Economic Capsule - November 2013

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Economic Capsule

November 2013

ECONOMIC & BUSINESS NEWS

Results for the nine months ended September 30, 2013

FINANCIAL SECTOR NEWS

C O N T E N T S

Budget 2014 – Summary Budget Highlights 2014 Government Revenue Proposals Aitken Spence to Build US$ 100 mn Resort in Ahungalla Sri Lanka to Sign USD 2 Bn FDI Deals Colombo Port City Other Investments Sri Lanka GDP grows 7.8 % in 3Q, 2013 External Sector Performance – September 2013 The Wealthiest Sri Lankans – Forbes Asia

Financial Sector News


Commercial Bank Results for the 09 months ended September 30, 2013

Economy & Business News


BUDGET 2014 - SUMMARY 2013 2014 Budget

Total Revenue and Grants 1,203.1 1,469.5

Total Revenue 1,183.1 1,437.4

Tax Revenue 1,052.2 1,274.6

Non Tax Revenue 130.9 162.8

Grants 20.0 32.0

Total Expenditure 1,712.4 1,985.6

Recurrent 1,224.9 1,328.3

Public Investment 503.9 668.5

Other (16.4) (11.1)

Revenue Surplus(+)/Deficit(-) (41.7) 109.2

Budget Deficit Surplus(+)/Deficit(-) (509.2) (516.1)

Total Financing 509.2 516.1

Total Foreign Financing 149.8 235.5

Total Domestic Financing 359.3 280.6

Revenue and Grants/GDP (%) 13.8 14.8

Expenditure/GDP (%) 19.7 20.0

Budget Surplus (+)/Deficit (-) / GDP (%) (5.8) (5.2)

(Rs. Billion)

Total Expenditure 2014

Total Revenue 2014

Source: Ministry of Finance & Planning, PwC

Budget Highlights 2014

Source: PWC


Budget Highlights 2014

Banking & Finance

Any finance companies which are subsidiaries of a main company to be absorbed by the main company to consolidate their operations;

Similarly, finance companies owned by a banks are also to consolidate their operations by acquiring finance companies within the group;

The cost of acquisition or merger of banks or finance companies by the main company will be given qualifying payment status for tax purposes; to be claimed within 3 years of assessments.

Also, development banks are encouraged to merge and CRIB to be improved to facilitate both banks and customers; and Any bank, finance company, insurance and manufacturing activities liable to tax at 28% will be given half tax holiday of

three years provided such company is listed its shares on the CSE in 2014. NBT: The business of providing banking and financial services which were hitherto exempt from NBT has been made

liable to NBT. The Banking and Finance sector was excluded from NBT on banking business from the inception of the NBT law. The imposition of NBT @ 2% would mean that a turnover based tax is imposed on this sector after a lapse of 15 years. However, it appears that post budget discussions are moving toward imposing the 2% NBT on Banking and Finance sector profits liable to financial VAT. This is yet to be finalised by the ministry and gazetted.


Budget Highlights 2014 (cont…)

Shipping and aviation Income of shipping industry will be taxed at 12% to be in par with export sector income tax rates; Aviation services and related activities for payment in foreign currencies will also be treated as exports for VAT

purposes and be exempt from NBT.

External trade Government endeavors to reach India, Japan, China, Australia, S.Arabia, UAE, Qatar, Russia, South Africa and Brazil in

addition to America and Europe in order to achieve new waves of export growth. In this regard: Credit facilities at rates not exceeding 8% for manufacturing and SME industries are expected to be provided to

modernize their factories to be energy efficient to achieve international competitiveness; Online facilities will be extended to imports in relation to ports and customs and USD 20 bn in 2020 is expected from

exports.

Telecommunication Levy Present rate of 20% will be revised to 25%



Ownership of lands by foreigners Foreigners will only be allowed to access both state and private lands through long-term leases; Land lease tax will be implemented to protect long-term value of lands; and A 15% WHT will be collected upfront when leasing both state and private lands to foreigners.

State enterprises All previous loans granted to Ceylon Electricity Board, National Water Supplies and Drainage Board, Airport & Aviation

Services and Sri Lanka Ports Authority by the Treasury will be converted to Government Equity;

VAT on Wholesale and retail trade The present threshold of quarterly value of supplies of any person or partnership carrying on a business of wholesale or

retail trade for the chargeability to VAT, will be reduced from Rs 500 mn to Rs 250 mn. Whether a subsidiary or associated company of a group of companies, engaged in a wholesale or retail sale, has reached

the liable threshold for any quarter will be determined based on the aggregate value of supplies of each company in the group, engaged in such trade, for that quarter.


Fisheries and livestock Higher custom based taxes on import of these products while further expanding incentives granted to export of fish products and

ornamental fish; LKR 1,000 mn allocated to development of existing fisheries harbors and higher taxes on import of fishing boats; Special loan scheme at interest of 8% will be implemented to SMEs in the dairy sector while higher import CESS on butter,

yoghurt and dairy products; and a pricing formula to be introduced to poultry.

Agriculture A three-year plan is proposed to rehabilitate all abandoned paddy lands and to put them back into productive use.

LKR 2,300 mn has been proposed for this task including rehabilitation of tanks and minor irrigation schemes; Value added exportation of coconut, tea, rubber, cinnamon and pepper will be encouraged via strengthening of export CESS; A comprehensive assessment of underperforming plantation companies out of those privatized on 50-year lease agreements will

be performed. Those companies that had performed well will be provided a credit scheme with eight year maturity at 6% subject to conditions, and LKR 500 mn will be earmarked for this development loan scheme;

A pension scheme for farmers over 63 years of age will be implemented from 2014. A government contribution of LKR 1,000 mn is provided for this fund; and

LKR 500 mn will be provided for research work of agricultural faculties on food technology.



Financial support for livelihood


All banks and financial institutions are requested to grant at least 500 working capital loans of LKR 25,000 each at the rate of 6% without any collateral to selected families;

Women Entrepreneurship to be improved and Regional Development banks and SME banking units of commercial banks to provide working capital loans up to LKR 250,000 with no collateral

Public service Cost-of-Living allowance of public servants will be raised by LKR 1,200 per month; and Pensioners who retired before 2006 and others will receive LKR 600 and 400 per month respectively.

Skills development The Government has secured around USD 350 mn budget support from the World Bank and the Asian Development Bank to

supplement Government expenditure on skills education. A deduction of 10% of income tax payable by a ship operator or any agent of a foreign ship will be allowed in consideration of the

provision of skill development in the shipping industry to trainees. The criterion for the deduction will be decided based on the number of individuals trained.



An allocation of Rs. 2,500 mn to build a state-of-the-art Post Graduate Institute of Medicine over the next 3 years. Setup a Centre of Medical Excellence to continue to obtain the services of specialized medical professionals after the completion

of their service term and to broaden specialized medical services in our country.

Sri Lanka as a Regional Medical Hub

Professional Services Hub Where any individual engaged in any profession alone or together with such other individuals, set up a consortium with a bank

and the construction contractors for the purpose of constructing a residential apartment complex for their own residential purposes, following concessions will be accorded;

Bank providing loan facility will be taxed only at half of the applicable rate on the interest on such loans granted to such individuals for that purposes.

Qualifying payment of an amount not exceeding Rs. 50,000 per month on the capital repayment will be allowed to be deducted in full by such individuals, on the respective payment.

Stamp Duty applicable on the deed of transfer of the property will be reduced by 25 % thereof.



It is proposed to develop an ICT Zone at Hambantota as the emerging ICT Hub of South Asia, capitalizing on the newly built infrastructure such as the Port, Airport, expressway and the railway network, by promoting investments in this zone.

The new Revenue Protection Order provides a better classification for IT and IT related products under a single tariff band with reduced rates of import duty.

Removal of the prevailing anomalies relating to VAT on hardware and software and further simplify taxation. Allocation of Rs.1,000 mn to implement a 3 year program inclusive of the expansion of Nanasala centers with reading facilities in

the villages, in line with the new IT policy strategy of the Government. The transformation of public institutions by introducing web based facilities to enable the provision of public services such as issuance of construction permits, land and property registration, investment approvals etc. on line, is a major component of this reform agenda.

IT Industry Development

Following concessions will be given to the professionals who establish corporate entities to provide international services Half of the applicable corporate income tax rate for a period of 5 years on services liable to tax; Concessions of 10 % of the aggregate taxes and duties on the importation of a motor vehicle will be allowed, if more than USD

100,000 per year is remitted to Sri Lanka in any consecutive period of distinct 3 years.

Professional Services Hub (cont...)


Proposal Revenue( Rs. Mn)

Extension of NBT to banking and financial institutions 3,665

Strengthening the application of Value Added Tax at supermarket and trade scale (Quarterly turnover of Rs. 250 mn and exemption limited to 25 percent of turnover) 15,000

Telecommunication Levy to be fixed at 25 percent 4,000

Revision in depreciation of motor vehicle for Customs Duty 2,000

Revision in CESS on Primary Commodity Exports and items vulnerable to undervaluation to ensure domestic value chain 4,000

Revision in Special Commodity Levy / Customs Duty for the support of local value addition 12,750

Total 41,415


Rs.bn 2012 Est. 2013 2014Total Revenue and Grants 1,067.5 1,203.1 1,469.5 Total Revenue 1,051.4 1,183.1 1,437.4 Tax Revenue 908.9 1,052.2 1,274.6 Income Tax 172.6 239.5 283.3 Taxes on Goods and Services 519.1 578.0 688.0 Taxes on External Trade 217.2 234.7 303.3 Non Tax Revenue 142.5 130.9 162.8 Grants 16.1 20.0 32.0Total Expenditure 1,556.5 1,712.4 1,985.6 Recurrent 1,131.0 1,224.9 1,328.3 Salaries and Wages 347.8 391.4 410.6 Other Goods and Services 140.0 132.2 191.8 Interest 408.5 444.8 441.0 Subsidies and Transfers 234.7 256.4 284.7 Public Investment 443.9 503.9 668.5 Education and Health 46.1 55.5 74.1 Infrastructure 397.8 448.4 594.4 Other (18.4) (16.4) (11.1) Revenue Surplus(+)/Deficit(-) (79.5) (41.7) 109.2 Budget Deficit Surplus(+)/Deficit(-) (488.9) (509.2) (516.1) Budget Surplus (+)/Deficit (-) / GDP (%) (6.4) (5.8) (5.2)

Summary of the Budget 2014

Aitken Spence to Build US$ 100 mn Resort in Ahungalla

Aitken Spence will partner with RIU-Hotels Spain to build US$ 100 mn resort in Ahungalla spearheading the first business model around Southern development.

Aitken Spence PLC will launch the first business model involving the Southern Highway and the Mattala Airport by investing in a US$ 100 mn beach resort in Ahungalla to be managed by an international hotel chain. The five storey 500 roomed 5 star luxury resort which will be managed by RIU Hotels, Spain, would also be a first for the Spanish chain, being their inaugural project in the Asia Pacific region.

The project will also be unique in its concept, since it will introduce charter flights to the country. The hotel which would cater to high end customers looking for long stay vacations will arrive on Boeing 787 Dreamliner charters which can carry upto 200 to 300 passengers at a time. RIU Hotels, is an all-inclusive model which has seen international success across 107 properties managed by them in 16 countries.


Sri Lanka to Sign USD 2 Bn FDI Deals

Project Investing Company AmountUSD Mn Completion by

Port City ColomboThis includes breakwater, reclaiming land on sea, road construction, water and drainage facilities and other infrastructure for the proposed artificial island in Colombo.

China Communications Construction Co Ltd.

1300(USD 390 mn equity and USD 910 mn of

loans)

8 years

Mixed Development Project This includes commercial buildings, malls, service apartments and multi-level car parks in Sir James Peiris Mawatha, Colombo.

Australia’s Property Alliance Capital Co. 450 5 years

Apartment Complex (528-unit)The project includes a housing, apartment and a shopping complex in Colombo.

AVIC International Engineering of Hong Kong.

250 5 years


ColomboPort City

The project by China Communications Construction will build the port city on a 233 hectare site that will be reclaimed from the sea.

The site is next to Sri Lanka’s main port and Colombo’s historic Galle Face Green seafront.

According to the proposed deal, 108 hectares of land will be given to the Chinese firm after the port city development, while 63 hectares and 60 hectares of land will be given for public usage and the State-run Sri Lanka Ports Authority respectively.

The land will be given to the Chinese company on a 99-year lease and the project will be completed in eight years.

It has already created new land near the proposed port city as part of its expansion of the Colombo Port to double its capacity by 2015.


Other InvestmentsProject Investing Company Amount

Build a Golf Course andTwo hotels in Hambantota and Katunayake

−A resort in Mattala will have a golf course, a 250-room hotel and a tax free shopping complex.

−A 200-room transit hotel in Katunayake will also have a 1000 vehicle car part and tax free shopping facilities.

China Harbhour Engineering Company

Over USD 500 Mn



Sri Lanka GDP grows 7.8 % in 3Q, 2013

Category (USD mn)Jan-Oct

2012

Jan- Oct

2013

Jan- Oct (%)

Growth

Exports 8,075.0 8,368.3 3.6

Imports 15,752.2 15,583.9 -1.1

Balance in the Trade Account -7,677.3 -7,215.7 -6.0

Workers’ Remittances 4,940.8 5,521.9 11.80

Foreign Direct Investments (1H) 614.7 870.1 42.0

Earnings from Tourism 790.5 996.2 26.0

External Sector Performance – October 2013

3Q, 2012 3Q, 2013

Gross Domestic Product (GDP) 4.8 7.8 Agriculture -0.5 7.0

Industry 7.3 8.1

Services 4.6 7.9

SL’s 2013 economic growth will stand at a minimum of 7.2%, according to the Central Bank Governor, down from an earlier forecast of 7.5%.

Earnings from exports in October, 2013 exceeded USD 1 bn for the first time in the history.

Earnings from textiles and garments exports grew by 46.8 %, year-on-year, to USD 436 mn in October 2013, which was the highest monthly value of export of garment and textiles ever recorded.

The Wealthiest Sri Lankans – Forbes AsiaDhammika Perera

Dhammika Perera’s estimated $550 mn fortune is most likely one of the four biggest in Sri Lanka. It’s impossible to rank the four piles because much of the wealth is held in private assets, but in alphabetical

order, here are the other three:

Sohli and Rusi Captain

Family is the largest shareholder in conglomerate John Keells Holdings and Chemical Industries Colombo. Investments include banking, paint, agribusiness, raw materials, packaging and pharmaceuticals. Stock market wealth totals $185 mn. Father Sohli turned 80 in September; son Rusi, 48, a graduate of the University of Miami in Florida, is an entrepreneur and investor.

Harry Jayawardena

Chairman of the Stassen Group, which he founded as a tea exporter in 1977, and conglomerate Distilleries Co. of Sri Lanka. The 71-year-old was awarded the Knight’s Cross of Dannebrog by Queen Margrethe II of Denmark for his contributions to Danish arts, sciences and business.

The brothers’ empire is largely private. Their listed companies Carson Cumberbatch, Bukit Darah, Ceylon Beverage Holdings and others are involved in palm oil, financial management, brewing, real estate and hotels. Hari, 64, and Mano, 66, are the grandsons of an Indian immigrant who arrived in Colombo nearly 100 years ago, started a petrol station and never stopped expanding.

Hari and Mano Selvanathan

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

Economy & Finance

Economic Capsule - November 2013