economic capsule october 2010

ECONOMIC CAPSULESeptember, 2010

Research & Development Unit

ECONOMIC CAPSULEOctober 2010

Commercial Bank Posts Robust 3Q Growth

Sri Lanka Com Bank Cuts Interest Rate on Credit Cards

Commercial Bank Expands Money Transfer Services in Saudi Arabia

Sri Lanka Private Sector Credit up by 12.8%

Branch Openings

Budget 2011

Initial Public Offerings

High Powered Team to Help Achieve Sri Lanka’s USD 4,000 Per Capita Goal

Ease of Doing Business 2011

Snippets

Analysis & Forecast

Economy & Business News

Financial Sector NewsC

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ECONOMIC CAPSULE – OCTOBER, 2010

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F I N A N C I A L S E C T O R

N E W S

Commercial Bank Posts Robust 3Q Growth

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Commercial Bank 9M Performance (Group)

Commercial Bank 3Q Performance (Bank)

A strong focus on core banking operations and a resurgence of credit demand generated solid growth in key performance indicators for the Bank at the end of the 3Q of 2010.

Growth was particularly strong in the 3Q, with the Bank’s profit before tax growing 54.8 % to Rs 2.494 bn, and its post-tax profit improving 47.8 % to Rs 1.414 bn over the corresponding three months of 2009.

One of the principal contributors to this performance was the robust growth of the Bank’s loan book in the 3Q as well as over the nine month period.

Gross Loans and Advances increased by Rs 18.135 bn in the three months, from Rs 186.635 bn at 30th June, 2010 to Rs 204.770 bn at 30th September, 2010 a growth of 9.72%. Within these three months alone, non-performing loans reduced by Rs 2.602 bn or 13.65 %.

Net Interest Income growth was more pronounced in the 3Q. Increased lending had generated Net Interest Income of Rs 4.312 bn in the three months ending 30th September 2010, a growth of 41.5 % compared to the corresponding period of 2009.

These measures, coupled with improved macro economic conditions in the country had enabled the Bank to bring down its gross and net non-performing advances ratios to 5.02 % and 3.36 % respectively by the end of the 3Q from levels of 6.84% and 4.89% at the end of the previous year.

Sri Lanka Com Bank Cuts Interest Rate on Credit Cards

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This reduction is in line with the trend of reducing lending rates, and is even less than the 24 % rate requested by the Central Bank from the credit card issuing banks.

Commercial Bank has reduced interest rate applicable on all credit cards issued by the bank.

The interest rate on outstanding balances on the bank's

cards has been reduced to 22 % a year from 35 % or to

1.83 % a month with effect from November 01, 2010.

Commercial Bank Expands Money Transfer Services in Saudi Arabia

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Commercial Bank expanded its Instant Money Transfer Service, in Saudi Arabia for the benefit of thousands of Sri Lankans working in the Kingdom. The Bank will also deploy banking officers in Saudi Arabia to assist its growing Sri Lankan customer base in the country with their diverse financial needs.

The money transfer service can be obtained via the Bank’s representatives in Saudi Arabia, the Al Rajhi Bank, Arab National Bank, National Commercial Bank and Al Bilad Bank. In addition to sending money to Sri Lanka, customers can also open local and foreign currency accounts and enjoy a host of other services offered by the bank rated Sri Lanka’s best.

Commercial Bank’s money transfer service, known as ‘e-Exchange’ locally and in most of the Middle Eastern countries, is a sophisticated yet low cost real time on-line money transfer facility which is available to remitters through a network of agents in over 50 countries.

Sri Lanka Private Sector Credit up by 12.8%Back to

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Private sector credit demand (Y-o-Y) has been picking-up.

After posting y-o-y declines since April, 09’, private sector credit demand entered positive territory in March, 10’ and recorded a y-o-y growth of 12.8 % by end August, 10’ in contrast to a contraction of 5.7 % at end 09’.

2010 Aug Year Ago

Rs. bn % Rs. bn %

Net Credit to Govt. 697.4 -2.1 712.3 73.4

Credit to Corp. 106.4 194.4 36.1 -10.8

Credit to Private Sector 1,326.2 12.8 1,175.5 -4.8

Credit to the Private Sector - YoY Change %%


Branch OpeningsBack to

Contents

Mawathagama

Commercial Bank to Serve Customers on Hadji Day

Fifty (50) of Commercial Bank’s branches and Supermarket Banking counters will be kept open for the convenience of customers on November 17, Hadji Festival day, a statutory bank holiday.

17 branches in the Colombo and Gampaha districts, the foreign branch at the Head Office, the Bank's 25 Supermarket Banking counters and its 365 day banking centres at Colombo 07, Ampara, Negombo, Galle City, Kandy City, Majestic City and Jaffna will be open for business and that all over-the-counter banking transactions could be conducted as usual.

The branches that will stay open in Colombo and Gampaha Districts include the foreign branch and branches at Wellawatte, Kollupitiya, Kotahena, Maharagama, Borella, Nugegoda, Narahenpita, Battaramulla, Panchikawatte, Union Place, Wattala, Dehiwala, Moratuwa, Nittambuwa, Kiribathgoda, Avissawella and Piliyandala.

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E C O N O M I C & B U S I N E S S

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Budget 2011Back to

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The Appropriation Bill showing government expenditure for 2011 was submitted to the Parliament recently. The government has estimated its expenditure for 2011 to be over 1,080 bn.

The highest allocation in the Appropriation Bill has been made to the Defence Ministry. It stood at Rs. 215.22 bn, (an increase of about 6 % from last year) which includes recurrent expenditure and expenditure such as payment of wages for the Security Services personnel.

The allocation for Economic Development amounts to Rs. 75.24 bn and the allocation for the Health Sector amounts to Rs. 62.25 bn Ports and Aviation services have been allocated a sum of Rs. 28.65 bn.

The Government expects to obtain a sum of Rs. 997 bn as loans from local and foreign sources to cover its expenses next year.

The Appropriation Bill is considered the first reading of the budget and sets out expenditure allocations for various ministries and also foreign and local borrowing limits for the next year. The budget for 2011 is scheduled to be presented in Parliament on the 22nd of November, 2010.

The Appropriation Bill 2011The Presidential Commission on Taxation headed by Prof. W.D. Lakshman has recommended far reaching tax reforms including the; Sharp reduction of the number of existing taxes which are about 60 to about half of it, simplifying the computation of taxes and offering a range of new tax holidays to local and foreign investors.The Commission has recommended -not to increase the rates of existing taxes in its attempt to improve the tax revenue -but to simplify the tax collection mechanism. Action will also be taken to broaden the VAT and income tax bases, simplify the operational modalities of the VAT system and income taxes to eliminate weaknesses, including the complex VAT refund mechanism, and to improve revenue collection. Streamlining trade and excise taxes with tax exemptions to be allowed only on the grounds of national security, health, environment, and international commitments and simplifying the dual customs duty structure which has prevailed for almost 10 yearsThe commission has also recommended a complete overhaul of the administration of the Inland Revenue Department, modernization of the tax administration and introduction of IT.

Tax Reforms

Fiscal Performance – August, 2010 Jan-Aug 2010 (Rs. Bn) Jan-Aug 2009 (Rs. Bn)

Total Revenue & Grants 502.9 426.4Revenue 495.3 409.2 Tax 441.0 373.6 Non tax 54.3 35.5Grants 7.6 17.3Expenditure & Lending Minus Repayments 817.5 773.1 Current expenditure 635.3 614.8 Capital & Lending Minus Repayments 182.2 158.3Budget Deficit (incl. grants) -314.6 -346.7As a % of GDP -5.72 -7.18Budget Deficit (excl. grants) -322.2 363.9As a % of GDP -5.86 -7.54

Initial Public Offerings

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Laugfs Gas A share issue by Sri Lankan liquid petroleum gas supplier Laugfs Gas to raise Rs. 2.5 bn was oversubscribed on the opening day itself. Laugfs Gas announced its intention to raise Rs 2,505 mn from the public through an Initial Public Offering (IPO) of 22 % of its stake. The firm offered

75 mn voting shares at Rs. 23 each and 52 mn non-voting shares at Rs. 15 each. The money will be used to expand the gas business and diversify into hotels and property and repay debt.

Hydro Power Free Lanka The Rs. 350 mn Initial Public Offering (IPO) of Hydro Power Free Lanka Ltd. had triggered a massive oversubscription with investors demanding a staggering

Rs. 20 bn worth of shares. According to the registrars to the issue the IPO had generated 111 applications with payments made by bank guarantees requesting 1.925 bn shares worth Rs.

19.25 bn whilst 6,778 applications had requested for 71.88 mn shares worth Rs. 718.8 mn, bringing the total to Rs. 20 bn reflecting an oversubscription of 57 times.

The IPO consisted of 35 mn shares at Rs. 10 each. Hydro Power Free Lanka wants to build three new plants. It now has two power plants which sell power to the state-run Ceylon Electricity Board. A new 0.83 MW

plant is to be built in Thebuwana and another 0.94 MW plant in Stellenberg for Rs. 150 mn each for which agreements have been finalized. It also plans a larger plant in Halgran Oya for 3.0 MW which can be expanded by another 0.60 MW with agreement with the CEB to be finalized in November.

Sierra Construction Sierra Construction Ltd is to go public early next year to raise Rs. 400 mn in a bid to take on more projects and retire its debt, according to company officials. Sierra, which owns boutique hotel Elephant Corridor, is also eyeing four mega projects in Matale, Avissawella and two in the upcountry.

IPO’S

Sri Lanka Singer FinanceSinger Finance Ltd plans to raise Rs. 400 mn in an IPO through selling 25 % (26.6 mn shares) of its shares at 15 rupees a share to the public.

High Powered Team to Help Achieve Sri Lanka’s USD 4,000 Per Capita GoalBack to

Contents


The main focus of the committee is to concentrate on upgrading goods and services to make them on par with international standards.

In order to do this, proper technologies and processes should be in place. In order to rationalise and prioritise the course of action needed to double per capita income, the Cabinet has approved the drawing up of a National Science, Technology and Innovation Strategy for 2011-2015.

Cabinet has given approval for the appointment of a high powered committee to formulate strategic plans with assistance from the private sector to achieve the goal of doubling the per capita income to USD 4,000 by 2015.

The committee had been selected to specifically focus on the priority needs for rapid economic development in the next five years. They are tasked with evaluating the project proposals submitted by line ministries and formulate a coordinating structure that would include the private sector wherever possible.

Ease of Doing Business 2011Back to

Contents


Economies are ranked on their ease of doing business, from 1 – 183. A high ranking on the ease of doing business index means the regulatory environment is more conducive to the starting and operation of a local firm. This index averages the country's percentile rankings on 9 topics, made up of a variety of indicators, giving equal weight to each topic. The rankings are from the Doing Business 2011 report, covering the period June 2009 through May 2010.

Sri Lanka Stays in Place in Doing Business 2011 RankingSri Lanka retained its place at 102 in a ranking of 183 countries for ease of doing business, by the World Bank group for 2011 though some of its neighbors made gains.

Doing Business Rank 2011

Doing Business Rank 2010

Sri Lanka 102 102

Maldives 11 85 96

Bangladesh 4 107 111

India 1 134 135

Pakistan 8 83 75

Nepal 4 116 112

Bhutan 2 142 140

Afghanistan 2 167 165

Top 10 Rankings

1 Singapore

2 Hong Kong SAR, China

3 New Zealand

4 United Kingdom

5 United States

6 Denmark

7 Canada

8 Norway

9 Ireland

10 Australia

Topic Rankings

DB 2011 Rank

DB 2010 Rank

Change in Rank

Starting a Business 34 40 6

Dealing with Construction Permits 169 167 -2

Registering Property 155 151 -4

Getting Credit 72 69 -3

Protecting Investors 74 73 -1

Paying Taxes 166 165 -1

Trading Across Borders 72 66 -6

Enforcing Contracts 137 136 -1

Closing a Business 43 45 2

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According to the Securities and Exchange Commission chairperson Ms. Indrani Sugathadasa, Sri Lanka's active stock market investors had increased to 64,000 by September 2010 from 37,000 a year earlier.

At present the number of total Central Depository System (CDS) account holders is 530,000.

The Colombo Stock Exchange (CSE) has created history by establishing new records in almost all aspects of trading from total market turnover to market capitalization recently. The CSE has been ranked the best performing capital market in the world for 2010, with a growth of over 95 %.

SL’s Stock Investors Increase amid Boom

Ceylon Asset Management has launched a dedicated Financial Sector Fund, describing it as the next biggest investment arena with potential to grow significantly in post-war Sri Lanka. The fund is structured as an open-ended, equity fund that lets investors invest and exit at anytime and it will distribute tax free income from profits on an annual basis.

Partnering with Deutsche Bank AG, the Ceylon Asset Management is introducing this fund in a bid to capture the returns from the top 10 banking, finance and insurance sector (BFI) companies namely Commercial Bank of Ceylon, Hatton National Bank, Lanka Orix Leasing Company, DFCC Bank, Sampath Bank, National Development Bank, Nations Trust Bank, Central Finance Company, Seylan Bank & Aviva NDB Insurance listed on the Colombo Stock Exchange (CSE).

The BFI sector is reported to have gained 166.81% in the first three quarters of 2010, outperforming the ASPI which gained 106.68% to emerge as Asia’s top performer

Dedicated Financial Sector Fund by Ceylon Asset Management

Three labour market experts, won the 2010 Nobel Economics Prize for research that has had an impact on employment reforms worldwide.

According to the Nobel jury, the work of Peter Diamond and Dale Mortensen of the United States and British-Cypriot Christopher Pissarides helped resolve puzzles such as why people remained unemployed despite a large number of job openings.

It lauded the three economists "for their analysis of markets with search frictions," which helps explain how unemployment, job vacancies and wages are affected by regulation and economic policy.

According to traditional theory, markets should work on their own to ensure that job seekers find available jobs.

The Diamond-Mortensen-Pissarides, or DMP model, however, shows that markets do not always function that way and helps explain why unemployment persists and proves stubbornly resistant even when economic circumstances improve.

Trio of Labour Market Specialists wins 2010 Economics Prize

SL’s Stock Investors Increase amid Boom

Heraymila group, a Middle Eastern investment house is planning to float a USD 50 mn fund in early 2011 which will invest in fundamentally sound Sri Lankan stocks.

Heraymila Investments is a Dubai-based firm which manages USD 260 mn directly and is operating as an overseas investment arm for Al Mashal, a Saudi Arabia based family.

The firm says it has invested in publicly traded companies, private firms and property in developed markets like the US, Japan, Australia and in emerging markets.

It started investing in Sri Lanka in 2005, and has now bought its own Colombo-based stockbrokering firm from Sri Lanka's Amana Islamic finance group which has been re-named Heraymila Securities.

Sri Lanka USD 50mn Fund Planned by Heraymila


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The second Jaffna International Trade Fair 2011 (JITF) organized by the Lanka Exhibition & Conference Services (Pvt) Ltd, in collaboration with the Federation of Chambers of Commerce and Industry of Sri Lanka is scheduled to be held from 21-23 January 2011 at the Durayappah Stadium, Jaffna.

The trade fair themed “Open for Business” is aimed at strengthening and bridging trade links between the North and the rest of Sri Lanka.

The Government of Sri Lanka and the World Bank jointly signed off on three projects with agreements totaling US$ 125.4 mn for Small and Medium Enterprise Development, North East Local Service Improvements, and Sustainable Tourism development.

The credits from the International Development Association (IDA), the World Bank’s concessionary lending arm, have 20 years to maturity with a 10-year grace period.

SME Development USD 57.4 mn Improve access to finance for SMEs affected by the Global Financial Crisis

North East Service Improvement Projects USD 50.0 mn

This project will support repairing and rebuilding critical infrastructure – from rural roads, culverts and bridges to public buildings, waste disposal, and rural water supply

Sustainable Tourism Development USD 18.0 mn

Facilitate environmentally and socially sound investments in the tourism sector, focusing particularly on the eastern part of the country

Jaffna International Trade Fair 2011 (JITF)World Bank Provides US$125.4 mn for Tourism, SME Development, and North East Service Improvement Projects

Sri Lanka Unemployment Lower in 2Q, 2010

*Excluding Northern Province 2009 2009, Q2 2010, Q2Labour force participation rate 48.7 48.3 47.9

Unemployment rate 5.8 6.2 5.4

Employed population 7,602,414 7,465,030 7,613,267

By Industry (%) Agriculture 32.6 31.9 32.0

Industry 25.1 25.6 23.6

Services 42.3 42.4 44.4

Cargills (Ceylon) PLC acquired Kotmale Holdings PLC as part of its accelerated expansion and diversification drive.

The acquisition includes 3 production plants under Kotmale Holdings PLC located in Bogahawatta, Kaluthara and Colombo.

Cargills acquired a 73% stake at a maximum price of Rs. 40/- per share and a mandatory offer, as per regulations for the balance shares would follow shortly.

Cargills buys Kotmale Holdings

* Group

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Sri Lanka to List Stake in Broadcast Tower

Sri Lanka is to start building a 350-metre telecom tower in the capital Colombo and intends to sell shares to the public in a firm to be set up to operate it.

According to director general of the Telecommunications Regulatory Commission Mr. Anusha Pelpita, the tower is to be called 'Lotus Tower' is to be built with a USD 100 mn dollar financing from China.

The state is planning to list a 30 % stake in the tower in the Colombo stock exchange in two years.

The telecom tower will be built on land owned by the State Engineering Corporation in Peliyagoda.

The state-run Sri Lanka Insurance Corporation (SLIC) is to help operate a liquid petroleum gas business the government acquired after buying out a majority stake held by Shell.

The government bought a 51 %stake in the unit of Royal Dutch Shell in the island for USD 63 mn,. The government already held a % stake, and a 100 % stake in a storage terminal company.

Sri Lanka Insurance Corp to Help Run Gas Business

300 Sri Lankan Workers for Farm Work in Israel

For the first time in the history, of Sri Lanka, 300 seasonal workers from the country are to participate in a test project, for six months, on 80 farms across Israel, assisting Israeli farmers, during their seasonal peak.

An employee is assured of a minimum wage of Rs 115,000 per month, accommodation, medical and other facilities along with an insurance cover. They are also protected by Israeli labour laws.

The project is being coordinated between the government of Israel, the government of Sri Lanka and the Geneva-based International Organization for Migration.

Even though Israel has limited land and faces a scarcity of water, it applies the most modern and economical strategies for agriculture which could be beneficial to Sri Lanka through a knowledge/technology transfer.

Analysis & ForecastBack to

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External TradeEarnings from exports:

on a year-on-year basis, increased by 7% in August,2010on a cumulative basis, increased by 10.8% during Jan – Aug 2010

Expenditure on imports:on a year-on-year basis, increased by 35.7% in August,2010on a cumulative basis, increased by 36.9% during Jan – Aug 2010Trade deficit expanded to USD 3,630 mn during Jan – Aug 2010 from USD 1,782 mn in the corresponding period of 2009.

Category

Jan - Aug 2009

USD mn

Jan - Aug 2010

USD mnChange %

Exports 4,551.3 5,040.4 10.8

Imports 6,333.0 8,669.9 36.9

Balance of Trade -1,781.7 -3,629.6 -103.7

Workers’ Remittances 2,194.7 2,478.8 12.9

The rate of inflation as measured by the CCPI on a Year on Year basis increased to 6.6 % in October 2010 from 5.8 % recorded in September 2010 third time in October. The highest contribution to the overall increase of around 69 % came from food commodities which increase by 5 % in October 2010. The combined effects of both domestically produced and imported food commodities contributed to the increase in the food sub Index

The annual average inflation increased to 5.4 % in October, 2010 from 5.0 % in the previous month.

Inflation

Analysis & ForecastBack to

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International Reserves International Reserves - The gross official reserves of the country surpassed the USD 7 bn level on 4th October 2010. This level of reserves is

sufficient to cover over 6.8 months of imports and is the highest ever recorded reserves level of Sri Lanka.

Under IMF-SBA, the fifth tranche was received on 24 September 2010, amounting to approximately USD 212.5 mn. This is in addition to the two tranches received on 30 June 2010(about USD 407.8 mn).

The issue of the USD 1 bn sovereign bond with a 10 year maturity was finalised on 27 September 2010. The yield of 6.25% was substantially lower than those of the previous issues.

Market interest rates have continued to adjust downward during the year reflecting the significant easing of monetary policy since early 2009.

The AWDR declined to 6.58% by September from 8.01% in December 2009 while the AWFDR declined to 8.68% in September from 10.91% in December 2009.

The monthly AWPR was 9.55% in September compared to 11.12% in December 2009.

Interest Rates

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Monthly AWPR AWDR AWFDR T-Bill yield (91-day)

Analysis & Forecast Back to Contents


Sri Lanka2009 2010* 2011* 2012*

Actual IMF Fitch IMF Fitch IMF FitchGDP Growth Rate (%) 3.5 7.0 7.2 7.0 7.0 6.5 7.3Rate of Inflation [change in CCPI (N) – Annual Avg.] (%) 3.4 6.5 5.5 8.0 6.0 8.0 6.5Current Account Balance (% of GDP) -0.5 -4.3 -2.7 -4.6 -2.9 -4.8 -3.3Gross Official Reserves (USD Bn) 4.9 7.0 6.9 7.2 7.2 7.2 7.5Rs./USD (annual average) 114.38 - 113.9 - 112.8 - 111.5Fiscal Deficit as % of GDP (9.8) - (8.2) - (7.2) - (6.0)

IMF World Outlook 2009 2010* 2011*World Output -0.6 4.8 4.2Advanced Economies -3.2 2.7 2.2United States -2.6 2.6 2.3Euro Area -4.1 1.7 1.5Germany -4.7 3.3 2.0Italy -5.0 1.0 1.0Japan -5.2 2.8 1.5United Kingdom -4.9 1.7 2.0Russia -7.9 4.0 4.3Developing Asia 6.9 9.4 8.4China 9.1 10.5 9.6

India 5.7 9.7 8.4ASEAN-5 1.7 6.6 5.4Middle East & North Africa 2.0 4.1 5.1Brazil -0.2 7.5 4.1

*Projections Source: IMF, Oct 2010ASEAN-5 - Indonesia, Malaysia, Philippines, Thailand, and Vietnam

* Forecast

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

Regret for wasted time is more wasted time

Mason Cooley

economic capsule october 2010

Economy & Finance