bn came from rights issues.



ECONOMY & BUSINESS NEWS

Sri Lanka’s Growth World’s Fourth Best !


The high 8.4 % economic growth enjoyed by Sri Lanka in the third quarter is considered the fourth best in the world according to an analysis by stock broking firm DNH Financial.

As per its analysis, Sri Lanka has also remained consistent as against other emerging economies in the top four rank.

*Sri Lanka GDP - USD 56 Bn (2011 IMF est.)


Brazil Beats UK as World’s Sixth Largest Economy


Rank 2011

Rank 2010 Country GDP (USD Bn)

1 1 United States 15,065

2 2 China 6,988

3 3 Japan 5,855

4 4 Germany 3,629

5 5 France 2,808

6 7 Brazil 2,518

7 6 United Kingdom 2,481

8 8 Italy 2,246

9 10 Russia 1,885

10 9 India 1,843

Source: Centre for Economics and Business Research

Brazil has overtaken Britain to become the world’s sixth-largest economy.

Latest figures from the Centre for Economic and Business Research’s annual world economic league table showed that the UK is now the seventh richest country in the world, and has fallen behind a South American nation for the first time.

The US, China, Japan, Germany and France occupied the top five places and India was placed on the 10th spot in the list.

According to the report, Brazil’s economy has surged because of vast reserves of natural resources and a rapidly growing, and cash-rich, middle class. At the same time the UK languishes in the grip of a national debt crisis and lack of bank credit.


Sri Lanka’s FDIs Exceed 2011 Targets


According to government sources, Sri Lanka's Foreign Direct Investment (FDI) inflows has exceeded its target of USD 1 bn in the year 2011 as there has been an influx of investments particularly into the rapidly developing tourism sector since the end of the three decade war in May 2009.

The FDI reached USD 1.07 bn by December 2011, and the Government is now targeting a record USD 1.75 bn in FDI in the year 2012.

Source: BOI


Sri Lanka Approves USD 1.8bn in Tourism Projects


Sri Lanka's tourism development office has approved USD 1.85 bn of investment proposals to build hotels. The 184 projects with a combined investment value of USD 1.85 bn involve building 11,809 rooms.

Investment (USD Mn) No. of Rooms

Colombo 903.8 3,941

Hambantota 189.1 720

Gampaha 179.8 1,512

Galle 139.6 1,417

Trincomalee 77.2 794

Jaffna 24.1 298

Batticaloa 43.07 606


Conde Nast Traveller Names Sri Lanka Among World’s Top Five Destinations for 2012 Travel


World’s leading and the most discerning and trusted monthly travel magazine in Britain Condé Nast Traveller has nominated Sri Lanka as one of the top five destinations to watch in 2012.The travel experts of the magazine have predicted that Sri Lanka will be among the hottest new holiday destinations for travellers in the coming year.Unveiling the list of destinations the magazine reveals that “One of the great joys of travel is the feeling you’ve discovered somewhere special, somewhere that’s all yours, for the first time – before the developers move in and the crowds descend. It could be a new and unexplored region, like the Arctic Circle, or an entire country that has been off-limits to tourists for political reasons, such as Sri Lanka and Burma.”Sri Lanka has been placed third in the list of destinations ahead of Britain, Australia and Abu Dhabi. Tag-lining Sri Lanka as “The coasts less travelled,” the writer remarks that “although the north and east coasts are undeveloped, their natural beauty is unspoiled.



Akbar Brothers, which for decades has been dominating the local tea industry, in 2011 became the world’s biggest tea exporter, beating global giant Lipton.

According to the company, its exports in 2011 amounted to 52.2 mn kilos, positioning it as the biggest exporter of single origin tea. Lipton Africa, the industry giant, is estimated to have shipped only 48.4 mn kilos globally in 2011. Out of Sri Lanka’s total exports, Akbar commanded the lion’s share of 16% in 2011.

The value of Akbar’s exports was Rs. 27 bn, up from Rs. 24 bn achieved in 2010. Volume wise exports improved by over four mn kilos or over 9% in comparison to 2010. Value-added teas had accounted for 75% out of Akbar’s total.

Sri Lanka’s Akbar Brothers - World’s Biggest Tea Exporter

Sri Lanka’s New Start-ups have Risen by 40.35% with 5,993 New Companies Incorporated

According to the Department of Registrar of Companies, the total number of companies registered under the new Companies Act No. 7 of 2007 as at 30 September, 2011 is 5,993 and it is an increase of 40.35% over the corresponding period in 2010, which stood at 4,270. The total number of existing companies as at 30 September 2010 stood at 48,961.

SMEs consist of more than 75% of Sri Lanka’s industries and enterprises.


Inflation - December 2011


The rate of inflation (based on CCPI) on a year-on-year basis increased to 4.9 % in December, 2011 from 4.7% month ago, while the annual average rate of inflation decreased to 6.7 % in December, 2011 from 6.9 % a month ago.

December inflation was driven mainly by increases in food prices compared to November, with prices of many non-food items largely unchanged.

External Sector - October 2011

CategoryJan–Oct

2010USD mn

Jan-Oct2011

USD mn

Growth Jan–Oct

%

Exports 7,053.1 8,702.1 23.4

Imports 10,909.2 16,436.0 50.7

Balance of Trade -3,856.1 -7,733.9 -100.6

Workers’ Remittances 3,380.4 4,202.7 24.3

Foreign Direct Investments (FDI) (c) 309.7 679.3 119.3

Earnings from Tourism (d) 501.5 735.7 46.7

Inflows to the Government (e) 3,262.9 3,507.3 7.5

(c) FDIs for the first nine months of 2010 and 2011

(d) Earnings from tourism for the first eleven months of 2010 and 2011

(e) Government inflows in 2010 and 2011 include the proceeds of the International Sovereign Bonds issued in October 2010 and July2011, respectively.

Gross official reserves, had dropped to USD 6.9 bn in end October 2011 after recording USD 8.1 bn at end August, 2011.



Rapid credit growth and rising asset prices has put Sri Lanka among the highest-risk financial systems, according to a new report by Fitch Ratings which has cut its growth forecast for emerging Asia.

The report on the Asia-Pacific sovereign credit outlook has stated there were growing concerns about bank credit in the region.

The speed of credit growth and rising asset prices has led to Asia-Pacific harbouring four of the world’s nine highest-risk financial systems.

Hong Kong and China were joined by Indonesia and Sri Lanka in the December 2011 assessment, although Vietnam dropped out as credit growth eased.

Fitch upgraded Sri Lanka’s long-term foreign-currency rating to ‘BB−’ with a stable outlook from ‘B+’/Positive in July 2011. The move reflected the stabilisation and recovery of the economy under the authorities’ IMF programme and efforts to consolidate the chronic budget deficit.

However, foreign direct investment has been slow to recover after the end of the country’s long civil war in 2009, and the authorities devalued the Sri Lankan rupee by three percent in November 2011.

According to Fitch, structural reforms to support longer-term growth prospects combined with further fiscal consolidation efforts would increase Sri Lanka’s chances of moving further up the ratings scale.

India and Sri Lanka are the only Fitch-rated emerging Asian countries to run deficits on “basic balance” (the current account plus net foreign direct investment).

Asian economies were not immune from the financial crises in the industrialised countries.

Fitch has cut its forecast for emerging Asia’s 2012 growth to 6.8 % for 2012, from 7.4 % estimated in June 2011.

Both China and India face a combination of slowing activity and stubbornly high inflation, underlining the risks that can arise from allowing inflation to rise above desired ranges.

Sri Lanka Among Highest Risk Financial Systems: Fitch Ratings

Source: Fitch Ratings - Asia Pacific Sovereign Credit Outlook, December 2011



ANALYSIS & FORECAST

Exchange Rate


ANALYSIS & FORECAST

The LKR is expected to be under pressure in 2012 as well, due to following;

Higher investment goods imports due to ongoing development activities and higher expenditure on crude oil imports.

The export income is expected to be affected due to recession in the major exports markets (EU & USA).

The USD has been appreciating due to the current risk perceptions in global markets. Investors have sought safe havens such as the JPY, Swiss Franc and US treasury holdings (US 10 year bond rates are at record lows) and therefore demand for these assets have increased at the expense of more “risky” assets and currency holdings in emerging economies. Therefore, the LKR could remain under pressure as long as global risk perceptions are high.

The foreign reserve position of the country has deteriorated during the past few months since reinvestments of the country’s foreign reserves by CBSL have made losses owing to the collapse of Treasury bond prices in European economies such as Greece, Portugal, Italy and Spain. The drain of foreign reserves will therefore, continue, exerting pressure on the exchange rate. (cont…)


Exchange Rate (cont…)


ANALYSIS & FORECAST

Since the LKR was depreciated by 3% as a proposal in budget 2012, the Central Bank is likely to manage the level of depreciation to a certain extent.

The rate of rupee devaluation by 3% is not expected to be sufficient to significantly curtail domestic demand for imports and therefore pressure on the rupee to depreciate is expected to continue.

However, the depreciation or the appreciation of the LKR will depend to a large extent on the movements in the current account deficit as well as on the level of foreign fund inflows.

The income from tourism and remittances is expected increase in 2012.

However, despite these inflows, the current account deficit is expected to reduce only slightly to 5 % in 2012 from 5.6 % expected for 2011.

Source: R&D - CBC


Inflation


ANALYSIS & FORECAST

Inflationary pressures are expected to build up, in 2012 due to; Increase in credit given by banks supported by relatively low interest rates, rising household wealth and upbeat consumer

sentiment. The CBSL has increased its Treasury bill holdings (Rs.155.90 bn by 16 Dec 2011 from Rs.1.1 bn as at 1 Sep 2011) to reduce the

pressures on interest rates. This will have inflationary consequences with a lagged effect. Expected higher foreign capital inflows. Increase in imported inflationary pressures due to depreciation of the rupee by 3% (budget 2012). However, these inflationary pressures are expected to be mitigated to some extent due to improving domestic supply and the

receding threat of higher global oil and food prices, due to weaker demand conditions. Therefore, the rate of inflation is expected to record around 6-7% by end 2012. The Central Bank should be on the lookout for signs of overheating, and be prepared to adjust policy rates if required. The high growth in credit has been driven by increased economic activity. It is important to ensure that credit is granted with

a longer term perspective to productive sectors and to finance viable projects rather than to finance excessive consumption which will have inflationary consequences.

Source: R&D - CBC


Interest Rates


ANALYSIS & FORECAST

The interest rates of commercial banks and the government securities are expected to increase in 2012 due to the following:Increase in inflationary pressures due to depreciation of LKR.Reduction in the liquidity position of the banking system. The CBSL has increased its Treasury bill holdings with a view to reducing the upward pressures on interest rates and kept its policy rates unchanged.

The CBSL is expecting foreign direct investments (FDIs) & foreign fund inflows to increase further in 2012 and onwards, reducing the pressures on policy rates.

However, the increase in the Central Bank’s Treasury bill holdings creates inflationary pressures in the economy.

Therefore, the CBSL cannot increase its Treasury bill holdings continuously.

If the government does not get adequate FDIs & foreign fund inflows, the CBSL will have to increase its policy rates to reduce the inflationary pressures.

Source: R&D - CBC



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 December 2011

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Transcript of Economic Capsule December 2011