Economic Capsule - JULY 2013

July 2013

ECONOMIC CAPSULEJuly 2013

< Research & Development Unit >

FINANCIAL SECTOR NEWS Commercial Bank Only Sri Lankan Bank in Top 1000 Glob

al Banks for 3rd Successive Year

For the First Time, a Chinese Bank Takes the Top Spot in World Rankings

Central Bank Places Cap on Penal Interest Rates Charged on Loans and Advances by Banks, Finance Companies and Leasing Companies

Launch of the Common ATM Switch

NTB gets USD 15mn ADB Financing for SME Lending

BOC Raises USD 200 mn Syndicated Loan

ECONOMIC & BUSINESS NEWS Sri Lanka’s FDIs Reach USD 430 mn in 1H, 2013 Sri Lanka to Capture the Chinese Market Sri Lanka Teams up with Chinese Firm for USD 1.4 bn Port City Colombo and Hambantota Ports Declared as Free Ports Sri Lankan Experts in Global Hydro-Carbon Industry set up Home Co

mpany Price Revisions Inflation - July, 2013 External Trade Performance – May, 2013 Immense Potential in Sri Lanka for UK Companies — UK Trade and I

nvestment Head of South Asia Unit Fitch : External Finances Holding Up, Macroeconomic Performance

Stabilizing Moody's : Sri Lanka's Credit Profile has Stabilized Standard & Poor’s : Sri Lanka 'B+/B' Ratings Affirmed; Outlook Stabl

e World Economy: Growing Pains

C O N T E N T S

Financial Sector News


Commercial Bank Only Sri Lankan Bank in Top 1000 Global Banks for 3rd Successive Year

The Commercial Bank of Ceylon PLC has been ranked among the Top 1000 Banks of the World for a third successive year, becoming the only Sri Lankan bank to achieve this feat.

The prestigious ranking published annually by ‘The Banker’ of the UK, has ranked Commercial Bank at No 983 in 2013, with Tier I capital of USD 355 mn at the end of 2012.

The Top 1000 rankings are compiled from a database of over 5,000 banks worldwide and are widely recognized by the global financial community as the definitive guide to bank rankings and analyses.

No 983

2013


For the First Time, a Chinese Bank Takes the Top Spot in World RankingsEight years ago Industrial and Commercial Bank of China ranked 32nd among the world's top 1,000 banks by Tier-1 capital, which is mostly common stock and retained earnings. Within two years it was in the top ten, and at the end of last year, according to recent figures published by the Banker, it displaced Bank of America as the world's biggest—the first time a Chinese bank has held that position.

Notwithstanding China's recent financial hiccups, the country now accounts for four of the world's ten biggest banks and 96 of the top 1,000.

America can match China for top-ten banks, but Europe has just one: HSBC, which benefits greatly from its Asian operations.

.

Source: The Economist


Central Bank Places Cap on Penal Interest Rates Charged on Loans and Advances by Banks, Finance Companies and Leasing Companies

The Central Bank has requested banks to reduce the penal rates of interest charged on all loans and advances, including credit facilities already granted, to a level not exceeding 2 % per annum, whilst the finance companies and leasing companies have been requested to reduce the penal rate of interest to a level not exceeding 3 % per annum, with effect from 1 August 2013.

According to the Central Bank the current penal interest rates charged by banks are in the range of 2 % to 20 % per annum on the amount in arrears and sometimes on the total amount outstanding, over and above the original interest rates charged on the loan. In the case of finance companies and leasing companies, the comparative rates are even higher.


Launch of the Common ATM Switch

Pursuant to a recommendation made by the National Payments Council in November 2010, LankaClear Ltd. (LCPL), with the approval of the Monetary Board of the Central Bank of Sri Lanka, initiated the establishment of a Common Card and Payment Switch (CCAPS) to provide a common platform for electronic retail payments in Sri Lanka. The Monetary Board in August 2011 designated CCAPS as the National Payment Switch in Sri Lanka.

The first phase of CCAPS is the Common ATM Switch which will offer inter-linked service across all the ATM machines of commercial banks who are the members of CCAPS.

There will be such technological arrangements under separate phases of CCAPS for Point of Sale transactions, mobile payments and other electronic retail payments in future.

The Common ATM Switch commenced with the participation of Bank of Ceylon and People’s Bank, linking over 900 ATMs of those two banks. This will allow ATM cardholder customers of those two banks to withdraw cash and carry out balance inquiries from any ATM of those two banks.


NTB gets USD 15mn ADB Financing for SME Lending

BOC Raises USD 200 mn Syndicated Loan

Asian Development Bank (ADB) signed a USD 15 mn loan with Nations Trust Bank to finance Small and Medium-sized Enterprises (SMEs) located in Sri Lanka’s post-conflict and tsunami-hit areas.

Bank of Ceylon’s syndicated loan was oversubscribed enabling the bank to upsize the facility to USD 200 mn from the initial USD 150 mn after total bids amounted to USD300 mn.

Economy & Business News


Sri Lanka’s FDIs Reach USD 430 mn in 1H, 2013

According to Sri Lanks’s Investment Promotion Minister, first half of 2013 brought in USD 430 mn worth of FDIs (excluding the John Keels and Lake Leisure investments) and the country is likely to touch on USD 2 bn, by end of the year from USD 1.2 bn FDI fetched in 2012.

According to Board of Investment Chairman Dr. Lakshman Jayaweera the USD 430 mn has come mainly from China and Hong Kong, while project wise the investments have targeted a number of tourism sector projects, manufacturing projects, and mixed development projects.


Sri Lanka to Capture the Chinese Market

Sri Lanka Tourism is planning to capture the Chinese market within the next few years and has targeted 60,000 Chinese tourists for 2013.

Chinese tourists are fast becoming the travel industry’s number one growth segment and according to the China National Tourism Administration, 37.9 mn Chinese travelled abroad between January and May 2013, a growth of 17.3% from a year earlier.

With China likely to become the world’s largest economy by 2017 as predicted by the IMF, the outbound tourism market will also grow within the next few years.

Chinese Tourist Arrivals to Sri Lanka

9,625

Jan - Jun 12’

16,582 (72.3)

Jan - Jun 13’


Sri Lanka Teams up with Chinese Firm for USD 1.4 bn Port City

Sri Lanka Ports Authority will reclaim 230 hectares (568 acres) next to the new Colombo South port, according to SLPA chairman Dr. Priyath Bandu Wickrama.

The Chinese firm will invest in reclaiming the land and in infrastructure of the port city. It will be given around 50 hectare of reclaimed land on a 99-year lease for its investment. The 39-month long construction project is to start in September, stated Mr. Wickrama, adding the city would include eco-parks, residential areas, offices and shopping malls.

Sri Lanka has finalised a deal with China Communications Construction Co Ltd. to build a USD 1.4 bn city complex on reclaimed land near the Colombo harbour.


Colombo and Hambantota Ports Declared as Free Ports

The enterprises which will be benefited from this arrangement will be;

The enterprises which will be benefitted from this arrangement will be entrepot trade involving import minor processing and re-export, off – shore business where goods can be procured from one country or manufactured in one country and shipped to another country without bringing them to Sri Lanka.

Provision of front end services to clients abroad, operations of the headquarters of the leading buyers, logistic services are also will be covered by the regulations gazetted as Commercial Hub Regulations No 1 of 2013.

The minimum investment of a new enterprise which is engaged in business activities mentioned above should be USD5 mn. These companies are expected to achieve an annual re- export turnover of not less than USD 20 mn over a period of five years. If the business is engaged in logistic services such as a bonded warehouse or in the cases of operation of multi country consolidation in Sri Lanka the minimum investment will be USD 3 mn.

The government declared the sea ports of Colombo and Hambantota as free ports, in a bid to woo mega investments while bolstering regional and international trade.

Further, a gazzette issued by the Ministry of Finance and Planning envisages the Katunayake Export Processing Zone, Koggala Export Processing Zone and Mattala International Airport as bonded areas.


Sri Lankan Experts in Global Hydro-Carbon Industry set up Home Company

The Petroleum Resources Development Secretariat PRDS earlier this year opened the country’s second round of bidding for petroleum exploration licenses for 13 blocks located in Sri Lanka’s side of the Mannar and Cauvery basins with several other blocks in the east and south waters of the country also on offer for joint studies with a view to further assessing their hydrocarbon potential. The closing date for bids is November 30, 2013.

According to Ceylan Energy Chairman Harry Kulasinghe, “the country is swimming in oil and gas! the seismic information we have seen is very encouraging and we are confident that there are significant hydro-carbon deposits".

Top Sri Lankan professionals in the global hydro-carbon industry with over 100 years of collective experience launched the country’s first oil and gas exploration and production company, ‘Ceylan Energy’, with the intention of co-venturing with multinational oil companies bidding for an exploration licence.


Price Revisions

The excise duty on tobacco, cigarettes, liquor and ethyl alcohol was revised with effect from 31 July 2013.

The import duty on vehicle tyres, excluding for busses, vehicle parts, dairy products, including butter, liquor and tobacco products was also revised with effect from 31 July 2013.


Inflation - July, 2013

MonthCCPI (%) CCPI Core (%)

Year on Year (Y-o-Y)

Annual Average (A.A)

Year on Year (Y-o-Y)

Annual Average (A.A)

June 6.8 8.6 4.3 6.4

July 6.1 8.3 3.1 6.2

Headline inflation fell to 6.1% in July 2013, from 6.8% a month earlier, due to a statistical phenomenon called the base-effect.

External Trade Performance – May, 2013

Category Jan-May 2012 (US$ mn)

Jan- May 2013 (US$ mn)

Growth (%)

Exports 4,123.9 3,853.6 -6.6

Agricultural Products 965.0 924.7 -4.2

Industrial Products 3,127.8 2,915.7 -6.8

Mineral Products 26.6 8.3 -68.6

Imports 8,364.7 7,581.1 -9.4

Consumer Goods 1,392.6 1,250.5 -10.2

Intermediate Goods 4,957.8 4,431.9 -10.6

Investment Goods 1,999.9 1,893.7 -5.3

Deficit in the Trade Account 4,240.8 3,727.5 -12.1


Immense Potential in Sri Lanka for UK Companies — UK Trade and Investment Head of South Asia Unit

Visiting Sri Lanka for the first time, United Kingdom Trade and Investment (UKTI) Head of South Asia Unit, Esther Williams noted that the development witnessed in Sri Lanka was much more than what she perceived it to be. In a quest to find business opportunities for UK companies in Sri Lanka, Williams commends the nation for its innovative approaches, especially in the apparel industry.

Q: What do you think of Sri Lanka’s economy?

A: Despite the slight dip in 2012, Sri Lanka has been experiencing high growth rates for the past few years. These are growth rates that we are envious of as the UK and EU struggle out of the economic downturn.

The main reason for my visit to Sri Lanka is to learn about the opportunities for UK companies in an emerging market. Having just visited Bangladesh and India prior to arriving in Sri Lanka, I was struck by the massive amounts of ongoing infrastructure development in Colombo. It is clear that infrastructure development is very high on the agenda for the Government. There are many UK companies that would like to tie up with local companies to share their expertise in this sector.

Cont…


Immense Potential in Sri Lanka for UK Companies — UK Trade and Investment Head of South Asia Unit (cont…)

Q: What do you think makes Sri Lanka attractive for trade activity?

A: Sri Lanka’s geographical location makes it an ideal logistical hub. The expansion of the Colombo Port and the addition of the new Hambantota Port and Mattala Rajapaksa International Airport are good steps to enhance the country’s ability to handle larger transhipment volumes.

The business climate is viewed favourably and there is a perception that it is easier to do business in Sri Lanka than in some other countries in the region. Sri Lanka is ranked higher in the World Bank’s Ease of Doing Business Index than India (Sri Lanka at 81 and India at 132). Transparency International scores Sri Lanka at 79, which is higher than India and Bangladesh. Such factors are attractive for companies when looking at Sri Lanka as a market.

Sri Lanka also has the highest literacy rate in the region and a high skilled labour force, which is why you find companies like Marks & Spencer and Speedo producing technically advanced garments here.

I was amazed to see the use of nano technology in creating lingerie. Speedo produced the ‘fast skin’ swimwear which was used in the 2008 Olympics by the likes of Michael Phelps. All these elements make Sri Lanka an attractive destination for investors. Q: Your visit to Sri Lanka was to find opportunities in the country for UK companies. What do you think the opportunities are and in which sectors?

A: Tourism is an obvious sector but we see potential for investors in an already-developed ICT market, Business Process Outsourcing and manufacturing, particularly in apparel, given Sri Lanka’s expertise in that area.

We also see education as a key sector and the potential for Sri Lanka to become an education hub. There is also potential in renewable energy as Sri Lanka becomes energy independent.

We have seen that UK investors have already seized these opportunities. For example, we have two big UK firms operating in the ICT sectors – the London Stock Exchange Group and Aepona – both providing software solutions to worldwide customers. We know of another major apparel manufacturer starting operations in Sri Lanka.

Furthermore, the increase in infrastructure development in post-war Sri Lanka has provided a platform for major investments and we are seeing UK companies winning contracts for building bridges and flyovers in all parts of the island bringing communities together.

Source: Daily FT

ANALYSIS & FORECAST


Fitch : External Finances Holding Up, Macroeconomic Performance Stabilizing

Sri Lanka’s economy is growing at a more sustainable level as real GDP grew by 6.0% yoy in Q1,13 and CPI pressure has moderated, rising by 6.8% yoy in Q2,13.

Sri Lanka’s external finances remain a source of concern due to a heavy external debt refinancing schedule, where an average of USD1.9bn per annum in sovereign debt is projected to mature during 2013-2015

An intensification in external financing risks, an extended period of overheating or a significant deterioration in the public finances.

Rating Factors Status Trend

Public finances Weakness Stable

Macroeconomics Neutral Stable

Structural issues Neutral Stable

External finances Weakness Stable

Strengths and Weaknesses Sustained improvements in both the public and external finances.

Key Rating Drivers

Upsides

Downsides


Moody's : Sri Lanka's Credit Profile has Stabilized

Sri Lanka’s ‘low’ economic strength reflects the country’s narrow economic base, although growth in per capita income and real GDP has been steady.

Through 2013 and 2014, Moody’s expect growth to remain below 7%, but more in line with Sri Lanka’s estimated potential growth rate of 6.75%.

Sri Lanka has moderate institutional strength, supported by a relatively strong degree of data transparency and a default-free debt record. Policy effectiveness- previously a weakness - also improved since 2012.

Cont…


Moody's : Sri Lanka's Credit Profile has Stabilized (cont…)

Sri Lanka has made significant progress in reducing its budget deficits, to 6.4% in 2012 from 9.9% of GDP in 2009. However, the deficit still remains above the B-median of 4.8% of GDP in 2012

The susceptibility to event risk assesses whether a shock resulting from economic, financial or political events could materially impact a government’s credit profile.

We assess Sri Lanka’s vulnerability to such risks as moderate, primarily reflecting political risks associated with the ongoing reconciliation process with the relatively recent end of the nearly three-decade long civil war. We consider that economic and financial risks are low.


Standard & Poor’s : Sri Lanka 'B+/B' Ratings Affirmed; Outlook Stable

Standard & Poor's affirmed its 'B+' long-term and 'B' short-term sovereign credit ratings on Sri Lanka. The outlook on the long-term rating is stable.

Sri Lanka has weak external liquidity, moderately high and increasing external debt, and a weighty government debt and interest burden. In addition, some of the country's political institutions lack extensive checks and balances.

Sri Lanka's robust growth prospects support the ratings. Growth drivers include government measures to reconstruct the northern districts, improve the finances of public enterprises, and limit inflation to single digits.

Agency Rating Outlook Action DateFitch BB - Stable Rating & Outlook Affirmed April, 2013

Moody’s B 1 Stable Revised the Outlook from Positive July, 2013

Standard & Poor’s B + Stable Rating & Outlook Affirmed August, 2013


World Economy: Growing Pains Global growth is projected to remain subdued at slightly above

3 % in 2013, the same as in 2012. Downside risks to global growth prospects still dominate:

while old risks remain, new risks have emerged, including the possibility of a longer growth slowdown in emerging market economies, especially given risks of lower potential growth, slowing credit, and possibly tighter financial conditions if the anticipated unwinding of monetary policy stimulus in the United States leads to sustained capital flow reversals.

Stronger global growth will require additional policy action. Specifically, major advanced economies should maintain a supportive macroeconomic policy mix, combined with credible plans for reaching medium-term debt sustainability and reforms to restore balance sheets and credit channels.

Many emerging market and developing economies face a trade-off between macroeconomic policies to support weak activity and those to contain capital outflows. Macroprudential and structural reforms can help make this trade-off less stark.

(Year on Year) 2012 2013p 2014p

World Output 3.1 3.1 3.8

Advanced Economies 1.2 1.2 2.1

United States 2.2 1.7 2.7

Euro Area -0.6 -0.6 0.9

Japan 1.9 2.0 1.2

Emerging Markets & Developing Economies 4.9 5.0 5.4

China 7.8 7.8 7.7

India 3.2 5.6 6.3

P - Projections Source: IMF, WEO Update, July 2013

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

"If you want to succeed and grow, you have to balance the

invisible hand of economics with the visible hand of good governance"

Kishore Mahbubulani (Kishore Mahbubani is a notable academic and former Singaporean diplomat. He is currently Professor in the Practice of Public Policy and Dean of the Lee Kuan

Yew School of Public Policy at the National University of Singapore )

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Economic Capsule - JULY 2013