economic capsule march 2010

March 2010 Research & Development Unit

CBC Best in Sri Lanka for 12th Successive Year

Commercial Bank Maintains Profitability in Tough 2009

Commercial Bank Group Results for the year ended 31.12.2009

Further Relaxation of Foreign Exchange Transactions

IMF Views on Sri Lanka

Forbes’ World's Billionaires 2010

Financial Sector News

Economy and Business News

Snippets

Analysis & ForecastC

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Research & Development Unit ECONOMIC CAPSULE – March 2010

Financial Sector News

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Research & Development Unit

Commercial Bank Best in Sri Lanka for 12th Successive Year

The Commercial Bank of Ceylon has been declared Sri Lanka’s best bank in 2010 for a record 12th year running by Global Finance magazine (www.gfmag.com) giving Sri Lanka’s benchmark private bank a dozen of these prestigious international accolades.

The US-based financial publication’s latest listing of the ‘Best Emerging Markets in Asia’ is to be published in its May 2010 issue.

This is the 17th year that the magazine has selected top banking performers in emerging markets. The report covers the best banks in Asia, the Middle East, Africa, Latin America, and Central and Eastern Europe.

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Commercial Bank Group Results for the year ended 31.12.2009

Rs. Mn.

Rs. Mn.

Rs. Mn.

Rs. Mn.

The Commercial Bank Group has demonstrated characteristic resilience to maintain profitability in the year ending 31st December 2009 despite testing conditions on the local and global fronts and lower demand for credit.

CBC reported profit after tax of Rs 1,370.8 mn for the 03 months ending 31st December 2009, a growth of 26 % over the corresponding quarter of 2009.

The Bank’s operations in Bangladesh, described as ‘the jewel in the crown’ of Commercial Bank, and now comprised of 15 delivery channels and 13 ATMs, achieved a net profit of Rs 624.6 mn, for 2009 contributing 14.51 % to CBC’s bottom line.

Total income for the year reached Rs 43.614 bn. Operating income increased by 2.44 % to Rs 20.121 bn, helped by a growth of 57.9% in other income, and exchange profit which grew 12.49% to Rs 2.9 bn.

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Commercial Bank Maintains Profitability in Tough 2009

ECONOMY & BUSINESS NEWS

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Further Relaxation of Foreign Exchange Transactions

With effect from 11th March 2010, in relation to foreign exchange transactions,

The following categories of resident Sri Lankans will be permitted to open and maintain bank accounts abroad:

I. Persons earning foreign exchange from investments abroad as approved by the Central Bank,

II. Persons engaged in providing international professional services in Sri Lanka or abroad,

III. Persons engaged in any occupation abroad,

IV. Persons who have proceeded outside Sri Lanka for education and/or for medical treatment, and

V. Exporters of goods.

Forward contracts in foreign currency to cover foreign exchange transactions related to trade in goods and services, remittances and approved foreign lending and borrowings, will be permitted.

The present 100% margin deposit requirement against advance payments on the invoice value of selected items to be imported, will be removed.

The suspension on the pre-payment of import bills will be lifted. The existing different investment accounts, namely Share Investment External Rupee Accounts (SIERA), Treasury Bond

Investment External Rupee Accounts (TIERA), Treasury Bill Investment External Rupee Accounts (TIERA-2), and Treasury Bill/Bond Investment External Rupee Accounts – Deshabhimani (TIERA -D) maintained by non-residents in commercial banks will be permitted to be unified.

The unified account will be renamed as Securities Investment Account (SIA).

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IMF Views on Sri Lanka

Overall economic conditions are improving as expected The economy is poised for a recovery this year External balances are strong Remittance inflows continue at a high rate Tourism prospects are rapidly improving Gross reserves remain at comfortable levels

For end-December, 2009 the government has met the targets agreed under the program for net international reserves and reserve money.

The ceiling on domestic budget borrowing—consistent with the government’s overall deficit target of 7 % of GDP—was exceeded by a substantial amount.

This mainly reflects faster-than-expected infrastructure project implementation, higher interest payments, and sluggish fourth-quarter revenue growth.

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IMF Views on Sri Lanka (cont...)

IMF is currently assessing the implications of this outturn for bringing the underlying budget deficit to a sustainable level.

Despite this higher borrowing, as well as a recent uptick in year-on-year headline inflation, IMF continue to assess the central bank’s monetary policy stance as appropriate.

With bank lending only slowly beginning to rebound, and economic growth remaining below its potential, IMF see little sign of emerging demand-driven inflationary pressures.

The central bank has acted appropriately through its monetary operations by not allowing higher budget spending to be financed through the creation of additional liquidity.

The upward trend in inflation in recent months—reflecting the temporary effects of increases in food and other international commodity prices from low levels in 2009—is in line with IMF expectations and should peak somewhere mid-year before reversing itself in the second half of 2010.

This phenomenon is not unique to Sri Lanka and is currently taking place in many other counties as well. Overall, IMF expect average inflation for the year as a whole to stabilize in the high single digits.

Rank NameNet

Worth (USD Bn)

Fortune Source of Wealth Age Citizenship

1▲ Carlos Slim Helu & family 53.5 ▲ Self made Telecom 70 Mexico

2▼ William Gates III 53.0 ▲ Self made Microsoft 50 United States

3▼ Warren Buffett 47.0 ▲ Self made Berkshire Hathaway 79 United States

4▲ Mukesh Ambani 29.0 ▲ Inherited & Growing Petrochemicals, oil & gas 52 India

5▲ Lakshmi Mittal 28.7 ▲ Inherited & Growing Steel 59 India

6▼ Lawrence Ellison 28.0 ▲ Self made Oracle 65 United States

7▲ Bernard Arnault 27.5 ▲ Inherited & Growing LVMH 61 France

8▲ Eike Batista 27.0 ▲ Self made Mining, oil 53 Brazil

9▲ Amancio Ortega 25.0 ▲ Self made Zara 74 Spain

10▼ Karl Albrecht 23.5▲ Self made Aldi 90 Germany

World's Billionaires 2010#1 #2 #3 #4 #5 #6 #7 #8 #9 #10

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SNIPPETS - SNIPPETS - SNIPPETS - SNIPPETS - SNIPPETS - SNIPPETS - SNIPPETS - SNIPPE

SNIPPETS - SNIPPETS - SNIPPETS - SNIPPETS - SNIPPETS - SNIPPETS - SNIPPETS - SNIPPETS

Rs 2.5 Mn in cash for Commercial Bank’s ‘e-Exchange’ customers Beneficiaries of CBC’s ‘e-Exchange’ instant money transfer service can win cash prizes worth Rs. 2.5 Mn, in the forthcoming Sinhala and Tamil New Year season. Customers who receive money through the ‘e-Exchange’ service between 15th Mar-15th Apr 2010 will automatically be eligible. The draw will be conducted at the end of the promotion and 100 lucky winners will be rewarded with a cash prize of Rs. 25,000 each.

Saubhagya for SMEs In a bid to revive Small and Medium Enterprises (SMEs), the Central Bank of Sri Lanka (CBSL) announced the launch of a Rs. 27.8 bn credit line known as 'Saubhagya' to the sector, which is now available from all licensed commercial banks and specialised banks.

Accordingly, SMEs are now eligible to obtain loans up to a maximum of Rs. 20 mn for the restoration of affected SMEs at an interest rate of 9% p.a. and for new start-up SMEs and expansion activities at a rate of 10% up to a maximum of Rs. 500,000.

CBSL also stated that when dispersing funds, the SME borrower would have to fund 15% of the projects, and the remaining 85% would be made available as an SME loan.

A salient feature of the new credit line is that it comes with a five-year repayment period and six-month grace period.

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Removal of taxes on gold importsWith effect from 1 March 2010, all taxes and other levies applicable on gold imports have been removed. The removal of all applicable import taxes and other levies on gold imports will reduce the gold prices in the market and promote gold and jewellery industry in the country.

CBSL to commence payment of 20% bonus interest to senior citizens CBSL to commence payment in terms of the decision of the government to pay a 20% bonus interest to citizens over 60 years of age, on interest on their rupee savings and FDs held with licensed banks, with effect from 01.01.2010, subject to a limit of Rs. 120,000 p.a. Payment for the month of January 2010 will commence on 18.03.2010.



CBSL to sell USD 100 Mn in bonds The GOSL will be raising USD 100 Mn (over Rs. 11.5 Bn.) by issuing Sri Lanka Development Bond (SLDBs) to fund the interim budget. The offering will consist of USD 50 Mn. each in 2 year and 3-year bonds and will pay a coupon based on the 6-month LIBOR + risk premium.These tax-free bonds can be bought by foreign investors and local firms that can have foreign currency assets with approval from the state investment promotion agency. The minimum investment is USD 100,000 and thereafter in multiples of USD 10,000.

Sri Lanka tourist arrivals up 67.7% in FebruarySri Lanka’s tourist arrivals surged by 67.7 % to 57,300 in February 2010 from a year earlier, with steep increases in generating markets such as India, UK and Germany.

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Analysis & Forecast

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An Overview of Fiscal Performance

Fiscal adjustments towards containing the Budget deficit below 7.0% of GDP in 2009 suffered a setback due to;– Less than expected recovery particularly in trade based activities – More than envisaged adverse impact of the global economic crisis of 2008/09 on the Sri Lankan

economy.

The Budget deficit of Rs. 495,112 mn turned out to be 10.22% of GDP in 2009. This is primarily due to;

– in projected revenue by Rs. 23,580 mn or 0.5 % of GDP, – in interest payments by Rs.38,464 mn or 0.8 % of GDP– in public investments by Rs. 48,074 mn or 1.0 % of GDP over the projected level for 09’.

Government revenue - from the estimated level of Rs. 725,708 mn to Rs. 702,128 mn – The aberration in revenue outcome in 2008/2009 was a result of a continued deterioration in

revenue collection from VAT, import duties and excise taxes levied at the point of import, due to the erosion in the value of imports as the tax base.

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An Overview of Fiscal Performance (cont…)

Government expenditure - from Rs.1,091,566 mn or 22.2 % of GDP to Rs. 1,197,240 mn.

The overall debt to GDP ratio which continued to decline from over 100 % prior to 2005 to below 82 % by 2008, to 86.3 % in 2009 owing to;

– More than planned borrowings during the year and less than projected – nominal growth in GDP.

However, 75 % of the debt stock continued to reflect a medium to long term maturity structure in the debt profile. The short term foreign currency debt exposure remained below 7 % of total reserves while short term tradable domestic debt remained below 25 % of total domestic debt.

The Government external debt stock as of December 2009 stood at US$ 15.3 bn (Rs.1,760.4 bn). This was an of 8 % or US$ 1 bn compared to the debt stock at December 2008.

The total external debt service payments made in 2009 amounted to US$ 1,043.2 mn. Of this US$ 815.3 mn was for principal payments and the balance US$ 227.9 mn for the interest payments.

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The debt service forecast from 2009 – 2015 (in US$ mn)

Item 2009Actual

Forecast

2010 2011 2012 2013 2014 2015

Principal 815.3 544.3 652.3 1,224.1 830.3 855.7 1,448.9

Interest 227.9 266.3 302.2 315.3 275.1 269.5 247.4

Total 1,043.2 810.6 954.5 1,539.4 1,105.4 1,125.2 1,696.3Source: Department of External Resources

* Note: The higher debt service forecasts for 2012 and 2015 are due to the maturing in each of those years of US$ 500 million worth of international bonds issued in 2007 and 2009 respectively.

The total debt of the Government amounted to Rs. 4,161 bn at end 2009 in comparison to Rs. 3,589 bn at end 2008. The increase in total debt exceeded the nominal growth in GDP.

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2010 Budget Outlook

On the assumption that economy is projected to increase by 6 – 7 % in 2010 and most of the one off effects reflected in 2009 budget are likely to disappear, the pressure on Budget deficit is expected to ease in 2010.

The revenue for the year 2010 as a whole is projected to be Rs. 825 bn with tax revenue of Rs. 735 bn and non tax revenue of Rs. 89 bn.

The total expenditure for 2010 is estimated at Rs. 1,263 bn which constitute of Rs. 933 bn of recurrent expenditure & Rs. 342 bn of public investment.

The borrowings for 2010 on a net basis would be in the region of Rs. 415 bn. The total foreign borrowing on a net basis would be Rs. 102 bn while the balance will be borrowed domestically.

Source: Pre – Election Budgetary Position Report – March 2010

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.

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

‘Within a single-currency zone, habitual surplus countries tend to be matched by habitual deficit ones.’

Mar 13, 2010

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economic capsule march 2010

Economy & Finance