Economic Capsule - September 2012

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ECONOMIC CAPSULE

September 2012

FINANCIAL SECTOR NEWS

Commercial Bank of Ceylon and Dialog partner for Managed Services

Etisalat and Commercial Bank gives a Mini-ATM Facility to Phones…

Service Points Openings


C O N T E N T S

ECONOMIC & BUSINESS NEWS

SL Bank Credit Volumes Fall to 18-month Low in July

Credit Expansion Falls by Half in 2Q 2012 : CBSL

Sri Lankan Economy – Key Figures and Forecasts

Global Economic Prospects - World Economic Outlook

Macro Trends

FINANCIAL SECTOR NEWS


Commercial Bank of Ceylon and Dialog partner for Managed Services

The Dialog Axiata IDC also serves the banking community at large by hosting the country’s Society for Worldwide Interbank Financial Telecommunication Bureau (SWIFT Bureau), and has undergone and passed audits by SWIFT Internal Audit.

Dialog Enterprise, the corporate solutions arm of Dialog Axiata PLC has partnered with Sri Lanka’s largest listed bank, Commercial Bank of Ceylon PLC to provide integrated enterprise communication solutions, which would ensure uninterrupted and highly secure connectivity leading to smooth banking services for Commercial Bank customers.

The new data centre hosted at the Dialog Axiata Internet Data Centre (IDC) provides a secure data communication solution providing connectivity between Commercial Bank branches, Head Office and Dialog IDC.

CBC Share Price Movement


Etisalat and Commercial Bank gives a Mini-ATM Facility to Phones… Etisalat Sri Lanka has partnered with Commercial Bank to introduce mobile

banking via USSD (Unstructured Supplementary Service Data) technology, a global system for mobile communication used to send a text between a mobile phone and an application program in a network.

Etisalat users can now enjoy the convenience of conducting their banking activities with Commercial Bank through their mobile phones while accessing the menu driven USSD portal.

The USSD portal can be accessed by simply dialling #8823#. Once a customer who is registered with the Bank for this service, dials into the USSD portal, they simply have to select the required function and enter a Personal Identification Number (PIN) provided by the bank for authentication and the system makes the desired transaction.

Through this service, Etisalat users who have accounts at Commercial Bank can make balance and credit card inquiries, bill payments, fund transfers, PIN changes, top up credit on prepaid connections and obtain micro statements.

This also offers SMS Banking, ReLoad and Tri-lingual Mobile Banking facilities to mutual clients. It’s like having a mini-ATM facility in your phone.


Service Points Openings

Commercial Bank

Maskeliya Branch

Wellawatte CSP

Makola CSP

Hendala CSP

222

223

224

225

ECONOMIC & BUSINESS NEWS


SL Bank Credit Volumes Fall to 18-month Low in July

Loans from Sri Lanka's commercial banks to state and private borrowers fell to 10.1 billion rupees in July 2012, down from 13.5 billion rupees in June, the lowest since January 2011, partly helped by a sovereign bond sale.

Loans to private borrowers rose 35.7 billion rupees to 2,270.6 billion rupees in July up 31.6% from a year earlier, according to the data released by the CBSL.

Credit to state enterprises fell in absolute terms to 261.5 billion rupees in July from 275.6 billion rupees a month earlier, though up 82.4% from 2011 July.

Total credit to state declined by 25.6 billion rupees, with rupee loans from commercial banks to the central government steady at 559 billion rupees in July from 560.3 billion rupees a month earlier (June).

Loans from foreign currency banking units rose to 144.4 billion rupees from 125.7 billion rupees.

The foreign exchange purchase drove up excess liquidity in the banking system (the clearing balance) as high as 58 billion rupees on July 26.


Credit Expansion Falls by Half in 2Q 2012 : CBSL

Efforts by the CBSL and the Government earlier this year to rein in high demand for imports and credit are yielding results.

Reflecting the impact of the policy measures taken, credit obtained by the private sector has decelerated since the second quarter of 2012, and the policy measures in place are expected to help ensure that the growth of credit will be within the desired level at year end according to the CBSL.

Average monthly credit decelerated to around Rs.27 bn during the period from April-July compared to the average monthly credit expansion of about Rs.52 bn in the first three months. The growth of broad money (M2b) also eased to below 20% in July for the first time in 2012.

According to CBSL, the amount of credit available has been sufficient to facilitate reasonably robust economic activity, and as per estimates of the Department of Census and Statistics, the economy recorded a growth rate of 7.2% during the first half of 2012.


Sri Lankan Economy – Key Figures and Forecasts

The GDP growth is expected to recorded 6.5% in 2012 (according to the Treasury Secretary) mainly due to the impact of the drought, and depressed global economic conditions.

The economy is poised to achieve 6.8% GDP growth in 2012 according to CBSL, Standard Chartered Bank (SCB) and IMF.

Downside risks:1. The euro area, which accounts for 30 % of Sri Lanka’s exports, remains vulnerable to event risk and is expected to stay

weak. 2. With reduced hydropower supply due to a drought, Sri Lanka has had to shift to higher-cost thermal power generation. 3. The drought has had a significant impact on agricultural output, destroying close to 50,000 hectares of rice, according to

the Finance Ministry. This has resulted in increased subsidies, with LKR 10bn allocated to drought relief for farmers. 4. The SCB does not expect the 18% credit ceiling on banks’ lending, which has considerably slowed domestic consumption,

to be lifted in the near term, as the central bank’s tight monetary policy stance is likely to prevail until inflation moderates.

Gross Domestic Product - GDP


Sri Lankan Economy – Key Figures and Forecasts (Cont…)

Rising costs of imported fuel and higher interest rates applied pressure on finances at the start of the year.

Policy adjustments implemented in H1-2012 (including an increase in import duties to curb demand for imported consumer goods and a reduction in fuel subsidies) helped to reduce this pressure. An increase in revenue is expected in 2H, 2012.

Besides, according to the Treasury Secretary, P.B. Jayasundera, non-essential expenditure would be rolled over to the next fiscal year (2013).

Gross Domestic Product - GDP (Cont…) According to SCB, the GDP growth rate is expected to moderate to around 6.3% in H2-2012 from 7.1%

in H1, and inflation is also expected to moderate. GDP growth is expected to pick up to 7.5% in 2013 since domestic activities are expected to compensate for lower export growth in 2013.

Fiscal Sector


Fiscal Sector (Cont…)

Additionally, since the government is keen on achieving the 2012 fiscal deficit target of 6.2% of GDP, a re-prioritization of capital expenditure of the government is expected to take place during the remainder of 2012.

The above measures are expected to reduce pressure on interest rates, liquidity position and inflation. The SCB expects the budget deficit to be around 7.0% in 2012 due to losses at state owned enterprises

(SOEs), electricity subsidies, and the impact of the drought. Fiscal consolidation may prove challenging in the near term given that growth is expected to slow in H2,

2012 and tax collection on external trade has fallen short of targets. Higher interest payments and the increase in non-interest expenditure on wages and welfare spending this year have also contributed to fiscal slippage.

In 2013, steps to reduce current expenditure, broaden the revenue base and improve the efficiency of SOEs will be needed to keep the fiscal deficit within the forecast (SCB) of 6.5% of GDP and reduce public debt.



The key challenge is to manage the rollover risk overhang. SL should be content as long as there is sufficient confidence to roll over the USD 3bn or so of the short-term foreign debt.

Short-Term Foreign Debt End June 2012

As % of Foreign Debt 14.2%

As % of Total Debt 6.6%

SL is probably near the upper limit unless the country can expand repayment capacity by improving export performance and remittances.

Continued relationship with the IMF and maintaining SL’s credit ratings would be important.

A large portion of current outstanding domestic gov. debt (40.71 %) is due to mature within 1–3 years. If this is left unattended, it would increase the rollover risk.

Key Risks are interest rates, the impact of slower GDP growth on revenue and additional pressures on expenditure due to drought relief, salaries etc.

SL faces difficulties in maintaining the momentum of capital expenditure without recourse to PPPs. Therefore, incremental investment has to come from the private sector.

Government Debt — External Debt

Government Debt — Domestic Debt



Demand driven inflationary pressures are expected to be reduced during the remainder of 2012 due to slowdown in economic activities and lower credit growth.

Although the Central Bank of Sri Lanka (CBSL) is mindful of higher inflation risks arising from domestic supply-side constraints and external factors, it is likely to keep policy rates on hold in the near term to avoid jeopardising growth.

A rate cut is likely in Q1-2013 as inflation moderates. The SCB expects a cumulative 50bps of rate cuts in 2013, taking the repo rate to 7.25% by end-2013.

Given the upward revision of SCBs inflation forecasts for the remainder of 2012, SCB expects the CBSL to maintain its anti-inflation stance via stable policy rates and tight banking system liquidity.

The SCB forecasts 1Y T-bill rates for Q3-2012 to be 13.50 % and for Q4-2012 to be 13.25%. In 2013 SCB expects slowing growth, to prompt a shift in the Central Bank’s focus from containing inflation to

supporting growth, paving the way for mild monetary easing in H1-2013.

Inflation

Interest Rates



Robust remittance inflows and tourism receipts are likely to continue and should help to narrow the current account deficit to 4.0% of GDP in 2013 from 6.1% in 2012.

Steady capital inflows, government bond issuance, and further IMF support in the form of an Extended Fund Facility (still under negotiation) should help to finance the current account deficit and push the BoP further into surplus in 2013 (from an expected USD 0.9bn surplus in 2012).

Inflows Jan—July (in USD mn) 2011 2012 Growth (%)

Workers’ Remittances 2,922.0 3,417.4 17.0

FDI 394.1 451.7 14.6

Portfolio Investments (Net) -74.0 205.1 377.2

Commercial Banks’ Long-term Foreign Currency Borrowings

- 927.5 -

Earnings from Tourism 451.4 560.4 24.2

Inflows to the Government 2,812.7 3,958.4 40.7

of which, T’Bills and T’Bonds 595.4 1,725.0 189.7

2011 Mar ‘12 Jun ‘12 Jul ‘12 End ‘12 (SCB)

BOP (in USD mn) (1061) (251) (320) 330.6 900Source: Standard Chartered Asia Focus, 24 September 2012 “The Resurgence”


SCB forecast that the fiscal deficit will narrow to 6.5% of GDP in 2013 from an expected 7.0% in 2012. This should trigger a reversal of the upward movement in long end bond yields.

Interest Rates (Cont…)


1Q 2013, USD/LKR - 125.00 (Frontier Research Forecast)- The improved Balance of Payments- Increased foreign inflows

End 2013, USD/LKR – 126.50 (SCB forecast)- Debt inflows- Improvement in BoP- Revival of Risk appetite as global growth starts to pick up- Prolonged weakness in USD

Exchange Rate 2011 2012 F 2013 F 2014 F

GDP (Real % YoY) 8.3 6.8 7.5 7.7

CCPI (Annual Avg Change %)

6.7 7.7 7.5 7.2

Policy Rate 7.00 7.75 7.25 7.00

USD-LKR (End Period) 113.9 130.0 126.5 124.0

Current A/c Balance (GDP %)

-7.6 -6.1 -4.0 -3.5

Fiscal Balance (GDP %) -6.9 -7.0 -6.5 -6.0

1Q 2Q 3Q F 4Q F 2012 F 1Q F 2Q F 3Q F 4Q F 2013 F

GDP 7.9 6.4 6.4 6.7 6.8 7.4 7.3 7.5 7.8 7.5

Inflation (YoY) 4.0 7.5 9.6 9.8 9.8 8.3 7.5 6.6 7.3 7.3

1 Year T-bill rates 11.32 12.88 13.50 13.25 13.25 - - - - N/A

Exchange Rate 128.2 133.3 132.0 130.0 130.0 128.5 128.0 127.0 126.5 126.5

Forecasts - Full Year

Forecasts - Quarterly

Source: Standard Chartered Asia Focus, 24 September 2012 “The Resurgence”

Source: Standard Chartered Asia Focus, 24 September 2012 “The Resurgence”



Global Economic Prospects - World Economic Outlook

Global output is expected to remain sluggish in advanced economies but still relatively solid in many emerging markets and developing economies. Unemployment is likely to stay elevated in many parts of the world.

In many advanced economies, injections of liquidity are having a positive impact on financial stability and output and employment, but the impact may be diminishing.

In emerging markets and developing economies, activity has been slowed by policy tightening in response to capacity constraints, weaker demand from advanced economies, and country-specific factors.

The crisis in the euro area remains the most obvious threat to the global outlook. U.S. legislators must soon remove the threat of the fiscal cliff and raise the debt ceiling––if they fail to do so, the U.S. economy could fall back into recession, with deleterious spillovers to the rest of the world.

World Economic Outlook

2011Projections

2012 2013World Output 3.8 3.3 3.6Advanced Economies 1.6 1.3 1.5

United States 1.8 2.2 2.1Euro Area 1.4 -0.4 0.2

Germany 3.1 0.9 0.9France 1.7 0.1 0.4Italy 0.4 -2.3 -0.7Spain 0.4 -1.5 -1.3

Japan -0.8 2.2 1.2United Kingdom 0.8 -0.4 1.1

Emerging & Developing Economies 6.2 5.3 5.6Russia 4.3 3.7 3.8Developing Asia 7.8 6.7 7.2

China 9.2 7.8 8.2India 6.8 4.9 6.0ASEAN-5 1 4.5 5.4 5.8

Brazil 2.7 1.5 4.0Consumer Prices Advanced Economies 2.7 1.9 1.6Emerging & Developing Economies 7.2 6.1 5.8London Interbank Offered Rate (%)2

On US Dollar Deposits 0.5 0.7 0.6On Euro Deposits 1.4 0.6 0.2


Global Economic Prospects - World Economic Outlook (Cont…)

Downside Risks: Delayed or insufficient policy action in the euro area. The looming U.S. “fiscal cliff” and delay in raising the U.S. debt ceiling. ISI Group projects USD 220

bn of fiscal tightening in the USA in 2013, or 1.4% of GDP. JPMorgan projects a slightly higher figure of USD 266 bn, or 1.7% of GDP. The IMF reckons fiscal policy will tighten more in America in 2013 than in Spain, Italy or Portugal. This fiscal tightening could push the US economy back into recession.

The risk of core inflation undershooting targets, especially in other advanced Europe. Ongoing geopolitical risks and concern about associated potential disruption of oil supply.


Macro Trends

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

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Economic Capsule - September 2012