economic capsule july 2012

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ECONOMIC CAPSULE

July 2012

ECONOMIC & BUSINESS NEWS External Sector Performance – Jan-May 2012

Sri Lanka: Selected Economic Indicators

Fitch Affirms Sri Lanka at 'BB -'; Outlook Stable

FINANCIAL SECTOR NEWS

Commercial Bank Wins Euromoney’s “Best Bank in Sri Lanka” Award

Commercial Bank Wins Finance Asia’s “Sri Lanka’s Best Bank” Award

Commercial Bank Among the Top 1000 Banks in the World Again…

RAM & Fitch affirms CBC ratings…

New operational measures for transfers between Non-Resident Foreign Currency (NRFC) and Resident Foreign Currency (RFC) Accounts

ANALYSIS & FORECAST

IMF Latest Projections on World Economy

Roubini Predicts a Perfect Storm in 2013...


C O N T E N T S

ECONOMIC & BUSINESS NEWS


External Sector Performance – Jan-May 2012

Gross Official Reserves (GOR) amounted to USD 5,815 mn by end May 2012.

In terms of months of imports, GOR were equivalent to 3.4 months of imports by end May 2012.

It is estimated that with the receipt of the final tranche of USD 414 mn under the Stand-by Arrangement (SBA) facility and the proceeds of the fifth international sovereign bond of USD 1 bn, GOR to have risen to around US dollars 7.1 billion by end July 2012, which is equivalent to an import cover of 4.2 months

A Summary of External Sector Performance (Jan-May) 2011USD mn

2012USD mn

Growth %

Exports 4,255.5 4,023.9 -5.4Agricultural 1,012.7 893.7 -11.8 of which, tea 594.3 530.1 -10.8Industrial 3,225.0 3,011.2 -6.6 of which, Textiles and garments 1,683.3 1,601.2 -4.9Mineral 14.1 25.9 83.9Imports 7,611.5 8,208.1 7.8Consumer Goods 1,481.3 1,383.5 -6.6Intermediate Goods 4,632.9 4,821.0 4.1 of which, Petroleum 1,802.8 2,168.1 20.3 Textile and textile articles 954.6 903.8 -5.3Investment Goods 1,477.6 1,989.2 34.6Balance of Trade -3,356.0 -4,184.2 -24.7Workers’ Remittances 2,103.0 2,475.2 17.7FDI (c) 437.0 Portfolio Investments (Net) (d) -66.8 186.5 379.2Commercial Banks’ Long-term FC Borrowings (e) 927.5 Earnings from Tourism 318.1 397.1 24.9Inflows to the Government 952.9 1,746.1 83.2

(c)Estimated FDI inflows to major projects (including loans) are for the period January-May 2012. This estimate may be revised based on the survey conducted by the BOI.(d)Net Portfolio investments are recorded for June and cumulative figures are for January- June of respective years.(e)Commercial Banks’ Long-term Foreign Currency Borrowings during the period January- June 2012.


Sri Lanka: Selected Economic Indicators

GDP and inflation (in percent) 2010 2011 2012 P 2013 PReal GDP growth 8.0 8.3 6.8 6.7Inflation (end-of-period) 6.8 4.9 9.5 7.0Core inflation (end-of-period) 8.9 5.3 7.2 6.5Public finances (as a % of GDP) Total revenue (including grants) 14.9 14.5 14.3 14.7Expenditure 22.8 21.4 20.5 20.5Budget deficit -8.0 -6.9 -6.2 -5.8Govt. debt (domestic and external) 81.9 78.5 80.9 79.4Money and credit (% chg. end of period) Reserve money 18.8 21.9 17.8 20.0Broad money 14.9 20.1 17.8 18.1Private sector credit 24.7 34.5 20.3 14.8Balance of payments (in USD Mn) Exports 8,626 10,559 10,482 11,010 Textiles & garments 3,356 4,191 4,100 4,160 Tea 1,440 1,492 1,401 1,437Imports -13,450 -20,213 -20,199 -21,292 Oil imports 3,019 4,686 4,732 5,012Current account balance -1,076 -4,543 -3,201 -3,053Current account balance (in percent of GDP) -2.2 -7.7 -5.4 -4.7FDI Inflows (USD Mn) 435 900 1,449 1,870Gross official reserves (end of period) In millions of U.S. dollars 6,410 5,734 6,680 7,206In months of imports 3.5 3.1 3.4 3.4


Fitch Affirms Sri Lanka at 'BB -'; Outlook Stable

Fitch Ratings has affirmed Sri Lanka's Foreign- and Local-Currency IDRs at 'BB-'. The Outlook for both ratings is Stable. The Country Ceiling has also been affirmed at 'BB-', and the Short-Term Foreign Currency IDR at 'B'.

According to Fitch's ratings, authorities have taken appropriate action to correct recent pressure on the balance of payments and place it on a more sustainable trajectory.

Given the weakened state of Sri Lanka's external finances and a heavy external debt refinancing schedule through to 2013, the authorities' ability to persist with policies that address existing macroeconomic imbalances and improving external liquidity is crucial.

Although Sri Lanka was able to record real GDP growth over 8% for the second consecutive year in 2011, such economic performance, coupled with policy missteps, resulted in the current account deficit rapidly widening to 7.8% of GDP from 2.2% in 2010. This, in conjunction with deterioration in the external economic environment and limited currency flexibility, led to balance of payment pressures and in turn a sharp depletion of foreign exchange (FX) reserves to USD 5.8 bn (3.4 months of imports) in January 2012 from USD 8.1 bn (equivalent to 5.7 months of imports) in July 2011.

The pace of deterioration in external buffers, rather than their level, is Fitch's main focus. The level of FX reserves meets with international conventions and does not indicate an immediate risk of substantial balance of payments stress. However, Fitch believes the rapid depletion of FX reserves in H211 has heightened the vulnerability of the Sri Lankan sovereign credit profile to a spike in global risk aversion.


Fitch Affirms Sri Lanka at 'BB -'; Outlook Stable (cont…)

Therefore, the resumption of IMF tranche disbursements following the implementation of policy measures aimed at macroeconomic rebalancing is a positive development.

More importantly, measures implemented by the Central Bank of Sri Lanka and the government since February 2012 have tightened monetary conditions and could help Sri Lanka to return to a more sustainable GDP growth trajectory over the long-term.

In the near-term, certain policy measures have resulted in adverse risks to both growth and inflation that have the potential to impact policy consistency. Due to the authorities' pro-growth bias and the fragile balance of payments, Fitch believes developments in the coming months warrant close monitoring.

Fitch notes that the government has been able to rationalise expenditure and continue consolidation efforts despite lower-than-expected fiscal revenues. As a result, the fiscal deficit (including grants) narrowed to 6.9% of GDP in 2011 from 8% in 2010 and public debt declined to 78.5% of GDP from 81.9%.

Further simplification of the tax system could bolster measures announced in previous budgets and aid in the attraction of greater foreign direct investment inflows.

FINANCIAL SECTOR NEWS


Commercial Bank Wins Euromoney’s “Best Bank in Sri Lanka” Award

Euromoney, a leading international financial magazine, has adjudged the Commercial Bank “The Best Bank in Sri Lanka”, for 2012.

The selection criteria for these awards involves an in-depth analysis by Euromoney editors based on qualitative and quantitative criteria such as market position, volume of business transacted, new product development, management system, credit ratings, efficiency ratios and annual key performance indicators.


Commercial Bank Wins Finance Asia’s “Sri Lanka’s Best Bank” Award

Euromoney, a leading international financial magazine, has adjudged the Commercial Bank “The Best Bank in Sri Lanka”, for 2012.

The selection criteria for these awards involves an in-depth analysis by Euromoney editors based on qualitative and quantitative criteria such as market position, volume of business transacted, new product development, management system, credit ratings, efficiency ratios and annual key performance indicators.


Commercial Bank Among the Top 1000 Banks in the World Again…

Sri Lanka is once again represented in the top 1,000 banks in the world, with the inclusion of the Commercial Bank to this prestigious annual ranking by the UK based ‘The Banker’ magazine.

Commercial Bank is ranked 963 in the Top 1000, 2012 ranking, rising from 986 in 2011.


RAM & Fitch affirms CBC ratings…

RAM Confirms Commercial Bank’s AA+ Rating

RAM Ratings Lanka has reaffirmed Commercial Bank ’s long- and short-term financial institution ratings at AA+ and P1, respectively; the long-term rating has a stable outlook. The ratings are premised on the Group’s strong market position as Sri Lanka’s largest privately owned licensed commercial bank (LCB) and third-largest overall LCB. The ratings also reflect the Bank’s strong franchise and healthy financial performance, funding and liquidity, as well as good capitalisation levels.

Fitch Affirms Commercial Bank of Ceylon at 'AA(lka)'/Stable

Fitch Ratings Lanka has affirmed Commercial Bank of Ceylon PLC's (CBC) National Long-Term rating at 'AA(lka)' with a Stable Outlook. The agency has also affirmed CBC's subordinated debentures at 'AA-(lka)'.


New operational measures for transfers between Non-Resident Foreign Currency (NRFC) and Resident Foreign Currency (RFC) Accounts

i. New operational measures for transfers between Non-Resident Foreign Currency (NRFC) and Resident Foreign Currency (RFC) Accounts:

a. The following transactions in relation to NRFC and RFC accounts held in the same bank or different banks irrespective of the holder of account or currency type in which accounts are maintained, will be permitted:

i. Fund transfers between NRFC accounts.

ii. Fund transfers between RFC accounts.

iii. Fund transfers from NRFC accounts to RFC accounts.

b. Opening of NRFC/RFC accounts by minors will be permitted through the credit of inward remittances received from their guardians/parents who are non-residents, or through the transfer of funds from existing NRFC accounts of such

guardians/parents.

c. Debits to NRFC accounts are freely allowed.

d. In respect of fund transfers between NRFC/RFC accounts, the bank which transfers funds should issue a confirmation to the receiving bank that the funds so transferred were originated from NRFC/RFC accounts.

Cont.…


New operational measures for transfers between Non-Resident Foreign Currency (NRFC) and Resident Foreign Currency (RFC) Accounts (cont…)

ii. New operational measures for “Foreign Exchange Earners’ Accounts” (FEEA):

A single foreign currency account, unifying several existing foreign currency accounts maintained in the banking system by foreign exchange earners will be introduced.

Such new account, titled “Foreign Exchange Earners’ Account” (FEEA) will replace the following:a. Exporters’ Foreign Currency (EFC) Account; b. Indirect Exporters’ Foreign Currency Account (IEFCA); c. Foreign Currency Account for Suppliers of Inputs (FCASI); d. Foreign Currency Account for Professional Services Providers (FCAPS); e. Non Resident Foreign Currency Accounts for Foreign Employment Agencies; f. Foreign Currency Account for Gem and Jewellery dealers, and temporary/ special foreign currency accounts authorized

by the Controller of Exchange.

Accordingly, exporters, indirect exporters, suppliers of inputs, professional services providers, entrepot traders, gem and jewellery dealers, insurers, insurance brokers, travel agents, hoteliers, bunker suppliers and other residents who undertake foreign projects would be permitted to execute their current international transactions through this new FEEA.

ANALYSIS & FORECAST


IMF Latest Projections on World Economy

According to IMF, an already sluggish global recovery shows signs of further weakness, mainly because of continuing financial problems in Europe and slower-than-expected growth in emerging economies.

The latest IMF Outlook projects that the global economy will grow 3.5 % this year, down 0.1 % points from the April forecast, and 3.9 % in 2013, 0.2 percentage points lower.

These forecasts, however, are predicated on two important assumptions: that there will be sufficient policy action to allow financial conditions in the euro area periphery to ease gradually and that recent policy easing in emerging market economies will gain traction.

Growth momentum has also slowed in various emerging market economies, notably Brazil, China, and India. This partly reflects a weaker external environment, but domestic demand has also decelerated sharply in response to capacity constraints and policy tightening over the past year. Many emerging market economies have also been hit by increases in investor risk aversion and perceived growth uncertainty, which have led not only to equity price declines, but also to capital outflows and currency depreciation.


Roubini Predicts a Perfect Storm in 2013...

A Perfect Storm in 2013...

Nouriel Roubini, the New York University professor dubbed "Dr Doom", stated a number of unpleasant factors would combine to derail the global economy in 2013. Escalation of the eurozone crisis. Further tax increases and spending cuts in the US that may drive the world's

largest economy into recession; A hard landing for China's economy; A further slowdown in emerging markets; War with Iran.

"Next year is the time when the can becomes too big to kick it down [the road]...then we have a global perfect storm”.

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

“The greatest failure is the failure to try…”

- William Arthur Ward

economic capsule july 2012

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