Research & Development Unit Research & Development Unit

E c o n o m i c

C a p s u l e

E c o n o m i c

C a p s u l e

February 2010

Commercial Bank Moves to No:2 from No:4 in Business Today Top 10

Highlights of the Banking Sector - 2009

Views of HSBC Asia Economist on Sri Lanka

Sri Lanka to Raise USD 500mn in Dollar Bond

Sri Lanka Plans USD 100mn Northern Re-finance Fund

Q+A: Sri Lanka to Face Loss of EU's GSP+ RRutRrs

Tourist Arrivals up 31.9% in January

External Sector Performance – Jan to Dec 09

Inflation (CCPI) - February 2010

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Economy and Business News

Economic and Financial Sector Snippets

Analysis & Forecast

E C O N O M I C C A P S U L E

Financial Sector News

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sCommercial Bank Moves to No:2 from No:4 in Business Today Top 10

Research & Development Unit

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CBC has moved up by two slots to secure the Number 02 position in 2008-2009 from 2007-2008 position of Number 04, of the Business Today Top10.

The elevation in position was mainly a result of an overall strong performance by CBC in its operations in both Sri Lanka as well as in Bangladesh, according to ‘Business Today’.

Rank08/09

Rank07/08

Points Name of the Corporate

01 02 8.000 Sri Lanka Telecom

02 04 6.250 Commercial Bank

03 01 5.950 John Keells Holdings

04 - 5.025 Ceylon Tobacco Company

05 - 4.650 Associated Electrical Corporation

06 03 3.900 Distilleries Company of Sri Lanka

07 06 3.750 Hatton National Bank

08 09 2.750 Aitken Spence & Company

09 10 1.900 Cargills (Ceylon)

10 08 1.650 Carson Cumberbatch

10 - 1.650 Sampath Bank

Source: 'Business Today' – February 2010

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 Highlights of the Banking Sector - 2009 Back to

Contents

Rs. Tn

11.5%

%

-3.9%Total assets of the banking sector for 2009 increased by 11.5% to reach Rs. 3 tn compared to Rs. 2.7 tn in 2008.

Within the composition of assets, the share of advances reduced to 52% in 2009 from 61% in 2008 while share of investments increased from 25% in 2008 to 31% in 2009.

Compared to 2008, the volume of loans and

advances contracted by 3.9% to Rs. 1.57tn in 2009.

Total Assets

Assets Composition

Deposits crossed Rs. 2tn, in 2009 and

recorded a growth of 18.5% over 2008, and this was the highest

growth in the last five years.

Loans & Advances

Deposits

Rs. Tn

Rs. Tn

18.5%

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With the contraction in advances, the credit to deposit ratio declined significantly to 70.6% in 2009 from 87% in 2008.

Non Performing Loans increased by 21% (Rs. 22bn) during 2009. Gross NPL ratio and net NPL ratio increased to 8.0% and 5.0%, from 6.3% and 3.4% in 2008, respectively.

Banking sector profit before tax indicated a growth of 17.7% against 14.3% in 2008, this was mainly due to the reduction in provisions and low growth in operational costs.

Bank interest rates have declined over time. However further reductions are expected.

By end 2009, all banks were required to meet the Agriculture Sector Lending target of 10%. Twenty five (25) banks had complied with the target. There were 10 banks that were below the target.

Out of 513 banking outlets (branches + extension offices) for which approval had been granted by the CBSL, 134 banking outlets were actually opened in 2009.

    Highlights of the Banking Sector - 2009 (cont…) Back to Contents

F e b r u a r y 2 0 1 0

E C O N O M I C C A P S U L E

Economy and Business News

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Research & Development Unit

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With the end of war, 30% of the land mass and 2/3 of the coastal belt automatically opens up for agriculture and fisheries and the entire nation will also greatly benefit from the renewed prospects for tourism.

Higher Foreign Direct Investments (FDI) will flow in to the country and the 7% growth rate predicted for 2010 would soon be the average annual growth rate for Sri Lanka.

Tourism, agriculture and construction are the key areas that would contribute towards growth in Sri Lanka.

Post war opportunities for Sri Lanka

The Senior Asian Economist, Global Research of HSBC, Robert Prior-Wandesford, in an interview with the Daily FT (15.02.10) has stated that Sri Lanka could achieve a 7% GDP growth in 2010, ranking third in the Asian region, after China and India. Following are his views on the Sri Lankan & the world economy.

Problem areas that needs to be solved,

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Stimulus measures put in place by the Government, such as the reduction in interest rates, special lending rates for the agriculture sector and to the Internally Displaced Persons (IDPs) and the 12.5% of the GDP planned to be spent on “mega projects” will pave the way for economic acceleration in the future.

The Stand-By Loan from the IMF will add financial security and attract more investors to the country.

 

 

  Views of HSBC Asia Economist on Sri Lanka (cont…) Back to Contents

SL was placed at the 105th place out of the total 183 countries studied in the, international surveys of Competitiveness and Ease of Doing Business Index, introduced by the World Bank.

 The World Competitiveness Index introduced at the recent World Economic Forum lists Sri Lanka at 79 out of 133 countries. These indexes clearly indicate that there is much room for improvement.

High level of regulatory, tax and bureaucracy constraints stands against the development in Sri Lanka.

The authorities must also concentrate on keeping a lid on the budget deficit.

Sri Lanka - What to Expect

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According to the views of Wandesforde, inflation should come down before the end of 2010 & exchange rates are to be much firmer and more stable than in previous years.

The CBSL forecasts look optimistic, and add security to the system. The CCPI inflation has been projected to average 7.5% in 2010, while the CBSL forecasts inflation rates of 5% to 6%.

Despite these challenges, SL has the opportunity to ride on the wave of Asian growth as many economists believe that the growth of the Asian region would far outclass the growth of the developed world.

 

  Views of HSBC Asia Economist on Sri Lanka (cont…) Back to Contents

World Economy

The developed world is only now emerging out of the recession, and will grow at a higher percentage in 2010 than in 2009.

Top economists have forecast that the GDP growth for 2010 in the developed world will be only 1.9%, while the emerging economies would have a 6% growth in the same period. However, HSBC forecasts the Asian region to grow at over 7% in 2010.

HSBC also forecasts that the USA would grow at 2.7% in 2010, while Europe would record a 1.7% GDP growth. The main markets in the Asian region predicted to record the highest growth in GDP are the Indian and Chinese markets, which are expected to show GDP growths of 8.5% and 9.5% respectively.

 

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Sri Lanka is planning on a 10-year USD 500mn sovereign bond after May 2010 when funding needs become clear after the budget is passed in April, 2010.

Sri Lanka had sold two USD 500mn sovereign bonds in 2007 and 2009 with a 5-year maturity on each occasion.

According to the Central Bank governor, the funds will go towards capital expenditure and reconstruction.

 Sri Lanka to Raise USD 500mn in Dollar Bond Back to

Contents

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Central Bank of Sri Lanka is planning a USD 100mn re-finance fund for the northern Jaffna peninsular which is seeing an economic revival after a highway to the south was opened with the end of a decades long conflict.

The Northern Regional Development Fund is to channel loans to businesses in the region through existing banks.

According to the Central Bank governor, CBSL’s northern revival loan re-finance scheme has already attracted applications for 9,000 loans valued at 1.8 bn rupees and a billion rupees has already been given through banks in the area.

The new fund is the result of a request made for a special development bank for the region at a forum attended by Central Bank Governor Mr. Nivard Cabraal last month in Jaffna.

  

  Sri Lanka Plans USD 100mn Northern Re-finance Fund Back to Contents

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  Q+A: Sri Lanka to Face Loss of EU's GSP+ Reuters Back to Contents

Q: WHAT IS THE EU GENERALISED SYSTEM OF PREFERENCES PLUS (GSP+)?

A: It is a special incentive scheme for sustainable development and good governance, offering tariff cuts to support vulnerable developing countries in ratification and implementation of international conventions in these areas.

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WHY IS THERE A POSSIBILITY OF SRI LANKA LOSING GSP+?

A: An EU probe has found Sri Lanka in breach of international human rights laws. Western diplomats say it will be very difficult for Sri Lanka to come back from losing it at this stage.

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WHY DOES IT MATTER FOR SRI LANKA?

A: Sri Lanka is one of 16 countries with GSP+ status. Garment exports, the country's second foreign exchange earner after remittances, have benefited substantially with a 6-7 % concession, and the EU has been the main buyer. The value of the benefits has been estimated at 100mn Euros (USD 136mn). Losing GSP+ means EU buyers will have to pay more for Sri Lankan exports, thus the exporters lose price competitiveness and market share.

 

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  Q+A: Sri Lanka to Face Loss of EU's GSP+ Reuters (cont…) Back to Contents

IS THERE ANY WAY SRI LANKA COULD GET GSP+ RENEWED?

If Sri Lanka could address the concerns of the EU in the next six months, there is a possibility.

RSri Lanka has said it is ready to engage with the EU to address the concerns raised by the bloc, asking that "unattainable targets" be avoided in any talks

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WHAT DOES LOSING GSP+ MEAN FOR THE SRI LANKAN ECONOMY?

Closure of small and medium-scale garment firms and job losses, mainly among the rural poor women.

Economists say there may be pressure on the USD 40 bn economy's fiscal and trade balances, if there is a significant decline in export revenue after losing the GSP+.

According to the central bank, exporters will still be competitive after the loss of the scheme due to depreciation of the currency against the euro and British pound. But garment exporters say their buyers have already signalled a move away from them to lower priced garments.

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  Tourist Arrivals up 31.9% in January Back to Contents

The number of tourists visiting Sri Lanka rose sharply in January 2010 with a recovery in traditional Western European markets and more visitors from newer south Asian markets after the end of the war.

Latest data from the government tourism authority showed arrivals rose 31.9 % to 50,757 in January 2010, albeit from a low base the year before.

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The deficit in the trade account was off-set by the higher inflows of workers’ remittances. During 2009 workers’ remittances increased by 14.1 % to USD 3,330.3mn. As a result, workers’ remittances were USD 532mn (about 19 %) in excess of the trade deficit.

The gross official reserves were at USD 5,097mn by end December 2009, which were sufficient to finance 6.2 months of imports.

  External Sector Performance – Jan to Dec 09 Back to Contents

-12.7

-29.5

Jan to Nov, 2008

Jan to Nov, 2009

Trade Balance (USD Bn)

52.5

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  Inflation (CCPI) – February 2010 Back to Contents

  Feb 10’ Jan 10’

Point to Point Change % 6.9 6.5

Annual Average Change % 3.1 3.1

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Economic & Financial Sector

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Sri Lanka's Eagle Insurance, a unit of Aviva, changed its name to Aviva NDB Insurance.

Since February 2006, Aviva and NDB have been the main shareholders of Eagle with 51% and 41.15% holdings respectively.

Research & Development Unit

Sri Lanka Among Top Growers in 2010:

Eagle InsuranceTransforms into

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J a n u a r y 2 0 1 0

E C O N O M I C C A P S U L E

Analysis & Forecast

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Fiscal Position

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Though Sri Lanka has the potential to achieve a higher GDP growth, risks are driven from the fiscal front.

According to CBSL the overall budget deficit is expected to reduce over the medium term and the improvement in the financial position of both the government and public corporations is expected to release resources to the private sector.

The growth in credit to the private sector is expected to return to positive territory by the second quarter of 2010. It is expected to increase, reaching a year-on-year growth of around 13% by end December 2010.

However, achieving all these targets will depend on how far the government will be able to manage fiscal policy.

Public investments targeting infrastructure development in ports, roads, bridges, water supply and irrigation, power generation, rural infrastructure, education and health services coupled with the sudden demand encountered to facilitate de-mining operations in the newly liberated areas in the north and post-conflict rehabilitation and resettlement expenditure have resulted in raising public investment to 6.5% of GDP in 2009. It is pertinent to note that public investment has been above 6%of GDP throughout the post 2005 period, which shows a significant policy shift from the pre 2005 period.

 

 

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        Fiscal Position (cont…)

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  2007 2008 2009(Target)

2009(Prov.)

Revenue and Grants/GDP (%) 16.6 15.6 15.2 15.1

Revenue /GDP% 15.8 14.9 14.8 14.6

Tax/GDP (%) 14.2 13.3 13.3 12.9

Non Tax/GDP (%) 1.6 1.6 1.4 1.7

Grants/GDP (%) 0.9 0.7 0.5 0.5

Expenditure/GDP (%) 23.5 22.6 22.2 24.8

Current Expenditure/GDP (%) 17.4 16.9 16.9 18.4

Capital Expenditure/GDP (%) 6.1 5.7 5.3 6.5

Public Investment/GDP (%) 6.4 6.0 5.4 6.5

Revenue Deficit / GDP (%) (1.6) (2.0) (2.1) (3.8)

Budget deficit /GDP (%) (6.9) (7.0) (7.0) (9.7)

Total Foreign Financing /GDP (%) 1.8 0.3 (0.0) 1.7

Domestic Financing/ GDP (%) 5.1 6.7 7.0 8.0

Non bank Financing/GDP (%) 4.6 6.6 6.9 7.9

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

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