economic capsule - november 2010

ECONOMIC CAPSULE

November 2010

Research & Development Unit

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Financial Sector News

CBC PERFORMANCE - First 09 months results, 2006-2010

12th ‘Best Bank’ Award from Global Finance

National Business Excellence Awards 2010

News from Commercial Bank

Budget 2011

Summary of the Budget 2011

Broad –based Tax Reforms Across All Key Sectors

Public Investment to Foster Inclusive Growth and Drive Infrastructure Development

Relaxation of Foreign Exchange Regulations

Corporate Debt Regulations

External Trade Performance – September, 2010 & Inflation – November, 2010

Snippets

Economic & Business News

FINANCIAL SECTOR NEWS

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CBC PERFORMANCE - First 09 months results, 2006-2010


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More Awards & Accolades for CBC…

Commercial Bank retained its status as the

leading private commercial bank in Sri Lanka,

winning the “Best Bank” Award from Global

Finance for the 12th consecutive year.


Overall Winner – Gold AwardBanking Sector – Winner

Extra Large Category – WinnerExcellence in Performance Management

Practices –Winner

12th ‘BEST BANK’ Award from Global Finance National Business Excellence Awards 2010

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News from Commercial Bank…

Margin Trading allows customers to borrow against their existing shares for additional investments in shares listed on the Colombo Stock Exchange (CSE).

The Bank will make direct payments to the broker for the purchases made.

The Bank also offers;

Fast facility approvals, Attractive interest rates

With the largest Single Borrower Limit amongst local private sector banks, structuring of large facilities is also possible.

CBC Introduces Margin Trading

Commercial Bank extended its e-Exchange Instant Money Transfer Service to Malaysia by joining with International Money Express (IME), one of the leading remittance services companies in Malaysia.

Utilising IME’s extensive network of 58 branches Sri Lankan expatriates in Malaysia can now send money home with ease.

CBC Launches Money Transfer Services In Malaysia


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News from Commercial Bank (Cont…)

The Commercial Bank of Ceylon PLC has commenced issuing chip-integrated Credit and Shopping Debit cards under the Visa brand, becoming the first bank in Sri Lanka to offer locally personalised chip cards.

Offering significantly enhanced security features, these chip cards can be used at points of sales in Sri Lanka and anywhere in the world for purchase of goods and services and for cash withdrawals at ATMs, the Bank said.

Since the personalisation of the card is done locally, the Bank can issue these cards faster to its customers, supporting their fast-paced lifestyle. All new Visa Credit and Shopping Debit cards issued by Commercial Bank and renewals would contain embedded chips with integrated circuits

Commercial Bank launches Chip Card with VISA


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More than 100 representatives of leading corporate institutions gained valuable insights into making ETF payments a hassle free online process at the latest awareness programme on ‘Paymaster,’ an innovative electronic payment mechanism offered by the Commercial Bank of Ceylon, held at Taj Samudra Hotel, Colombo.

The highly secure Paymaster service enables virtually, instant transfer of funds between parties maintaining accounts at Commercial Bank. There are no limits to the number of transactions and any number of payments can be accommodated in a single file sent to Paymaster. The popularity of the facility has lead to its widespread use and more than 1300 corporate clients use it at present.

Commercial Bank’s Paymaster Demo Attracts Corporates

ECONOMIC & BUSINESS NEWS

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Summary of the BUDGET 2011

2010

Revised2011

Budget

Total Revenue and Grants (1) 828.3 986.1

Total Revenue 812.1 963.5

Tax Revenue 720.0 862.1

Non Tax Revenue 92.0 101.4

Grants 16.2 22.6

Total Expenditure (2) 1,275.0 1,419.9

Recurrent 926.0 1,017.0

Public Investment 359.0 413.7

Other (10.0) (10.8)

Budget Deficit (1) - (2) (446.7) (433.7)

Budget Deficit/GDP (%)(Excluding Grants)

(8.0) (6.8)

BUDGET 2011

• Broad-based tax reforms impacting key sectors such as wholesale and retail trade, telecommunications, banking and finance and capital markets is the central theme of the budget.

• The proposed move towards a lower tax regime, with a reduction in corporate income tax to 28% from 35%, effective 01 April 2011, is likely to have a positive impact on all sectors. Tourism, banking and finance, agriculture and construction will be the key beneficiaries.

• Measures to improve export competitiveness and address the widening trade deficit point to a structural shift in the economy, from reliance on traditional exports to more diversified, value-added manufacturing and a more aggressive approach to capital formation.

• The proposed removal of the provincial turnover tax (1%) on wholesale and retail trade from January 2011, and introducing NBT (2%) to the wholesale and retail trade is arguably one of the most far-reaching reforms, impacting nearly all industries as well as consumers.

Broad-based Tax Reforms Across All Key Sectors

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Broad-based Tax Reforms Across All Key Sectors (Cont…) BUDGET 2011

• The tax reforms also include a surprise increase in the threshold for Pay As You Earn (PAYE) tax to LKR 600,000, while the highest tax rate has been reduced to 24% from 35%. Historically, income tax and VAT have been the biggest contributors to tax revenue.

• The reduction in income tax rates should also increase household disposable income, providing a much-needed boost to consumer spending.

• The inclusion of all public-sector incomes under the PAYE system, will help to broaden the tax base.

Financial-services VAT will be reduced from 20% to 12% to encourage banks to build capital for higher lending. However, banks will be required to create an investment fund at the central bank which can be utilised to grant long-term loans at a lower interest rate, which may impact profitability and returns available to fund providers.

The lifting of the debit tax on bank withdrawals is likely to promote greater use of the banking system by taxpayers and ease the tax burden on banks and financial institutions.

The proposed tax reforms would have little impact on capital markets. Other than a 0.1% increase in the share transaction levy, no changes are made to direct and indirect taxes applicable to share trading and capital markets.

Capital gains and profits from share trading remain exempt from income tax and other indirect taxes.

Banking and Finance

Reconstruction and construction activity should receive a boost from a reduction in the income tax to 12% from 15%. Further, a reduction in customs duties on selected goods and raw materials; capital allowances of 33% on acquisition costs for plant and machinery; and a 10% rate on the cost of construction of new buildings will also strengthen the sector.

Construction

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A single 20% telecommunications levy will replace all of the complex indirect taxes that were previously applicable.

VAT exemptions for high-tech equipment and machinery on which the sector depends should spur further capital investment and add impetus to the country’s rising status as an emerging IT hub.

IT and business process outsourcing (BPO) services are the country’s fifth-largest export segment.

Telecommunications

Broad-based Tax Reforms Across All Key Sectors (Cont…)

The imposition of a levy of USD 20 per bed on five-star hotels charging a room rate of less than USD 125 per night (effective 01 January 2011) is expected to drive rate premiums and boost sector earnings, which have shown only a moderate yoy increase.

Lack of tourism infrastructure and capacity have been highlighted as critical stumbling blocks to attracting more tourists in the medium term. The proposed 25% reduction in duties and taxes on passenger transport vehicles as well as the reduction in customs duties and VAT on machinery and equipment should facilitate refurbishment and expansion.

Tourism

CESS (a local tax) on all raw and semi-processed exports should encourage value-added exports, particularly tea and rubber.

A reduction in duties and taxes on machinery, equipment and raw materials will make world-class technology more accessible to enterprises.

Income tax rate reduced to 10% from 15% for industries with domestic value-addition in excess of 65%.

A reduction in income tax for all other industries to 12% from 15% to encourage general exports.

A proposed reduction in tax on profits to 28% from 35% should prompt domestic manufacturers to increase production.

Trade

Tax breaks to tea and rubber companies and subsidies for replanting and new planting of tea, rubber and coconuts along with fertiliser subsidies and seed farming development initiatives should drive growth in this sector.

Agriculture and Plantations

BUDGET 2011 Back to Contents


Taxes - Vat reduced from 20% to 12%, Nation Building Tax (NBT) reduced to 2% from 3%, Social Responsibility Levy (SRL) of 1.5% abolished, Regional Infrastructure Development Levy (RIDL) of 5% abolished.

Electric and hybrid vehicles will be completely freed from excise duties and value added tax. Duties and taxes on passenger transportation vehicles will be reduced by 25%.

Broad-based Tax Reforms Across All Key Sectors (Cont…)

Proposed rural development initiatives point to a push for ‘inclusive’ growth and are likely to empower the rural sector. Public investment in the rural sector is set to increase by 0.3% in 2011, with the aim of providing greater access to electricity, road networks, drinking water and telecommunications services as well as promoting food and energy security for rural communities.

Subsidies and transfers will be raised by 5.1% (to 3.7% of GDP), and fertiliser subsidies to farmers will be retained to support the growing agriculture sector.

An increase in transfer payments can be attributed to the resettlement of 278,000 internally displaced persons in the liberated north and east, which is more than 90% complete.

Gradual economic connectivity (integrating the rural poor into the broader economic landscape) through a USD 2bn reconstruction programme providing basic infrastructure facilities is on course for completion by 2012.

The 87% increase in allocations to education and health care to LKR 54 bn is also encouraging.

Infrastructure development spending also received a boost, increasing 9.1% to LKR 359.7bn.

A further LKR 64bn has been allocated for the expansion of power generation and distribution networks, as the country targets 100% electrification by 2015 from 83% currently.

Public Investment to Foster Inclusive Growth and Drive Infrastructure Development

Vehicles



The budget includes several FX liberalisation measures, the details of which were later announced by the Central Bank of Sri Lanka.These measures are intended to encourage international trade and hence greater two-way movement in the Sri Lankan rupee (LKR). It is also a step towards fulfilling the central bank’s commitment under the IMF loan programme

Beneficiary Facilityw.i.f. November 22,2010

Foreigner Can invest in Rupee denominated debenturesSri Lankan company Can borrow from foreign sourcesForeign company Can open places of business in Sri LankaForeigners on tour or Business in Sri Lanka Can open accounts in foreign currency in Sri Lanka

Staff of foreign embassies Can open foreign currency accounts in Sri Lanka

Importers Advanced payment on imports increased from USD 10,000/= to USD50,000/=

Importers and indirect Exporters of gems and jewellery

Can open foreign currency accounts in Sri Lanka.

w.i.f. January 01,2010Sri Lankan residents Can invest in equity of overseas companies & pay for setting up

places of business outside Sri Lanka.Insurers Can invest up to 20% of long term fund & technical reserves

abroad.

More Budget Highlights….

Relaxation of Foreign Exchange Regulations Foreign investors can now invest in LKR-denominated

listed debentures issued by local companies. A variety of debentures are eligible for investment –

convertible, non-convertible, redeemable and non-redeemable. However, the debenture should have an outstanding credit rating from a rating agency acceptable to the Securities and Exchange Commission of Sri Lanka.

Sri Lankan companies can now borrow up to USD 20mn from foreign lenders in foreign currency (mainly international banks, finance institutions, multilateral financial institutions and export credit agencies).

However, the minimum repayment period of such a loan has to be three years, and the cost of borrowing should not be more than 200bps over Sri Lanka’s prevailing (USD-denominated) International Sovereign Bond yield in the secondary market.

To expedite the loan approval process, the CBSL has set up a loan approval committee which will assess applications and communicate the decision within two weeks from the date of receipt of the application.

Additionally, companies in select sectors have been permitted to borrow, irrespective of their capacity to repay the loans out of their foreign exchange earnings, which is otherwise a prerequisite.

Corporate Debt Regulations



Sri Lanka’s external sector performance improved further in September, 2010 (YoY) reflecting enhanced trade and higher remittances.


External Trade Performance – September, 2010

Category

Jan - Sep2009

US$ mn

Jan - Sep2010

US$ mn

Change%

Exports 5,119.49 5,703.30 11.4 Imports 7,136.59 9,742.44 36.5 Balance of Trade -2,017.09 -4,039.14 100.3 Workers’ Remittances 2,481.40 2,814.50 13.4

Inflation – November, 2010

Inflation, as measured by the Colombo Consumers’ Price Index (CCPI), increased to 7.0% in November 2010, on a point-to-point basis, from 6.6% in October, 2010 mainly due to the increase in prices of rice, vegetables, coconut, coconut oil, big onions, red onions, potatoes, and fish and sea food. Meanwhile, prices of fresh fruit, eggs and chicken declined.

The annual average inflation registered a marginal increase to 5.8% in November from 5.4% in the previous month, as a result of the price developments in the preceding twelve month period.

However, the core inflation, which measures the price movement of non-food and non-energy items of the CCPI basket, remained at 5.6 per cent on a year-on-year basis, in November 2010 as in the previous month. On an annual average basis core inflation increased marginally to 6.4% in November 2010 from 6.3% in October 2010.

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

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

Sri Lanka and India have inked a deal for a USD 416.39 Mn credit from India's export import bank to rebuild railways in the north.

Sri Lanka gets USD 416.39 mn Indian Credit for Railways

Sri Lanka gets more Indian Aid for Coal Power Plant India is giving Sri Lanka a USD 200 Mn soft loan to build a jetty at Sampur to unload coal and a transmission

line from Sampur to north-central Habarana. India is also offering financial support for the equity contribution of the Ceylon Electricity Board (CEB) to set

up the joint venture with India's National Thermal Power Corporation (NTPC) for the coal power plant at Sampur, near the Trincomalee port.

India and Sri Lanka are to resume talks in December 2010 on a Comprehensive Economic Partnership Agreement (CEPA) that had been stalled due to protectionist lobbies on the island.

A delegation from the Ministry of Commerce and Industry of India would visit Sri Lanka on mutually convenient dates in December 2010 to resume discussions on such a framework from where they had been left in July 2008.

Sri Lanka, India Free Trade Talks to Resume in December

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Cont..>>>

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

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

The Government of Japan has provided a grant of Japanese Yen 1,217 Mn (approximately Rs. 1,650 Mn) for reconstruction of 5 bridges in the Eastern Province.

Under the grant agreement, four bridges between Padiyathalawa and Eravur on the A5 in Maha Oya and Eravurpattu DS Divisions and the Panichankerny bridge and causeway on the A15 (Trincomalee-Batticaloa Road) will be reconstructed.

The project will be implemented by the Road Development Authority under the supervision of the Ministry of Ports and Highways. The project will be administered by the Japan International Cooperation Agency (JICA) on behalf of the Government of Japan.

The Central Bank has decided to introduce a guarantee scheme to compensate banks that grant cultivation loans accepting land as collateral to facilitate farmers to practice their livelihood in the districts of Mullaitivu, Kilinochchi and Mannar.

A bank granting cultivation loans to a person residing in the said districts will be eligible to receive a guarantee from the Central Bank under certain conditions.

This scheme will be in operation until 31 December 2012 and will be reviewed thereafter.

According to Finance Ministry Secretary Dr. P B Jayasundera, Sri Lanka is expecting up to USD 500 Mn worth of investments on a key beachfront re-development in Colombo.

Mr. Jayasundera had stated that, development of the Galle Face area, Colombo's most prominent beachfront, is part of a large plan to redevelop Colombo. The government is declaring the Presidential Secretariat, the Treasury and the Galle Face Hotel as heritage buildings and a military camp in the area would be shifted .

A government committee is entertaining proposals to develop Colombo. Hotel, shopping mall and apartment development by Hong Kong-based Shangri-La group has been approved, according to recent reports.

Up to 400 hectares near Galle Face will be reclaimed from the sea by the Sri Lanka Ports Authority and roads will be expanded in Colombo to take up the new projects.

Guarantee Scheme for Cultivation Loans

Sri Lanka Beachfront InvestmentRs. 1.6 b Grant from Japan to Rebuild Bridges in the East

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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.

It is the mark of an educated mind to be able to entertain a thought without accepting it.

- Aristotle -

economic capsule - november 2010

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