news bulletin - january 2013

7/29/2019 News Bulletin - January 2013

1/13

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Alliance

In Economic news:

In Business news:

In Consumer news:

Motor car registrations continue to decline on high import tax. Motor car registrations in Dec

12 declined to 1,464 (-54.7% YoY), with total registrations declining 44.8% YoY to 25,308.

Total tea production in 2012 was 316.4m kg, lower than Sri Lankan Tea Boards orecast o

325m kg.

Tourist arrivals in Dec 12 were 122,252 (+25.4% YoY) with total arrivals reaching 1,005,605

(+17.5 YoY).

Sri Lanka Tourism: Living up to the hype - From our guest columnist o the month,

Capital Alliance

Leading supermarket chains request suppliers to absorb budget VAT. Increased risk or Sri Lankan

banks due to the high level o loans to the agriculture sector.

The LMD-Nielsen Business Confdence Index in Dec 12 reached a ten-month high o 139.

The price o a 12.5kg Liquid Petroleum

(LP) gas cylinder increased by Rs.150 to

Rs.2,396.

Bus ares likely to increase by 6 - 8%

in Feb 13. Maximum retail price o

medicinal drugs to be specifed.

The Nielsen Consumer Confdence

Index in Dec 12 increased marginally

to 62, up 2 points rom Nov 12.

Monthly Bul let in : January 2013

Central Bank outlines projections and plans or 2013 and beyond with aview to achieving a $100bn economy and per capita income o $4,000by 2016.

BMI cuts Sri Lankas 2013 GDP growth to 5.4% as World Bank orecasts6.8%.

FDI to reach $1.5bn in 2013 up rom 2012 anticipated inows o $1.2bn.However during Jan - Sep 12 FDI amounted to only $614.7m.

Ceylon Electricity Board and Ceylon Petroleum Corporation losses Rs.65bnand Rs.95bn in 2012.

Debt to private, public and the government rise at a decreasing pace.

Ination in Jan 13 rose to 9.8% YoY (+60bps MoM), on increasing oodprices as adverse weather conditions damaged crops and disruptedsupply.

The rupee ended the month at 125.04/128.29 vs. the USD (rupee stronger~0.4% MoM).

The All Share Price Index closed at 5,816.89 up 3.1% MoM.

Economic Intelligence Unit ranks Sri Lanka among the worst o or thoseborn in 2013.

Sri Lanka downgraded in Freedom Houses survey o civil and politicalrights.

Sri Lanka placed in very high risk band in Transparency International, UKsGlobal Deence Anti-Corruption Index.


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In Economic news:

Central Bankunveils roadmapor 2013. Central Banko Sri Lanka (CBSL) outlined

projections and plans or

2013 and beyond with a

view to achieving a $100bn

economy and per capita

income o $4,000 by 2016.

Projections or 2013

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Selected CBSL action in the coming year;

a) Exchange rate related

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controlling excessive uctuations and maintaining desired level o

external reserves.

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increased to give more exibility in managing oreign

exchange transactions

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b) Money supply related

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weeks, allowing greater exibility or banks to manage liquidity

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c) Banks and non-bank fnancial institutions (NBFIs) related

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the business models o banks and NBFIs

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income, through ee-based services

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diversifcation o sources o unding and business

BMI cuts Sri Lankas 2013 GDPgrowth to 5.4%. Business MonitorInternational (BMI) reduced Sri Lankas 2013 GDP to

5.4% rom 5.9%, citing rising credit costs, weakening

Sri Lankan rupee, and ragile state o the world

economy. BMI stated that Sri Lanka is now beginning

to eel the economic squeeze o the European Unions

Aug 2010 decision to withdraw the GSP+ acility rom

the country. Thus BMI expects 125 bps cut in interest

rates to stimulate growth. The World Bank (WB)orecasts 6.8% growth in 2013 rising to 7.2% in 2015.

WB notes current orecasts are less than the 8% range

achieved in 2010 and 2011, as growth in investment

and reconstruction moderates to levels in line with

underlying macroeconomic undamentals.

FDI to reach $1.5bn in 2013. Government expects oreign direct investment(FDI) to be about $1.5bn in 2013 up rom 2012 anticipated inows o $1.2bn. For 2012 the

original target was $2.0bn which was later revised to $1.75bn. However during Jan- Sep 12

FDIs amounted to only $614.7m.

Treasury Secretary Dr. P.B. Jayasundera commenting on lower FDI or 2012 stated Neither I

am a believer o numbers nor do I not deny that the FDI target is of-track. But what we need to

realize is that the investor sentiments are high as never beore. We have also developed a credible

investment pipeline which will pay of. He also mentioned tax holidays would not be provided

or extended as beore, with larger scale investment projects being the exception.

Attracting FDI in the coming year

would prove challenging, US

State Department spokesperson

Ms. Victoria Nuland commenting

on possible consequences

o the impeachment o Chie

Justice Shirani Bandaranayake

said any action that undermines

an independent judiciary would

impact on Sri Lankas ability to

attract FDI.

Original Latest

ADB 8.0% 7.0%

BMI 5.9% 5.4%

CBSL 8.0% 7.5%

IMF 8.0% .7%

CB 7.5% 7.5%WB 6.8% .8%

2013E

Source: ADB, IMF, CBSL, Standard Charter ed Bank, RAM Ratings.BMI,WB

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

0

200

400

600

800

11000

11200

11400

11600

2003 2004 2005 2006 007 2008 009 2010 2011 2012E 013E

FDI m F DI / G DP


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In Economic news:

Debt to private, public and government riseat a decreasing pace. CBSL Governor noted that thedepreciation o the rupee increased public debt to Rs.278bn in Dec12. The rupee depreciated by almost 17% in June beore recovering

to a 10% YoY loss by Dec 12. Debt to GDP reached 80.5% in 2012 uprom 78.5% in 2011. CBSL orecasts debt to GDP at 78% or 2013 urtherreducing to 71% by 2015.

Moreover, the 18% credit ceiling ended in 2012, with CBSL indicatingits desire to maintain credit to the private sector at 18.5% during 2013.CBSL Governor said There will not be a resh ceiling on credit, but we willkeep a close watch on the situation to avoid an undue increase in credit

expansion.Further underlying countrys debt dependence, Treasury secretaryrevealed that discussions have commenced with the International

CEB and CPC lose Rs.160bn in2012. As per a senior ocial at the Treasury, lossesat Ceylon Electricity Board (CEB) and Ceylon Petroleum

Corporation (CPC) were about Rs.65bn and Rs.95bn in2012. CEB is projected to lose a jaw dropping Rs.90bnin 2013 as CPC raised the price o urnace oil by Rs.25per litre it supplied to CEB or thermal generation. The

ocial urther stated The government can manage a losso between Rs.50-60bn and go on up to Rs.100bn, but goingbeyond that level is dangerous and thereore there is the

need or efecting price hikes and uel adjustments charges

CPC now wants CEB to purchase its oil or thermal generation directlyrom the international market and CPC would assist in its transport.

According to the ocial, CPC is due Rs.47bn rom CEB, Rs.21bn romSriLankan Airlines, Rs.14bn rom the Deence Ministry and Rs.5bn SriLanka Railway. CPC reportedly loses Rs.16 rom a litre o diesel and Rs.26rom a litre on kerosene.

Moreover, discussionsare being held withoil suppliers to extend

the credit period on

oil purchases rom thepresent 30 days. CBSLGovernor noted that

to avoid spot tendersand price hikes, arrangements are being made to acquire crude oiland bulk petroleum through bilateral agreements with oil producingcountries (Oil bill 2012 - $6.0bn, 2011 - $4.3bn, 2010 - $3.1bn).

CEB in a fling with the Public Utilities Commission o Sri Lanka (PUCSL)estimated 2013 expenses at Rs.268bn (+22.9% YoY) or cost o electricitygeneration, transmission, distribution and other costs or the supply o

electricity. PUCSL is to assess the validity o such cost estimates andand determine whether current electricity taris are sucient to recoverexpenditure. On a separate note, Japan International Corporation

Agency is to provide 15.9bn yen (~Rs.24bn) to upgrade the power grid inthe Greater Colombo region. The unding, a 40 year loan at 0.3% p.a. witha 10 year grace period and will be used to strengthen the transmissionand distribution network.


Monetary Fund (IMF) to obtain a $1bn loan or

budgetary support. Dr. PB. Jayasundera saidWe are asking IMF to extend budget support,that money cannot go the central bank. In2012 Sri Lanka received $2.6bn through a

stand-by arrangement with the IMF to shoreup declining oreign exchange reserves.

We mentioned in our Dec 12 news bulletin that despite CBSLs comments

that it would not raise bonds in the international markets to serviceexpenditure, we elt the country would be let with little choice comemiddle o the year. Our thoughts are now shared by Standard CharteredBank o Sri Lanka who note the country is likely to return to the US dollar

market in 2013 stating We expect $10-25bn o hard-currency issuance byAsian sovereigns in 2013 (slightly higher than 2012), with Indonesia and thePhilippines dominating, as usual. Sri Lanka and Mongolia will likely revisitthe US$ market.

28%

33%

38%

43%

48%

53%

58%

750

800

850

900

950

1, 00

1, 50

1,100

Nov-11

Dec-11

Jan-1

Feb-12

Mar-12

pr-

May-12

Jun-12

Jul-12

ug-

Sep-12

Oct-12

ov-

Net Credit to Government (Rs. bn) Growth YoY%

Source:CBSL

20

3040%

50

60%

70

80%

90

100%

110

120%

150

170

190

10

30

50

70

90

Nov-11

Dec-11

Jan-12

Feb-12

Mar-12

Apr-12

May-12

Jun-12

Jul-12

Aug-12

Sep-12

Oct-12

Nov-12

Growth YoY%

Source:CBSL

19%

1

3

5

7

9

1

3%

5

7%

1,900

1,950

,000

,050

,100

,150

,200

,250

,300

,350

Nov-11

Dec-11

Jan-12

Feb-12

Mar-12

Apr-12

May-12

Jun-12

Jul-12

Aug-12

Sep-12

Oct-12

Nov-12

Credit to the Private Sector (Rs. bn) Growth YoY

Source:CBSL

Source:CBSL and CeylonToday.lk

-80

-60

4

0

20

1 11 1 1 E

CEB CPCRs.bn


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In Economic news:

The rupee ended the month at 125.04/128.29vs. the USD (rupee stronger ~0.4% MoM).Rupeestrengthened as exporters cashed in dollar invoices and there wasless activity rom importers Sri Lanka relaxed restrictions on oreign

exchange orward deals and widened the net open positions or banks.

Limits on trading were placed during 2012 balance o payments crisis.Treasury Secretary Dr. P B Jayasundera said that Sri Lanka would liketo see stronger exports, and less imports beore an unnecessarily

appreciation o the exchange rate and urther commented I you all[reporters] dont talk about the exchange rate, the rate will appreciate evenmore.

The All Share Price Index closedat 5,816.89 up 3.1% MoM. Bestperorming sectors in the month were constructionand engineering (+6.2% MoM), healthcare (+5.1%)and banks, fnance and insurance (+4.7%) whilstworst perormers were services (-2.3% MoM),plantations (-1.1%) and land & property (-1.1%). In

Jan 13, oreign investors were net sellers o Rs.1.3bn.

The Colombo Stock Exchange (CSE) is to conducta road show in Mumbai in Feb 13. According toCSE Mumbai was selected due to the presence oa large number oreign unds and high net worthindividuals.

Asian Development Bank (ADB) isto assist in making Sri Lankas capitalmarket vibrant and a catalyst to urthereconomic progress. ADB CountryDirector Rita OSullivan said We arecommitted to helping implement thecapital market reorms to promote

the development o equity and debt markets. ADBssupport or capital market development is part oits Country Partnership Strategy (CPS) 2002-2016.Sri Lankas 2013 Budget includes a series o specifcproposals or the development o capital markets.

E-Trading platorm or treasury bills and bonds.CBSL is to establish anelectronic trading platorm or secondary bills and bonds market thus encouraging more activeparticipation by the general public. Currently general public invest in bills and bonds through 12primary dealers and licensed commercial banks.

Moreover to increase bond market eciency, CBSL is to allow covered short selling o treasuries,underwrite issues and introduce central clearing to reduce counter party risk. Mr. Ajith Fernando,

CEO, Capital Alliance group stated that With a central counter party arrangement marketparticipants can trade with each without worrying about credit limits with the other party. So it reesup trading limits. At the moment some institutions or example cannot trade with smaller partiesbecause they do not have adequate counter party limits.

CBSL let policy rates unchanged at 9.5% ollowing 25 bps cutin Jan 13. In an interview with Bloomberg, CBSL Governor said We think that the rates as itis are appropriate. We do see ination moderating, even though there is some possibility that therecould be some kind o a slighthike in the next two months.But we know that the demand-driven pressures are very clearlyaddressed, so thereore we arequite condent that the timehas now come to ease monetary

policy than to tighten monetarypolicy. On a separate note,taking advantage o declininginterest rates CBSL issued aboutRs.68bn o treasury securities ovarious maturities.

Ination in Jan 13 rose to 9.8% YoY (+60bpsMoM), on increasing ood prices as adverse weather conditionsdamaged crops and disrupted supply. CBSL Governor on ination versus

growth: We believe the ination-containment goal has been on track andthe time has now come or us to look into the possibility o giving a little moresupport to the growth unction, as well..And that is what is prompting us tokeep monetary policy in a kind o a slow-motion reduction, so that we would

be encouraging growth to take place, which we see is being driven by many


7.7%

.9%

8.2%

7.5%

.3

...5

..1%8.9%

..5.2%

.

6.2

7.0%

6.4

.1%4.4 7

4.9%

3.8%

2.7

5.5

6.1

7.0%

Source:CBSL

Source:CBSL

supportive actors.CBSL is aiming or 7.0% ination in 2013. However it

is worth to note that CBSLs ination target or 2012 o 5-6% was grosslyo target with year-end ination reaching 9.2% having settled rom yearhigh rate o 9.5% in Nov 12.

Source:CBSL

91 days T. bill

182 days T .bill

364 days T .bill

Inflation

%

%

%

11

13

30.

01.

13

11.

01.

13

21.

12.

12

30.

11.

12

09.

11.

12

19.

10.

12

28.

09.

12

31.

08.

12

10.

08.

12

20.

07.

12

29.

06.

12

08.

06.

12

18.

05.

12

27.

04.

12

05.

04.

12

09.

03.

12

17.

02.

12

27.

01.

12

06.

01.

12

02.

12.

11

28.

10.

11

07.

10.

11

16.

09.

11

26.

08.

11

05.

08.

11

5,600

5,800

6,000

PI

Source::CBSL

4,800

5,000

5,200

5,400

J an -1 2 F eb -1 2 M ar -1 2 A r -1 2 M ay -1 2 J un -1 2 J ul -1 2 A u - 12 S e - 12 O ct -1 2 N ov -1 2 D ec -1 2 J an-13


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In Economic news:

Sri Lanka placed in very highrisk band in Global DeenceAnti-Corruption Index. A study byEconomist Intelligence Unit, ranked countriesbased on economic orecasts up to 2030, assessingsocio-economic conditions children born in 2013will encounter when reaching adulthood. TheWashington Post commenting on the survey saidthat Youre worse of being born in any o these three

countries, according to the data, than you are just aboutanywhere else, including Sri Lanka, a poor hotbed o ethnic violence, oppressive Vietnam,or even Syria. The Economist magazine noted Being rich helps more than anything else,but it is not all that counts; things like crime, trust in public institutions and the health oamily lie matter too.

Sri Lanka downgradedin Freedom Housessurvey o civil andpolitical rights. US basedrights watchdog Freedom Housescored Sri Lanka 5 on politicalrights and 4 on civil liberties. During2008-2012 Sri Lanka lost 9 points,attributed to increasing corruptionand recent impeachment o theChie Justice. Freedom House nowconsiders Sri Lanka as a partly reecountry. 90 o the 195 countries areclassifed as been ree in 2012, withSri Lanka and Maldives noted asexperiencing most serious declinesin the Asia-Pacifc region.


Latest inormation relating tocountrys trade perormanceand government fnances(revenue and expenditure)

were not released at the time opublication o this bulletin.

Sri Lanka placed in very highrisk band in Global DeenceAnti-Corruption Index. TransparencyInternational UK (TI) positioned Sri Lanka in BandE (very high risk) on promoting accountability indeence transactions. TI commenting on Sri Lankathat in terms o competition in deence procurement,

the principle o open competition is assessed to be likelyto be undermined in practice, while tender boards oranti-collusion eforts are lacking in efectiveness. Thereis no transparency at all regarding control o agents orsub-contractors, or nancing packages.

The organisation urther went on to say that Inthe eld o personnel corruption risk, whistle-blowingis considered potentially treacherous. The Presidentwields control over recruitment o personnel at the mostsenior levels, and there is a high risk o avouritism and

politicisation in recruitment processes at other seniorlevels. 22% o the indexed countries were in bandE; Sri Lanka sharing the group with Aghanistan,Bahrain, Cote dIvoire, Indonesia, Iran, Iraq, Morocco,

Nigeria, Oman, Philippines, Qatar, Saudi Arabia,Tunisia, Uganda, Uzbekistan, Venezuela andZimbabwe. Previously in TIs Corruption PerceptionsIndex 2012, Sri Lanka was placed 79th out o 176countries.


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Motor car registrations continue to decline

on high import tax. According to JB Securities, motorcar registrations in Dec 12 declined to 1,464 (-54.7% YoY), with totalregistrations declining 44.8% YoY to 25,308. Registration o Maruti/Suzuki vehicles declined to 267units compared 760 in Dec 11. Howeverregistration o premium brands such as Mercedes, Audi and BMW wereup 12.0% YoY to 93 units. We believe that this is due to an inux o vehiclepermits into the secondary market rom the removal o term limits ontranser o vehicle permits.

Registrations o motor cycles, three wheelers and buses declined to11,924 (-43.3% YoY), 7,000 (-44.6% YoY) and 122 (-52.2% YoY) units duringthe month. Overall vehicle registrations or 2012 were down 26.8% YoYto 389,023 units. Maruti/Suzuki market share declined to 40.1% in 2012


In Business news:

(48.6% in 2011) whereas Micros share increased to 15.5% (4.1% in 2011).We believe that high import taris have made Suzuki/Maruti vehicles less

competitive.The government proposed regulations to impose taxes on single cabsand deender jeeps that have been converted to double cabs and luxuryvehicles. The ministry o transport stated that single cabs importedunder lower tax taris were being converted to double cabs which havea higher import tari.

The regulation applicable on a retrospective basis requires such convertedvehicles to be re-registered beore the 31st March 2012. The dierence intax between new/used vehicle similar to that o the converted vehicleand the tax paid on the original vehicle at the time o its importation is tobe paid to the government.

Tourist arrivals in Dec 12 was 122,252 (+25.4%

YoY), higher than our expectation o 116,500.Total arrivals or the year are up 17.5% YoY to1,005,605. During Dec 12, India was the highest contributor with18,941 arrivals (+8.5% YoY) ollowed by the UK with 12,861 (+27.8% YoY).

In terms o growth, Ukraine and the Philippines recorded growths o1,342.7% (3,275) and 427% (975) respectively.

A target o 1.2m visitors was set or 2013 with arrivals rom Chinaexpected to reach 60,000 (+133% YoY). Tourist Board ocials statedthat the target had been set having evaluated the availability o roomcapacity, state inrastructure development, hotel reurbishments...

Mr. Mahen Kariyawasam, President o the Sri Lanka Association oInbound Tour Operators and immediate past president Mr. NilminNanayakkara stated that the target is attainable i the country organisersmore promotional campaigns. They also stressed the need to attracttourists during o-peak periods, reduce the inrastructure developmentcost o the hotel industry and to be conscious on pricing given theeconomic downturn that is aecting many parts o the world.

On a separate note, Turkish Airlines is to commence ights to Colomborom Feb 13 as it plans to extend its existing fve weekly Istanbul-Maleservices to Colombo. On the other hand, Air Asia is withdrawing its dailyights rom Kuala Lumpur to Colombo rom Feb 13 as part o its

2 0 12 2 0 11

Maruti/Suzuki 40.1% 48.6%

Perodua 20.4% 12.2%

Micro 15.5% 4.1%

Tata 9.8% 4.4%

Toyota 3.0% 19.5%

Nissan 1.3% 2.2%

Mitsubishi 1.0% 0.8%

Kia 0.8% 0.3%

Hyundai 0.6% 0.6%

Others 7.5% 7.3%

Source: JB Securities

Mar k e t s ha r e - b r and new v eh ic le

r eg is t r a t ions


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In Business news:

SRI LANKA TOURISM: LIVING UP TO THE HYPECapital Alliance (CAL)

Since 2011 international tourism entities haveheaped accolades on Sri Lanka, including the #1destination world-wide (Lonely Planet in 2013).

The Sri Lanka governments ot-publicized target o attracting c.2.5mntourists by 2016 would require a 35% compounded annual increase intourist arrivals (vs. the c.12% YoY growth in 2012). Most observers ocustheir comments on the supply side: will Sri Lanka have enough hotelrooms (Figure 1) or workers (Figure 2) to accommodate this theoreticalinux o visitors? These are valid questions, and CALs own analysessuggest that Sri Lanka would be doing well to have the rooms andhotel sta to handle 2.5m visitors by 2020, a ull our years behind thegovernments target.

But the deeper question isone o whether Sri Lankastourism product oers acompetitive combinationo attractions, accessibility,convenience and value-or-money. Being Sri Lankans,we o course believe thatour tourist product bearscomparison with that o anyother country. So lets takethat as a given. But whatabout the other actors?

Value-or-money puts acomparative price on a roughly equivalent stay in another Asia island/beach-oriented destination such as Bali, Phuket or Goa. Conveniencespeaks to travel times point-to-point in country, source-countrylanguage tour guides, right-sized tour buses, authentic source-countrycuisine and large ormat shopping opportunities. Appropriateness inthe tourism context is the degree o ft between a destinations eaturesand the requirements o the target visitors. A glance at Sri Lankas tourisminrastructure shows that India should be a much higher priority thanurther afeld places such as China.

Value-for-Money: Weaker than the CompetitionAirares rom major source markets are roughly comparable or Sri Lanka,Phuket, Bali, etc. However, lodging costs and quality vary markedly. Theaverage 5-star hotel charges in SEA are c.23% less than their Sri Lanka5-star equivalents. But thats not a like-or-like comparison: many Sri Lanka5-star hotels are closer to other destinations 3-star plus or 4 star minusstandards. CAL attributes this discrepancy to the lack o internationalgrade competition to push our service providers to improve. Currently, Sri

Lanka has only about hal the number o international 5-star hotel chainsrelative to competitors. CAL expects local prices to start coming downas international-grade operators enter beginning in 2014. Sri Lanka maysee lower arrivals growth as mass market tourists seek better value-or-money holidays stays given severe economic hardship in Europe.

Are Sri Lanka hoteliers greedy? CAL thinks not, noting that land and

FROM OUR GUEST COLUMNIST OF THE MONTH


construction costs are higher locally than elsewhere in the region, as are

sta costs. One o the reasons theres a hotel room shortage is that themajor developers move cautiously as only a ew prospective projectsgenerate the profts needed to meet investors required rates o return.

An Inconvenient TruthA related concern is the lack o inrastructure. Sri Lanka is on the right pathor island-wide tourist development rom Trinco/Pasikudah in the East, toGalle and environs in the South, to Kalpitiya in the Northwest. However,compared to the region, where a tourist can disembark and get to thebeach within 45 minutes, it can take 3-to-7 hours in Sri Lanka. Until thereis integrated connectivity via highways and/or regional airports, a largeportion o potential visitors will steer clear o resorts located so ar romairports.

Inappropriate BehaviorWhile Europe suers economically, the imperative increases to grow and

diversiy tourist source markets.Yet Sri Lanka does not aggressivelymarket itsel globally or regionally.There are some internationalbranding eorts and trade airsattended, but regional brandingeorts are either low intensity ornon-existent. India is the mostlogical market to source large scaletourist numbers or 2013-2014.Over 2.2mn India tourists visitseaside Goa annually representingc.15% o the total India outboundtourist market. Sri Lanka oersmore variety at comparable pricesto Goa, yet total India arrivals

in 2012 c.176,000, less than c.8% o Goa. Sri Lankas national tourism

promotion bodies and the private sector operators need to make a muchgreater eort in India. Greatly aiding tourism would be a larger number odaytime direct ights oered by both ull-service and discount airlines.

Another market which is ot-spoken about is China. China is an almostcompletely untapped segment with 70+mn outbound market vs. SriLankas c.26,000 arrivals in 2012. But in the near term, Sri Lanka doesnot have the tourism packages that appeal to Chinas travelers. Themass market China tourist requires direct, aordable ights; Mandarinlanguage speaking guides; large-scale retail outlets with inexpensiveor unique goods; and authentic Chinese cuisine. At the higher end, thesame citizens that the Maldives draws would come to Sri Lanka i therewere international standard casinos, championship gol courses and/ortrue 5-star accommodation. Tapping the China tourist is a dream thats 5+years away, while India is an immediate opportunity ripe or the taking.

Capital Alliance (Pvt.) Ltd. is a ull-service investment bankwith a mission to be The Preerred Partner in CapitalMarkets. Commencing operations in October 2000, Capital

Alliance has established itsel as a leading player in the fnancial marketso Sri Lanka specializing in the origination, trading and investment indebt, and equity securities.

s OOss_ss_

55k40k

126k

2011 2020

SupplyatCurrentRate #ofEmployeesNeeded

Atthecurrentrateof1.5kindustrygraduatesp.a.,agapof70kmayexistin2020


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In Business news:

Tea production in2012 alls short oindustry orecasts.Total tea production in 2012was 316.4m kg, lower than SriLankan Tea Boards orecasto 325m kg. Tea productionin Dec 12 was up marginally

1.1% YoY to 25.9m kg despite adverse weather conditionshampering the industry. According to Ceylon Tea Brokers(CTB) national sales average on tea improved to Rs.391.46per kg (Rs.359.68 in 2011) driven by depreciation o therupee. We also believe that low supply o black tea in theglobal market played a role in driving prices higher.

John Keells Tea Brokers view that tea output in Jan 13 is likely to suerdue to adverse weather conditions which would also contribute to poorworker turnout. CTB warns that trade sanctions imposed on Iran andthe uncertainty prevailing in the Middle East region would create achallenging environment or the Ceylon tea industry in the coming months.Exports to Iran (11.8% o tea exports) during Jan-Sep 12 increased 34.1%YoY whereas exports to Syria (7.7% o total exports) and the U.A.E (3.4%o total exports) declined by 13.0% and 51.0%. Whilst political instabilityin Syria aects its demand or Sri Lankan tea, U.A.E is hit by a decline inthe re-export market to Iran. Export earnings or Dec 12 were Rs.17.7bn(+17.2% YoY) with total earnings or 2012 up 9.4% to Rs.180.4bn. Growth


Source: Sri Lanka Tea Board::

20.0

22.0

24.0

26.0

28.0

30.0

32.0

34.0

36.0

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2010 2011 2012

in export earnings was driven by the depreciation o the rupee as

volumes declined to 316.4m kg (vs. 322.6m kg in 2011).

Cess on bulk tea exports was doubled to Rs.10 per kg eective 23rd Jan13. Tea Exporters Association (TEA) strongly opposed the move statingthat many export contracts were entered into prior to the revision butshipped since 23rd Jan. Thus revisions to orders is to have signifcantimpact on export prices as cess and levies accounted or Rs.22 perkg. TEA also stated that the revision would negatively impact thecompetitiveness o Ceylon Tea as around 50% o Sri Lankas tea exportswere in bulk. It was also noted that the Ministry o Plantation Industrieswere unaware o the new developments until exporters began tocomplain.

Supermarkets urge suppliers toabsorb budget VAT.Leading supermarket chainshave requested suppliers to sell products at 12% less thanwhat was charged beore with certain suppliers beingasked to add 12% to the margins given to supermarkets inorder to negate the impact o VAT.

Suppliers deem this move to be unair stating that it wouldsqueeze their margins and are unable to raises pricesgiven sti competition. Previously a senior executive o asupermarket chain had stated that the burden would notbe passed on the customers and that all retailers in thecountry had decided absorb the added VAT. It was also saidthat the supermarkets would negotiate with the supplierson improving margins but passing on the burden entirely

on to the suppliers has come as a surprise. Margins atsupermarket chains such as Cargills were already underpressure with net proft margins or the group declining to0.6% (1.9% in 2011) or the quarter ended 30th Sep 12.


10/1310

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In Business news:

Increased risk or Sri Lankanbanks due to the high level oloans to the agriculture sector.Mr. Rajendra Theagarajah, MD/ CEO o HattonNational Bank stated that the industry isexpected to double its loans and advances toRs.6trn by 2016 o which Rs.600m should beor the agriculture sector, thereby increasingits exposure to a highly vulnerable industry.In May 08, CBSL required all banks to have anexposure o 10% to the agriculture sector otheir loan portolio. Those banks that ailedto comply had to contribute the shortall toa refnancing und operated by CBSL to be


Commerc ia l banks loans and advances to the pr ivate sector ( Jan-Sep)

2011 ( Rs.m ) 2012 ( Rs.m ) Gr ow th YoY As a % o f t ot al

%6.41%0.44801,733550,432gninwaP

%4.31%7.91858,903067,852gnihsiFdnaerutlucirgA

%5.31%5.61245,113943,762noitcurtsnoC

%7.7%9.02705,871646,741edarTliateRdnaelaselohW

Financial and Business Services 104,642 120,246 14.9% 5.2%

%4.2%3.24905,55120,93msiruoT

Source: Central Bank of Sri Lanka

Sri Lanka one o the most export-orientedsotware industries in the world according to UnitedNations Conerence on Trade And Developments (UNCTAD) InormationEconomy Report 2012. Sri Lanka has a very high ratio o sotwareexports to sotware spending with only Costa Rica and Ireland reportinghigher fgures. However, Sri Lanka is among the developing countrieswith the lowest level o sotware spending in relation to both GDP andoverall spending on ICTs.

The report concludes that the industry is likely to experience sustainedgrowth with domestic demand being driven by government-ledinrastructure development programmes and emerging opportunitiesin the mobile applications market as smartphone penetration growsrapidly driven by low cost phones and competitive broadband packages.It also notes a rising home-grown demand as applications developedlocally in the local language are gaining popularity. However, electronicpayment gateways were identifed as a bottleneck or uture growth aslocal banks that operate such gateways are not set up to support youngentrepreneurs such as web and app developers. Moreover, it states thatthe absence o plug and play models, extensive bank regulations andsecurity problems have hindered the transormation o the eorts oindividual/small sotware developers into commercial success stories.

Com pu te r s o f tw a re &

serv ices spending

As a % o f t o ta l

I CT spending

Com pu te r s o f tw a re and i n fo rm a t i on

s e rv i c es ex po r t s ($m )

Rat io to to ta l computer

sof tware & serv ices spending

01.5)0102(562%8.165aknaLirS

03.4)9002(708,33%7.8234,8aidnI

02.0)0102(391%8.21809natsikaP

01.0)0102(83%9.2123hsedalgnaB

Source: UNCTAD

( $ m )

drawn on by any other bank. For the frst nine months o 2012, 13.4% o the banking sectorloans were to the agriculture sector o which 14% is or the tea industry which is currentlyunder pressure.


11/1311

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In Business news:

Key stock market transactions during Jan 13 JP Morgan Franklin Templeton Investment Funds hasaccumulated Rs.1bn worth o shares in Commercial Bank o Ceylon. Lionhart Investments continues to reduce its stake in ERI asit sold 26m shares or Rs.429m to Capital Trust Partners.

Ports and Airports Levy (PAL) would make SriLankan operations less competitive. Mr. Ralph Anandappa,chairman o the Ceylon Association o Ships Agents stated that the proposed5% PAL on bunkering services would orce them to increases prices which arealready above the rates charged by rivals on bunkering services. He stated thatbunkering services in Sri Lanka currently costs $75-$100 per tonne and theproposed levy would increase prices to $110-$150 per tonne. According Mr.Anandappa, bunkering services generate around Rs.800m per year o whichRs.750m goes to the government. He stressed that the proposed levy wouldwipe out business and would result in large loss o oreign currency. The newlevy was to be eective rom Jan 13. However, the government has postponedthe levy and it is currently under review due to pressure rom stakeholderorganizations.

The LMD-Nielsen Business ConfdenceIndex in Dec 12 reached a ten-monthhigh o 139; up 5 points MoM. Index remains above 12 month(125), however is down 10 points YoY. Nielson Sri Lankas Director Mr.Shaheen Cader stated that the business sector is displaying signs oincreasing positivity over the economy and their businesses improving inthe next 12 months. However, he cautioned that concerns about hightaxes have increased markedly ater the November budget.

In the latest survey, 41% o the respondents believed that the

economy will improve over the next 12 months, up rom 34% in Nov12. Those who believed the economy to get worse declined to 25%rom 27% in Nov 12.


Source: lmd.lk

85

95

115

125

135

145

165

175

185

Dat e St at us Target Com p a n y Buy er Sell er No. of sh ar es Va lu e St ak e i nv olv ed ( % )

Jan-13 Completed Environmental Resources Lt . Photon Glo al Lt .Environmental Resources Investme t

P cNA $19.8m NA

Jan-13 Complet ed Commerc ia l Bank o f Cey lonJP Morgan Franklin Templeton

nvestment FundsNA NA Rs.1bn NA

Jan-13 Co p eted Peop es Leasing Plc Peoples Bank Cey on Guardian m Rs.100m NA

22-Jan-13 Completed Browns Investments Plc Brown and Company Taprobane Holdings Plc 162.3m Rs.730.4m 9.0%

21-Jan-13 Completed Environmental Resources Investment Capital Trust Partners Lionhart Investments 6m Rs.429m 7.5%

9-Jan-13 Completed Asiri Central Hospitals Plc Asiri Hospital Holdings Plc Actis Investment Holdings SL Lt .3m Rs.563m 10.0%

ourc :e: o:: m any ilin s


12/1312

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In Consumer news:

The price o a 12.5kg Liquid Petroleum(LP) gas cylinder increased by Rs.150 toRs.2,396. The Consumer Aairs Authority granted permissionto LP gas suppliers, Litro and Laugs, to raise prices stating thattheir request was justifable as the price o a metric ton o LP gasin the world market had risen rom $606 in July 12 to $1,008 in Nov12.State-owned Litro and Privately owned Laugs requested priceincreases o Rs.300 and Rs.517. In contrast, LP gas retailers in thePhilippines have cut retail prices citing a decline in internationalcontract prices or LP gas due to lower demand rom the UnitedStates and Europe.

Bus ares likely to increase by 6 - 8% in Feb13. Lanka Private Bus Owners Association chairman Mr. GemunuWijeratna presented multiple reasons justiying a are hike includingrupee depreciation, high cost o spare parts and rise in interest ratescharged on leasing acilities. He urther stated are increases couldhave been avoided had the government oered a diesel concession,charging that the government had given Sri Lanka Transport Board(SLTB) Rs.2.80bn in concessions whereas the private sector hadreceived nothing. In Jan 13, the treasury approved a cash injectiono Rs.2.80bn or salary increases and allowances o SLTB employees.Furthermore in 2011, SLTB was given a subsidy o Rs.3.94bn alongwith a cash hand out o Rs.4.60bn. According to Finance Ministrydata, operational losses or SLTB had amounted to about Rs.2.0bnin 2011 (+14.4% YoY).

Maximum retail price o medicinal drugsto be specifed. The Consumer Aair Authority (CAA)issuing a gazette notifcation stated that the objective was toprevent dierent pharmacists rom selling the same medicinal drugmanuactured by the same company at dierent prices.

The Nielsen Consumer

Confdence Index in Dec12 increased marginallyto 62, up 2 points rom Nov 12. 25%o the respondents (40% in Nov 12)stated that conditions will be bad orpeople to buy things they need over thenext 12 months due to improvementsin personal fnances. Consumers whoconsider job prospects to be badover the next 12 months were 13%compared to 21% in Nov 12.


he price o a 12.5kg Liquid Petroleu

Dec12 62

Nov12 60

Oct12 59

Sep12 59

Aug12 57

Jul12 59

Jun

12 58May12 60

Apr12 65

Mar12 72

Feb12 77

Jan12 85

Dec11 87

Nov11 85

Oct

11 75Source:lmd.lkNielsenConsu

merIndex


13/13

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