Economic Capsule August 2010

August 2010

Research & Development Unit

ECONOMIC CAPSULE

Banks to Enhance CapitalComBank Reduce the Interest Rates on its ‘Nivahana’ Home Loan Product ComBank in Mega Promotion with Singer Commercial Bank Launches Innovative ‘Gold Overdraft’ Facility Branch Openings Credit Growth

External Trade Performance – June, 2010 Inflation – August, 2010 Sri Lanka International Sovereign Bond Issue of USD 1,000 mn in 2010Sri Lanka Seeks Moody's Debt Rating Before USD 1 Bn Sovereign Bond SaleSnippets Sri Lanka Advised to Improve Connectivity to Prosperous Areas by World Bank

Financial Sector News

Economy & Business News

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ECONOMIC CAPSULE – AUGUST, 2010

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< FINANCIAL SECTOR NEWS >

>> Branch Openings

>> ComBank Reduce the Interest Rates on its ‘Nivahana’ Home Loan Product

>> CBSL Cuts Reverse Repurchase Rate

Credit Growth >>

>> Banks to Enhance Capital

>> ComBank in Mega Promotion with Singer

>> Commercial Bank Launches Innovative ‘Gold Overdraft’ Facility


Banks to Enhance CapitalBack to

Contents

The Monetary Board of the Central Bank of Sri Lanka has decided to increase the minimum capital requirement of licensed banks, as follows:

Effective Year/Date LCBs (Rs. Bn.)

LSBs (Rs. Bn.)

New Banks Existing Banks

2010 31.12.2011 3.0 2.0

2012 31.12.2013 4.0 2.5

2014 31.12.2015 5.0 3.0

In keeping abreast with this requirement and having considered the need for enhancing the ability of banks to raise additional capital in a more transparent manner and further improving governance through market discipline, the Monetary Board has also decided to require unlisted locally incorporated private banks to list in the Colombo Stock Exchange by 31.12.2011.

Commercial Bank has announced a reduction in the interest rate on its Home Loan Product, offering a floating rate of 12.5% per annum or a fixed rate of 13.5% per cent per annum.


ComBank Reduce the Interest Rates on its ‘Nivahana’ Home Loan Product Back to

Contents

Bank Fixed Floating

13.5 % 12.5 %

13.5% 12.5 %

N/A 13.5%

N/A

Upto 01 Mn. – 12.75%01 – 2.5 Mn. – 13.50%2.5 – 05 Mn. – 14.00%05 – 10 Mn. – 14.50%Over 10 Mn. – 15.00%

N/A 14%

N/A 14%

Upto 500,000 – 12%500,000 – 1 Mn. – 13%

Over 1 Mn. – 14% N/A

N/A 16%

14.5% 13.5%


ComBank in Mega Promotion with Singer

Valuable discounts of up to 30% on an extensive array of products are on offer to Credit and Shopping Debit Card holders of Commercial Bank under a new promotion launched with the consumer durables retail giant Singer.

Effective 18th August to end October 2010, the promotion not only offers some of the largest discounts ever seen, but also enables cardholders to purchase items on zero-interest basis with repayment over 12 months and still be eligible for the discounts.

Available at all four of the Singer Group’s retail Channels, - Singer Plus, Singer Mega, Singer Homes and Sisil World -- the discounts cover items ranging from home electronic appliances like television sets, audio and video systems, home theatre systems, refrigerators, washing machines, dishwashers, kitchen appliances and gas cookers to furniture, desktop and laptop computers, sewing machines, power generators, bicycles and even home security systems.

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Commercial Bank Launches Innovative ‘Gold Overdraft’ Facility

An overdraft facility that is literally worth its weight in gold has been launched by the Commercial Bank to provide an innovative solution for people who may periodically need access to extra cash at short notice.

Secured by gold or gold jewellery over 18kt deposited with the Bank, the Commercial Bank Gold Overdraft facility can be obtained quickly, with minimal documentation and procedures.

Targeted at businessmen and high-earning executives, the facility is designed to provide access to funds for short term investments or for bridging finance, and can be operated for an initial period of one year or extended if required.

A customer who deposits gold gets a current account opened, using which he or she may avail of the overdraft by issuing cheques.

The interest rate applicable is 15 %, which is much lower than a regular overdraft interest rate. Account holders have the option of repaying the facility at anytime partially or fully.

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183 @ Valachenai

184 @ Wellawaya

Branch Openings


Branch Openings Back to

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Source: CBSL

Central Bank had reduced the reverse repurchase rate by 50 basis points with

effect from 20.08.10 while keeping the repurchase rate unchanged.

Date of Change Repo (%) RRrepo (%)23.02.2007 10.500 12.000

11.02.2009 10.250 11.750

22.04.2009 9.000 11.750

21.05.2009 9.000 11.500

16.06.2009 8.500 11.000

11.09.2009 8.000 10.500

18.11.2009 7.500 9.750

10.07.2009 7.250 9.500

20.08.2010 7.250 9.000

CBSL Cuts Reverse Repurchase Rate


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Interest rates revisions

Credit Growth Back to

Contents

Credit to the Private Sector – YoY Change%

Credit to the Private Sector (Rs. Bn.)

Jun – 10 Jun – 09 Increase

Rupee loans 1,116.6 1,051.8 6.2

Forex loans 152.2 143.2 6.3

Total private sector loans 1,268.9 1,195.0 6.2


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<< ECONOMY AND BUSINESS NEWS

>> External Trade Performance – June 2010

>> Sri Lanka – 66th Best Country

>> Sri Lanka July Tourist Arrivals up 50%

>> Sri Lanka advised to Improve Connectivity to prosperous Areas by World Bank


>> Inflation– August 2010

Sri Lanka’s external sector performance improved in June, 2010 reflecting enhanced trade and higher remittances.


External Trade Performance – June, 2010

Category

Jan - June2009

US$ mn

Jan - June2010

US$ mn

Change%

Exports 3,188.66 3,624.20 13.7 Imports 4,551.59 6,467.76 42.1 Balance of Trade -1,362.93 -2,843.56 -108.6 Workers’ Remittances 1,602.91 1,820.01 13.54

Inflation – August, 2010

Inflation, as measured by the Colombo Consumers’ Price Index (CCPI), increased to 5.0 % in August 2010, on a point-to-point basis, from 4.3 % in July,2010 mainly due to the increase in prices of some varieties of fish and sea food, meat, milk powder, bread, wheat flour, meals bought from outside, fruits and garments. This increase came after 5 consecutive months in which inflation declined.

Meanwhile, the annual average inflation registered a marginal increase to 4.5 % in August from 4.2 % in the previous month, as a result of the price developments in the preceding twelve month period.

However, the core inflation, which measures the price movement of non-food and non-energy items of the CCPI basket, decreased to 5.5 % in August from 5.9 % in the previous month on a point-to-point basis, while the annual average core inflation stabilized at 6.3 % for the third consecutive month.

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Sri Lanka International Sovereign Bond Issue of USD 1,000 mn in 2010Back to

Contents

The Central Bank of Sri Lanka (CBSL), on behalf of the Government, plans to issue an International Sovereign Bond amounting to USD 1,000 mn. The issuance will be timed subject to market conditions probably later this year.

After evaluation of the proposals received from seven international investment banks, the Government of Sri Lanka has selected the Hongkong and Shanghai Banking Corporation Limited (HSBC), Bank of America Merrill Lynch and the Royal Bank of Scotland (RBS) as Joint Lead Managers and Bookrunners for the proposed issuance.

In addition, Bank of Ceylon has been appointed as a Co-manager to work with the three Joint Lead Managers to execute the proposed bond issuance.

The proceeds from this Sovereign Bond issue would be utilized for infrastructure development activities carried out by the government and to restructure the existing government debt portfolio by retiring high cost domestic debt and short term foreign currency denominated debt.

Year Amount(USD mn) Period Interest

RateOversubscribed

by Distribution Rating Lead Managers

October, 2007 500 5 years 8.25% More than 03 times

USA - 40%Europe - 30%Asia - 30%

S& P: B +Fitch: BB –

Barclays CapitalHSBCJPMorgan

October, 2009 500 5 years 7.40% More than 13 times

USA - 45%Europe - 31%Asia - 24%

S& P : BFitch : B +

HSBCJ.P. MorganThe Royal Bank of Scotland

Previous Issues


Sri Lanka Seeks Moody's Debt Rating Before USD 1 Bn Sovereign Bond Sale

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According to Central Bank Assistant Governor C.J.P. Siriwardena, Sri Lanka is seeking a rating of its sovereign debt from Moody’s Investors Service ahead of a planned USD 1 bn overseas bond sale.

Moody’s doesn’t have a credit rating for Sri Lanka, while Standard & Poor’s and Fitch Ratings have placed the country’s long-term foreign-currency debt at non-investment grade.

S&P and Fitch raised their outlook on Sri Lanka’s debt in October, 2009

S&P lifted the outlook on Sri Lanka to positive from stable, and affirmed the nation’s long-term foreign-currency debt rating at B, five levels below investment grade.

Fitch changed the outlook to stable from negative. It affirmed Sri Lanka’s rating at B+, four levels below investment grade.

Sri Lanka has selected three leading international banks, namely The Hong Kong and Shanghai Banking Corporation Ltd, Bank of America Merrill Lynch and The Royal Bank of Scotland PLC as rating advisors for a period of four years starting July 2010 to assist and guide the GOSL to achieve its stated objective of attaining investment grade ratings by 2014.

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


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Sri Lanka Rural Finance Market Eyed by India's Mahindra

According to officials, India's Mahindra and Mahindra group plans to enter Sri Lanka's financial sector, especially the rural areas.The group plans to get into financing all automobiles and later get into all financial sectors such as rural housing. The USD 7.1 bn Mahindra Group manufactures utility vehicles and tractors in India, is in information technology, and has a growing business in financial services, tourism, infrastructure development, trade and logistics.

China Overtakes Japan in 2Q as No. 2 EconomyChina passed Japan in the second quarter of 2010 to become the world’s second-largest economy behind the United States. The recognition came when Tokyo stated that Japan’s economy was valued at about USD 1.28 trillion in the second quarter, slightly below China’s USD 1.33 trillion. Japan’s economy grew 0.4 % in the quarter, substantially less than what was forecast. That weakness suggests that China’s economy will race past Japan’s for the full year. According to experts, unseating Japan — and in recent years passing Germany, France and Great Britain — underscores China’s growing clout and bolsters forecasts that China will pass the United States as the world’s biggest economy as early as 2030. And while the United States and the European Union are struggling to grow in the wake of the worst economic crisis in decades, China has continued to climb up the economic league tables by investing heavily in infrastructure and backing a USD 586 bn stimulus plan.

Sri Lanka - 66th Best Country *Best in South Asia

The USA based Newsweek magazine has ranked Sri Lanka as the 66th best country in a recent survey. Malaysia is in the 37th position while Thailand, China and the Philippines are positioned at 58th, 59th and 63rd. The magazine had selected 100 countries based on a survey conducted on different parameters including the levels of education and health fields, quality of life, economic dynamism and political environment. The survey was conducted by a panel of economists and social policy experts. Of the 100 countries, India is 78th, Bangladesh 88th and Pakistan 89th. Finland has been ranked the best country with Sweden and Switzerland dropping to second and third places. Cont.



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Sri Lanka July Tourist Arrivals up 50% Tourist arrivals into Sri Lanka surged by 50% in July 2010 to 63,339 from a year ago as post-war optimism and removal of travel advisories encouraged visitors even during the off-season. The total number of tourist arrivals in the January-July 2010 period was up 48.7 % to 341,991 from the corresponding period a year ago.The increase in the number of visitors was driven largely by more arrivals from Western Europe, the traditional main market for Sri Lanka, from where arrivals shot up 72 % to 28,738. The number of visitors from the Middle East, a new market the tourism industry is trying to exploit, rose by 68 % to 6,975. The number of arrivals from South Asia, which has also emerged as a big market for Sri Lanka, rose 15 % to 12,736 in July 2010 from a year ago led by visitors from India, up 35 % to 9,058.

Asia leads world tourism recovery in 2010According to the United Nations World Tourism Organisation, world tourism rebounded strongly in 2010 from the global financial crisis, led by Asia and the Middle East.

International tourist arrivals totaled 421 mn in the first six months of 2010, up 7.0 % on last year but still 2.0 % below the record year of 2008.

Asia and the Pacific, where tourist arrivals were up 14 %, and the Middle East, where the figure was 20 %.

Asia in particular is experiencing a very dynamic rebound, it, noting strong results in particular from Sri Lanka, Japan, Vietnam, Myanmar and Hong Kong.

Tourism in the Americas was up 7.0 %, and Europe 2.0 %.

For the whole of 2010, the body maintained its forecast of 3.0 to 4.0 % growth in international tourism.

Current growth rates, coupled with an improving global economic environment suggest that end-year results are likely to be closer to 4.0 %, and may even exceed this figure.

However, high unemployment continues to be a major cause of concern and the austerity measures as well as the rise in taxation implemented in several advanced economies to fight public deficits represent a clear challenge to many leading outbound markets.


Sri Lanka Advised to Improve Connectivity to Prosperous Areas by World Bank

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The World Bank has advised Sri Lanka to change its development approach and improve access of people to prosperous parts of the country instead of shifting economic activity to lagging regions.

Growth can be speeded up by enabling people to seek economic opportunities, improving quality of basic services across regions, and targeting interventions to stimulate economic growth in selected lagging areas.

This can lead to "rapid and geographically inclusive" growth in Sri Lanka, said a new World Bank report called “Sri Lanka: Reshaping Economic Geography: Connecting People to Prosperity.”

A World Bank statement had quoted Naoko Ishii, World Bank Country Director for Sri Lanka, as saying Sri Lanka’s development drive to middle income status can still be inclusive if people who start their lives in lagging regions of the country can be connected to leading areas where there are economic opportunities.

However, targeted interventions aimed at simply relocating economic activities to lagging areas can in reality slow down economic progress because workers and firms earn higher returns when located close to the international gateway and to similar businesses.

While economic production has become concentrated, Sri Lanka’s public policies have been "remarkably successful" in levelling social welfare and preparing the ground for "inclusive" development by raising living standards everywhere.

Poverty has come down in all provinces and service delivery in education, basic healthcare, and basic infrastructure including water and sanitation is dispersed throughout the country.

Sri Lanka needs to build on what has already been achieved and design and implement more ambitious policies to improve living standards across provinces, amplifying but not dampening the processes of geographic transformation.

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

Investing should be more like watching paint dry or watching grass grow.

If you want excitement, take $800 and go to Las Vegas.

Paul Samuelson

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Economic Capsule August 2010

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