economic capsule november 2011

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November 2011

ECONOMIC CAPSULE November 2011

C o n t e n t s

FINANCIAL SECTOR NEWS IFC & Commercial Bank Structure Landmark USD 65 mn Facility for SMEs in S

ri Lanka

Commercial Bank’s 2010 Annual Report Becomes the BEST Annual Report

Group Results for the 09 Months ended 30.09.2011

Commercial Bank Offers NRFC Accounts in Chinese Yuan (Renminbi)

Service Points Openings

Analysis & Forecast Sri Lanka: Prospects for 2012


ECONOMIC & BUSINESS NEWSSri Lankan Economy Grew 8.4 % in 3Q 2011

Budget 2012 - Highlights

Key Taxation Proposals 2012

Snippets

Latest Developments in Colombo : Former Dutch Hospital - Colombo's New "Shopping Precinct" - Independence Square and Adjacent Area Opened for Public - Sri Lanka to Develop Colombo Fort into Tourist Attraction

Sri Lanka Tourism - National Geographic Traveler Names Sri Lanka Among “Best of the World Must See Places for 2012” - Sri Lanka Tourism Targets - Sri Lanka's to get USD 300 mn Sheraton Hotel

S&P Warns of Broad Euro Zone Downgrade Over Debt Crisis

OECD Countries - Weighed Down by Debt


FINANCIAL SECTOR NEWS

IFC & Commercial Bank Structure Landmark USD 65 mn Facility for SMEs in Sri Lanka


The International Finance Corporation (IFC), a member of the World Bank Group, has extended a seven-year, USD 65 mn (approximately Rs 7.4 bn) financing facility to the Commercial Bank to expand the Bank’s lending to Small and Medium Enterprises (SME).

IFC’s largest financial markets investment in Sri Lanka to date, the facility is also the first future flow-backed financing done for a bank in South Asia, and is expected to help about 20,000 small businesses, create improved economic conditions that reduce poverty, and improve access to credit in underserved areas, including the north and east of Sri Lanka.

Commercial Bank’s 2010 Annual Report Becomes the BEST Annual Report


Overall Category Winner

Banking Sector Gold Award

Corporate Governance Category Silver Award

Management Discussion & Analysis Bronze Award

Commercial Bank 2010 Annual Report won the following awards at the "Excellence in Annual Reports Awards - 2011" competition organized by The Institute of Chartered Accountants of Sri Lanka.

Group Results for the 09 Months ended 30.09.2011


Commercial Bank’s Net Profit Tops Rs 6 Bn at 3Q 2011Interest income generated by the robust growth of the loan book, gains from the reduced effective tax rate and a noteworthy contribution from non-interest income have enabled Commercial Bank to accelerate profit growth in the first nine months of 2011 and post sector-leading financial results befitting its status as the country’s benchmark private bank.

Cont…

Commercial Bank Offers NRFC Accounts in Chinese Yuan (Renminbi)


Commercial Bank is now offering Non-Resident Foreign Currency (NRFC) accounts in the Chinese Yuan following its inclusion as a Designated Currency in Sri Lanka by the Central Bank.

The enhancement comes several weeks after the Bank began offering customers the option of transacting in Yuan for export and import dealings with counterparts in China, thereby substantially reducing conversion losses and time lapses in the conversion process.

Service Points Openings – Commercial Bank


209 Passara

210 Katunayake*

*Commercial Bank opened its first 24-hour Banking Centre in Sri Lanka in the vicinity of the Bandaranaike International Airport at Katunayake, providing convenient round-the-clock access to banking facilities to out and in-bound travellers as well as residents of the area.


ECONOMY & BUSINESS NEWS

Sector (growth rates -%) 3 Q 2010 3 Q 2011

Agriculture, Forestry and Fishing 6.0 6.2

Tea 2.8 -6.9

Paddy 31.8 12.4

Inland – Fishing 9.7 32.6

Marine - Fishing 15.3 14.3

Industry 8.8 10.8

Gem Mining 10.2 23.7

Textile Wearing apparel & leather 3.2 10.2

Construction 11.3 17.3

Services 8.0 7.8

Import trade 11.4 14.2

Export trade 1.2 7.5

Hotels and restaurants 32.2 27.2

Banking insurance and real estate 8.5 7.4

Gross Domestic Product 8.0 8.4

Sri Lankan Economy Grew 8.4 % in 3Q 2011

Sri Lanka's economy grew 8.4 % in the 3Q 2011 compared to the 8.0 % in the 3Q of 2010.


BUDGET 2012 - HIGHLIGHTS


(Rs Bn) 2010 2011 2012 Budget

Revenue and Grants 834.2 937.0 1,126.1

Total Expenditure 1,280.2 1,397.2 1,594.9

Recurrent Expenditure 937.1 1,018.8 1,107.9

Public Investment 356.5 389.0 497.5

Budget Deficit (446.0) (460.0) (468.9)

Source: Budget Speech 2012

Budget Summary

(as a % of GDP)2010

Projections

2011 2012 2013 2014

Revenue 14.6 14.1 14.7 15.0 15.5

Tax Revenue 12.9 12.7 13.3 13.7 14.2

Non Tax Revenue 1.7 1.5 1.4 1.3 1.3

Expenditure 22.9 21.4 21.2 20.9 20.7

Current Expenditure 16.7 15.6 14.7 14.6 14.4

Public Investment 6.4 6.0 6.6 6.5 6.5

Budget Deficit -8.0 -7.0 -6.2 -5.8 -5.2

Government Debt 81.9 78.2 74.2 70.3 66.4

Source: Department of Fiscal Policy

Medium Term Macro Fiscal Framework: 2011-2014

Cont…

BUDGET 2012 – HIGHLIGHTS (Cont…)


Proposal to depreciate the rupee exchange rate by 3% with immediate effect to correct the disadvantageous trade balance position and to encourage exports.

Proposal to enter in to agreement with emerging economies in Asia , Africa and South America on trade, tourism , foreign employment and investment.

New Investment Priorities

Extending tax holidays of 4-6 years with regard to investments in the range of Rs 50-300 mn. The minimum investment required to be made in areas such as agriculture and information technology will be Rs 25 mn.

Proposal to extend a 6-12 year tax holiday and other tax incentives to investments in the range of Rs 300-2,500 mn.

Investment Incentives

Cont…



The Investment Fund Account balances of banks as a result of tax savings due to concessions granted in the previous budget to enable the respective banks to venture into long term lending during the next two years.

Permission to borrow from abroad.

Proposal to simplify taxes applicable to the credit and interest payments involving international financial transactions.

Profits and income of a newly setup branch of a commercial bank dedicated to development banking of SMEs is proposed to be taxed at 24% down from the prevailing rate of 28%.

Profit and income from redemption of a unit or unit trust or mutual fund is exempted from income tax.

Banking and Business Development

Cont…



Proposal to increase the subsidy given to tea small holders for re-planting from Rs 250,000 to Rs 300,000 and for new plantations from Rs 50,000 to Rs 150,000.

Introduction of a concessionary loan scheme at 8% annual interest repayable in seven years to assist plantation companies to re-plant and plant.

Proposal to promote joint ventures between tea producers and export companies to encourage tea exports under trade names registered in Sri Lanka.

Reduction in income tax payable by such joint ventures which will be engaged in tea exports under Sri Lanka brand names up to 12%.

Enhance the allocations made to improve tea and rubber cultivation and develop related research by a further Rs 200 mn. A further allocation of Rs 150 mn to the Export Agriculture Department to provide cultivation aid to promote intercropping of

cinnamon, pepper, cardamoms and cocoa. Reduction in taxes on equipment required for promotion of high quality water management techniques. Tax concessions to promote the private sector to set up high standard processing factories, with deductions of research and

development expenditure permitted from taxes.

Export Development

Cont…



Amendments to tax laws to permit SMEs , whose annual turnover does not exceed Rs 500 mn , to deduct expenditure of the year prior to the commencement of the enterprise , from the income of the first year in which income tax is payable

Small enterprises engaged in the collection of fresh milk, green tea leaves, cinnamon, latex will be exempted from Nation Building Tax.

SMEs with a quarterly turnover of less than Rs 500 mn to be exempted from paying Economic Service Charge , up to Rs 100 mn

Reduction in taxes on import of machinery and equipment where such machinery and equipment are not manufactured in Sri Lanka.

Bank of Ceylon, People’s Bank and Regional Development Bank to set up a special SME bank branch in all districts within 2012.

Proposal to reduce prevailing income tax rate from 28% to 24% for interest income from such SME banking and other fee levying activities.

Threshold income tax of SMEs for Economic Service Charge increased from Rs 25 mn to Rs 50 mn.

Small and Medium Enterprises

Cont…



Increase in salaries of public servants by 10% of the basic salary with non staff categories given the increase from January 2012 and staff grade officers to be given 5% of the increase in January 2012 and the balance 5% from July 2012.

The Public Service

Priority to develop 1,000 high quality secondary schools that could be improved to meet universal standards and 5,000 well performing primary schools.

Allocation of further Rs 2,500 million for the school development program which is co-financed by the Asian Development bank, the World Bank and USAID.

A Knowledge Society

Cont…



The allocation at national and provincial level for health services in 2012 is Rs 105 bn with Rs 500 bn investment to be made between 2011-2014.

A Healthy Society

Proposal to extend tax relief to the private sector to promote production of pharmaceuticals and enter in to contracts to import high quality pharmaceuticals.

Reduction in the income tax on health services to 12% to promote private health care investments.

Pharmaceutical Manufacturing Industry

Cont…



The profits and income from the activities carried out as research and development by a person other than a company to be reduced to a maximum rate of 16%.

Proposal to reduce income tax on all institutions engaged in research and technology to 20% and the supply of research & development services of such institutions to be exempt from VAT.

Allocation of Rs 300 mn to the National Council to encourage special research that would facilitate economic development.

Research and Technology

Proposal to allocate Rs 500 mn to broad base the IT Labs set up under the Nanasala Centres. Telecommunication charges on incoming and outgoing calls to be revised with development priorities.

Information Technology

Cont…


Proposal to exempt all taxes imposed at the point of customs on the importation of yarn.

Removal of VAT and custom duty on equipment required to modernize the industry.

Introduction of an all inclusive tax of Rs 75/- on a kilo of material imported to simplify the tax payable.

Proposal to reduce the income tax burden and extend long term tax holidays if substantial new investments have been made to modernize existing textile factories and related new investments made respectively.

Imposition of a CESS of Rs 25/- on each item released to the local market by exporters and high taxes imposed on importation of garments.

Textile Industry


Cont…


Visa fees for online visa facilities will be USD 10 for SAARC countries and USD 20 for others. No levy of visa fees on travellers from countries that do not charge a visa fee from Sri Lankans. Proposal to reduce taxes at the point of import by 50% for those operating transport services to and from the

airports.

Tourism

Proposal to construct domestic airports in Kandy, Nuwara Eliya, Batticaloa, Trincomalee, Hingurakgoda, Sigiriya, Anuradhapura and Iranamadu to facilitate domestic air travel.

Rs 750 mn will be allocated to commence construction of airports in Iranmadu, Nuwara Eliya and Kandy.

Domestic Airports


Source: Budget Proposals 2012 - PWC



Investment Limits (for New Enterprises)Small scale enterprises Agriculture and/ or processing, Animal husbandry and/ or processing, Fisheries and/ or fish processing or Creative work including art work will be eligible for 4 year tax holiday if a minimum sum of Rs 25 mn is invested.

Medium scale enterprisesEngaged in any specified activity will be eligible to a tax holiday as follows;

Income Tax

Investment Tax Holiday Rs 50 mn - Rs 100 mn 4 years Rs 100 mn - Rs 200 mn 5 years Over Rs 200 mn 6 years Cont…



Large scale enterprises Agriculture & forestry, Animal husbandry, Processing & solid waste management, Specified manufacture, Specified services, Any other activity approved by the Minister of Finance, will be eligible for tax holiday depending on the size of investment is as follows;

Investment Tax Holiday

Rs 300 mn - Rs 500 mn 6 years

Rs 500 mn - Rs 700 mn 7 years

Rs 700 mn - Rs 1,000 mn 8 years

Rs 1,000 mn - Rs 1,500 mn 9 years

Rs 1,500 mn - Rs 2,500 mn 10 years

Rs 2,500 mn and above 12 years

Income Tax - Investment Limits (for New Enterprises) (Cont…)

Cont…



Strategic Import Replacement Enterprises The production of the following items to replace imports will be eligible for following concessionsNew enterprises: the concessionary income tax rate will be applicable for a period of 5 years.Expansion of existing enterprises: both of the concessionary income tax rate and the qualifying payment relief will be applicable for a period of 5 years.

Income Tax (cont…)

Product Investment Limit

Concessionary Tax Rate

Cement USD 50 Mn 12 %Steel USD 30 Mn 12 %Pharmaceutical USD 10 Mn 12 %Fabric USD 05 Mn 12 %Milk Powder USD 30 Mn 12 %

The importation of plant, machinery or equipment by the enterprises referred to in above will be deferred during the project implementation period, and such deferment will be treated as an exemption on the fulfilment of the conditions specified by the Board of Investment of Sri Lanka with the concurrence of Commissioner General of Inland Revenue.

Cont…



Concessions The production of the following items to replace imports will be eligible for following concessions

Value added teaA grower cum manufacturer of tea , who established a joint venture with a tea exporter for the purpose of exporting pure Sri Lanka tea in value added form , with a Sri Lankan brand name, will be tax at lower rate of 12%.

Handloom industryTax rate will be reduced to 12%.

Health care servicesTax rate will be reduced to a maximum of 12%.

Income Tax (cont…)

Cont…



Value Added Tax Effective from January 1, 2012, the 5% restriction will be removed and the tax payers will be

permitted to claim the balance against any tax administrated by the Commissioner General of Inland Revenue, or the Director General of Telecommunication Regulatory Commission subject to the limit of 10% of the unabsorbed balance as at December 31, 2010, until the residue of the unabsorbed balance as at December 31, 2010, (after deducting the amount already set off up to December 31, 2011) is fully absorbed.

Exemptions from VAT granted on the import/supply of listed goods and services.

Economic Services Charges The current threshold of Rs 25 mn per quarter will be increased to Rs 50 mn per quarter

for payment of ESC. Source: Budget Proposals 2012 - PWC


Four Companies to Start Building Factories in H’totaFour companies will begin building factories in the Hambantota economic zone starting December 2011, according to Sri Lanka Ports Authority Chairman Dr. Priyath Bandu Wickrama.The Cabinet has granted approval to proposals from an Indian sugar company (Shree Renuka Suger),a Singaporean petrochemical plant (Peak Energy),a Pakistani cement grinding factory (Thatta Cement Company ) and a local fertiliser (Hayleys Advantis). The USD 7.4 mn fertiliser plant by Hayleys Plc in partnership with Hong Kong-based Dragon Asia Fertiliser Ltd. has already commenced building.

Increased Limits on Foreign Investments in Government SecuritiesThe Central Bank of Sri Lanka, on 5th December 2011, has decided to raise the current threshold for foreign investments in Treasury bills and Treasury bonds from 10 % of the outstanding Treasury bill and Treasury bond stock to 12.5 % in order to support the growth momentum of the economy by enhancing resource availability, while also easing the domestic savings-investment gap and thereby mitigating any pressure on interest rates.

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

China, Sri Lanka's Top LenderChina has emerged as the top lender to Sri Lanka in the nine months to September 2011, in terms of foreign financing disbursements. Up to September 2011, China has disbursed USD 599.9 mn (38%) out of total foreign financing disbursements of USD 1,573.9 bn.China also committed the most money to new projects in the nine months to September accounting for USD 784.7 mn out of a total foreign financing commitments of USD 1,802.09 mn.

The site is now open for public 24x7, including the newly constructed bikers' path and the walking lanes that run across the National Library and the national Archives Department.

Independence Square and Adjacent Area Opened for Public

Former Dutch Hospital - Colombo's New "Shopping Precinct"

A new shopping precinct at the former Dutch Hospital of Colombo was opened for public as the latest tourist attraction in the city. The shopping precinct consists of 12 stalls including a restaurant, jewelers, textile and handicraft stalls.

Sri Lanka’s tourism authorities together with the UDA have laid plans to develop the Fort area in the heart of the island’s commercial capital Colombo into a tourist attraction, capitalizing on the colonial architectural.

Authorities now want to capitalize on the historical architecture to make the area a tourist attraction starting from the 17th century Dutch Hospital.

According to Mr. Nihal Fernando, director general of Urban Development Authority, two more buildings behind the Dutch hospital belonging to the British Colonial era are already being renovated to be used for tourism development while the broader plan for the city includes development of the area starting from the south gate of the Colombo harbor to the shores of the Beira Lake. From the Beira Lake to D. R. Wijewardena Mawatha, UDA is working with the World bank to create a pedestrian promenade. From that point onwards going down to end of DR W Mawatha, facilities will be available for pedestrians. The entire stretch is going to be for tourism activities.

Sri Lanka to Develop Colombo Fort into Tourist Attraction (LBR, 02 December 2011)

by Dominic Sansoni

Sri Lanka Tourism Targets Sri Lanka Tourism welcomed the arrival of the record 800,000th tourist on 19th December, 2011.Nalaka Godahewa, chairman of Sri Lanka Tourism Development Authority, expects a foreign income of USD 800 mn by end 2011 while the target for 2012 is to lure 950,000 tourists. The industry is currently the fifth largest forex earner to the country.

Sri Lanka has been among the 20 best destinations to visit in 2012 by National Geographic Traveler, which has focused on the island's hill country.

National Geographic Traveler Names Sri Lanka Among “Best of the World Must See Places for 2012”

Sri Lanka's to get USD 300 mn Sheraton Hotel

India's ITC Ltd, franchisee for US-based Sheraton leisure group is to invest USD 300 mn in Sri Lanka's on a beachfront in Sri Lanka's capital Colombo.The mixed development project will be built on five acres of state land which will be given on a 99-year lease for USD 73.5 mn in a deal approved by the cabinet of ministers. The land given to ITC had earlier been earmarked to be sold on freehold basis to China's CATIC. However the deal did not materialize.

Nawaloka Inks Major Breakthrough Deal with Japan’s Biotech Specialist Mebiopharm

In a first-of-its-kind move which is likely to transform Sri Lanka’s healthcare and pharmaceutical manufacturing industry, Nawaloka Holdings Ltd., in Tokyo announced a groundbreaking joint venture with Japanese biotechnology specialist Mebiopharm Co Ltd.

In a partnership facilitated by New World Securities, which is currently promoting investments in Sri Lanka via a forum and one-to-one meetings in Tokyo for a group of Sri Lankan firms, the joint venture headquartered in Colombo will manufacture clinical and other niche products in Sri Lanka for the local market as well as tap vast potential for exports in South Asian region.

According to Nawaloka Holdings and Nawaloka Hospitals Chairman Mr. Jayantha Dharmadasa, under the first phase, the joint venture will bid for Government tenders whilst the second phase involves setting up the manufacturing plant, whilst after one year the joint venture will be listed on the Diri Savi Board.

Singapore’s Musthapha to set up Rs.10 bn Hotel, Shopping Mall at Mutwal

Singaporean retail shopping complex giant Musthaphas is to set up a USD 104 mn complex on Sri Ramanathan Mawatha, Mutwal, Colombo 15, in which premises, it will house a 975-room hotel, 100 service apartments and a ballroom which could accommodate 1,000 people. It will also house 1,000 car parking slots and go up to 23 levels .

Musthaphas had already purchased a five-acre block, which was hitherto owned by The Finance Co. for Rs. 1.2 bn, for the project. The new investors would be targeting the completion in five years.

S&P Warns of Broad Euro Zone Downgrade Over Debt Crisis


Standard & Poor's has warned it may carry out an unprecedented mass downgrade on the credit ratings of euro zone countries if EU leaders fail to reach an agreement on how to solve the region's debt crisis.

S&P placed the ratings of 15 euro zone countries on credit watch negative including those of top-rated Germany and France, the region's two biggest economies and stated "systemic stresses" are building up as credit conditions tighten in the 17-nation region.

While a credit watch negative typically signals a possible downgrade in no more than three months, S&P stated it expects to conclude its review "as soon as possible" following a crucial summit of EU leaders on December 9, 2011.

Source: Reuters

OECD countries - Weighed Down by Debt


THE OECD, a rich-country think-tank, issued its latest round of economic projections for its member countries and other important emerging markets on November 28th.

Its baseline scenario involves a mild recession in Europe and a slowdown across the rest of the rich world.

Euro-area GDP growth is expected to fall from 1.6% this year to 0.2% in 2012. Meanwhile America's economy is expected to register a healthier 2%.

Taken as a whole, the 34 countries that make up the OECD account for around two-thirds of global GDP, but the OECD expects its members to contribute just 28% to quarterly world GDP growth on average between 2012 and 2013.

Source: The Economist


ANALYSIS & FORECAST

SRI LANKA: PROSPECTS FOR 2012- CBSL, Recent Economic Developments -Highlights of 2011 and Prospects for 2012 - November, 2011.


The economy of Sri Lanka is projected to grow at around 8.5-9.0 % in 2012.Tea production in the country is expected to increase up to 340 mn kg in 2012 on account of expected improvement in productivity and favourable weather conditions

Rubber production in 2012 is expected to reach 175 mn kg depending on the continuation of strong demand for natural rubber.

The paddy production in 2012 is projected to increase by 18% to 4.5 mn metric tons.

Fish production in the country is expected to increase by 10% to 460,000 metric tons.

GDP

Inflation is targeted to maintain at mid-single digit levels in 2012.

Inflation

Cont…

SRI LANKA: PROSPECTS FOR 2012 (cont…)


Both exports and imports in 2012 are expected to grow at a lower rate than in 2011, mainly due to the high base in 2011.

External Sector

Exports are projected to grow at around 14% & Imports are projected to grow at around 10%.

The current account deficit is projected to be around 3.9% of GDP in 2012, lower than the deficit in 2011.

The overall BOP is expected to record a surplus

The gross official reserves would remain high equivalent to around 5 months of imports.

Inflows of workers’ remittances: are expected to exceed USD 5.8 bn in 2012.

The average international crude oil price is expected to be around USD 105-110 per barrel in 2012.

Oil Price

Source: Central Bank of Sri Lanka, Recent Economic Developments -Highlights of 2011 and Prospects for 2012 - November, 2011.Cont…

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

Do not spoil what you have by desiring what you have not; but remember that what you now have was once among the things you only hoped for.

Epicurus - Greek philosopher