Economic Capsule June 2011

Economic CapsuleJune 2011

Research & Development Unit

C o n t e n t s

Financial Sector N e w s

ComBank - Best Sri Lankan Trade Bank Once Again !

ComBank Commences Sharia Compliant Banking

ComBank Introduces Tri-lingual Mobile Application

Commercial Bank to take Gold Loans Country-wide

More Great Discounts with ComBanks Dine and Smile !

Branch Openings

Economic & Business N e w s

Sri Lanka Gets USD 236mn FDIs in 1Q, 2011

Issue of 3 year and 4 year SLDBs

Sri Lanka Records 1Q GDP Growth of 7.9 %

Sri Lanka Tourist Arrivals up 39 % in May 11

Movements of the CCPI – June 2011

Sri Lanka seen Luring Back Apparel Buyers

CBSL Designates Chinese “Renminbi” for Banking Transactions in Sri Lanka

CBSL Appoints Lead Managers to the Bond Issue

Sri Lanka to get USD 1.5 bn from China Development Bank

Interest Rates Must Rise Worldwide – BIS

International News Snippets

Greece Adopts Austerity Bill

Christine Lagarde Named IMF Chief

Mild Slowdown of the Global Expansion, and Increasing Risks - IMF


Financial Sector N e w s


Commercial Bank has been adjudged the ‘Best Sri Lankan Trade Bank’ by the prestigious

UK based ‘Trade Finance’ magazine in yet another international acknowledgement of

the Bank’s status as the country’s best bank.

This is the second occasion that the Commercial Bank has been declared the Best Sri

Lankan Trade Bank by Trade Finance. The Bank previously received this accolade in

2009, the year that the category was introduced at the magazine’s annual awards for

banking excellence.

The Commercial Bank’s strong network of agents and correspondents and its expertise

in international trade were cited as some of the reasons for the Bank being singled out

for honours at the Trade Finance Awards for Excellence.

ComBank - Best Sri Lankan Trade Bank Once Again !


ComBank Commences Sharia Compliant Banking

Commercial Bank launched ‘Sharia Compliant Banking’ to better serve an important segment of its customer base that requires Sharia-compliant financial products based on Islamic principles.

Commercial Bank’s Islamic Banking Unit would initially be located on the fourth floor of its headquarters building at No 21, Bristol Street, Colombo 01, but the products would later be made accessible to customers visiting branches via the bank’s sophisticated IT system.

Services Offered:

Mudaraba - Profit Sharing Investment Musharaka - Joint Ownership

Murabaha - Trade Financing

Ijara - Islamic Leasing

Diminishing Musharaka - Financing of Assets

For further details + 94 11 2 486 072-5


ComBank Introduces Tri-lingual Mobile Application Commercial Bank introduced a new mobile banking application to its portfolio of innovative customer-access products. The new application which will be initially available to Commercial Bank account-holders with Dialog, Airtel and Etisalat mobile phone connections with GPRS facility enabled in their phones, can be accessed through a menu available in English, Sinhala and Tamil.

Facilities Available:Balance Inquiry (Current & Savings in all currencies)Micro Statement - (last 4 transactions)Fund Transfers - (between own accounts)Checking Master/Visa Card balanceBill Payments - All Fixed/Mobile Phone Connections, Water, CEB & LECOPre Paid Mobile reloadsViewing Foreign Exchange RatesChanging of PIN

Bank expects to introduce further value additions to the mobile banking facility in the near future.

These will include services enabling customers to remit funds, block lost/stolen cards, order bank statements and cheque books, get information on the status of deposited cheques and access Commercial Bank’s ATM/Branch locator.

Commercial Bank's internet banking facilities are also to be shortly offered via a Wireless Application Protocol (WAP) portal

For further details + 94 11 4 935536/7


Commercial Bank to take Gold Loans Country-wide Commercial Bank plans to extend its ‘Gold Loans’ facility to its widespread

branch network island-wide, to offer the masses an opportunity to use their gold to mobilise funds with one of the country’s most stable financial institutions.

The Bank has already enabled 108 branches with the necessary infrastructure and deployed specially trained staff to offer Gold Loan facilities to customers. Commercial Bank plans to offer the Gold Loan facility through its entire network of branches except supermarket banking units by August 2011.

This new thrust into Gold Loans is backed by a commitment to offer up to 80 % of the gold value, in the form of jewellery, biscuits or bars, and a lower-than-average interest rate of 14 % per annum (1.16 % per month) on the advances.

The minimum advance offered by Commercial Bank as a Gold Loan would be Rs 10,000, making the facility viable for a wide segment of the populace.

A choice of terms of six months or one year for repayment and redemption of the gold would be available to customers.

For more info: http://www.combank.lk/newweb/personal/loans?product=Personal-Pawning


More Great Discounts with ComBanks Dine and Smile !

Promo period : 19th June to 31st August 2011

Eligible cards : All Credit and Debit cards of ComBank

Discount percentage : 25% on the bill for Dining (Only @ "Pizza hut " the discount will be available for Dining as well as Takeaway and Delivery.)

Restaurants : Ceylon Continental (Tandoori & The Emerald restaurants), Pizza Hut, Barista Lavazza, Loon Tao - College Avenue,

Mount Lavinia, Raja Bojun - Galle Road, Colombo 3, Urban Kitchen - Hyde Park Corner, Colombo 2, Jack Tree - Park Road, Colombo 5, Mango

Tree - Dharmapala Mw, Colombo 3, Prima Taste Restaurant – Rajagiriya, Bars Café - Deal Place, Colombo 3, Oak Ray Restaurant – Kandy,

Senani Restaurant – Kandy, Devons Captains Table – Kandy.

Conditions apply

Minimum bill value: Rs. 500/-For more info: http://www.combank.net/newweb/info/192


Branch Openings

198

Nittabuwa

Nihal Super Market, No. 638, New Bus Stand, Nittambuwa.


Economic & Business N e w s


Sri Lanka Gets USD 236mn FDIs in 1Q, 2011

Sri Lanka received USD 236 mn as FDIs in 1Q of 2011, up 160 % from a year earlier. The strong performance was helped by investments in the tourism sector which accounted for USD 132 mn. Hong Kong based Shangri-La group which bought land in Sri Lanka's capital Colombo and Hambantota in the South

was the top contributor in the first quarter. Utilities brought the next highest investments of USD 62 mn led by telecoms. Apparel sector brought USD 7 mn

worth FDIs.

BOI Targets: BOI expects to attract a total of USD 1 bn as FDIs in 2011. The BOI is planning to increase FDIs to USD 2.5 bn by 2015 which will be around 4.0 % of GDP, up from the current

level of about 1.04 % of GDP.

2009 2010 1Q, 2011 2011* 2015*

Amount (USD Mn) 601 516 236 1,000 2,500

The views expressed in Economic Capsule are not necessarily those of the Management of Commercial Bank of Ceylon PLC


Issue of 3 year and 4 year SLDBs

With the current US quantitative easing programme expected to continue until late 2012 or early 2013, these are good times for Sri Lanka to consider borrowing through euro bonds and utilize the money to retire expensive debt borrowed earlier.

Once the US economy begins to rebound and Federal Reserve starts to tighten monetary policy, there would be some capital flight back into US debt, which could apply pressure on yields of emerging economies.

Amount USD 100 mn

Interest Rate USD 6 month LIBOR + a margin to be determined through competitive bidding

Total Bids Received USD 134.5 mn

Bids Accepted by Govt.

USD 103.5 mn in 3 year maturity – USD 6 month LIBOR + 365 bps (weighted average margin) = 4.05275 USD 23.0 mn in 4 year maturity – USD 6 month LIBOR + 375 bps (weighted average margin) = 4.15275

*USD 6 month LIBOR rate as @ 27.06.11 - 0.40275%

Purpose To be used to settle maturing SLDBs of USD 125.8 mn



Sri Lanka Records 2011 - 1Q GDP Growth of 7.9 %

Sri Lanka's economy grew 7.9 % in the first quarter of 2011, up from 7.1 % in the same period a year ago, with strong growth in industry and services while the agriculture sector contracted.

The industry sector grew by 11.1 % and services by 9.5 % while agriculture contracted by 5.1 %.



Sri Lanka Tourist Arrivals up 39 % in May 11

Tourist arrivals to Sri Lanka rose 39% to 48,943 in May 2011 from a year earlier, led by increases in visitors from India and East Asia. In the five months to May arrivals rose 40.2 % to 327,902 from a year earlier.

Tourist Arrivals by Country of Residence

Jan - May

2010 2011 % Cha.

North America 14,319 17,711 23.7Canada 7,683 9,044 17.7USA 6,636 8,667 30.6Latin America & Caribbean 261 459 75.9Western Europe 94,369 129,367 37.1France 11,999 22,335 86.1UK 38,725 41,474 7.1Germany 19,618 23,065 17.6Eastern Europe 15,913 19,919 25.2Russia 5,782 7,400 28.0Africa 674 1,137 68.7Middle East 11,146 15,958 43.2East Asia 24,294 34,504 42.0China 3,838 7,481 94.9Japan 5,350 6,706 25.3Malaysia 4,515 5,972 32.3Singapore 3,608 5,300 46.9South Asia 61,726 93,139 50.9India 44,549 68,830 54.5Maldives 12,633 15,624 23.7Australia 11,220 15,708 40.0Australia 10,026 13,933 39.0

Source: Sri Lanka Tourism Development Authority



Movements of the CCPI – June 2011 (Base: 2006/07 = 100) (New Index)

The new Colombo Consumer Price Index (CCPI) uses surveys done in 2006 and 2007 replacing the existing one, which has a base year of 2002 and was introduced in early 2008.

The weight for food items under the new index has been reduced to 41.03% from 46.71%, while the weight on housing, water, electricity, and gas has increased to 23.72% from 18.29%.

The new index does not include alcoholic beverages and tobacco products. It also have a higher weight for rice, and a lower one for wheat.

The new index, similar to the existing one, will cover only the greater Colombo area.

PeriodCCPI (%) CCPI Core (%)

Y-o-Y A.A. Y-o-Y A.A.May, 2011 8.2 6.6 8.4 6.9

June, 2011 7.1 6.7 8.7 7.1



Sri Lanka seen Luring Back Apparel Buyers Sri Lanka has begun luring back foreign apparel buyers who shifted to other Asian producers following the global economic crisis .

World's leading apparel buyers had shifted their sourcing towards low cost countries such as Bangladesh, Vietnam and Cambodia from Sri Lanka in the light of the global economic turmoil. However, these low cost destinations had failed to accomplish service levels with required standards . Therefore, such buyers are gradually returning to Sri Lanka.

Also, Middle East is no more a major supplier -Egypt, Dubai, Bahrain who were huge suppliers - have wound up.

Sri Lanka can also benefit from rising costs in China. (challenged with currency appreciation, subsidy withdrawals and escalating labour costs China is rapidly turning into an unprofitable garment manufacturing destination.)

This trend in China presents an opening for Sri Lanka to reinforce its position as a cost effective sourcing country in the global fashion industry.

Sri Lanka's garment manufacturing sector overcome hurdles -end of textile quotas and withdrawal of GSP+ import duty concessions by the European Union.

In the first quarter of 2011 Sri Lanka's apparel exports surged 74% to USD 1,225 mn.

JAAF, has forecasted apparel exports to reach USD 5.0 bn by 2015, from the USD 3.4 bn in 2010.



CBSL Designates Chinese “Renminbi” for Banking Transactions in Sri Lanka

CBSL has decided to include the Chinese Renminbi in the list of designated currencies permitted for international transactions through banks in Sri Lanka in terms of the provisions of the Banking Act.

Accordingly, the public can now undertake all permitted transactions in foreign currency in Renminbi with banks authorized for such transactions.

The other currencies in the designated list are Australian Dollar, Canadian Dollar, Danish Kroner, Euro, Hong Kong Dollar, Japanese Yen, New Zealand Dollar, Norwegian Kroner, Pound Sterling, Singapore Dollar, Swedish Kroner, Swiss Franc and United States Dollar.

China is recognized today as the world’s second largest economy, while also being a leading player in international trade, investments, and foreign reserves.

It also enjoys extensive economic connections with many countries, as a result of which the Renminbi has been gradually evolving as a globally acceptable currency.

Since Sri Lanka too has a growing volume of trade and investments transactions with China, the use of the Chinese currency, Renminbi, in banking transactions would significantly facilitate such trade and investments.



Sri Lanka, has appointed four institutions, namely Bank of America Merrill Lynch, Barclays Capital PLC, The Hongkong and Shanghai Banking Corporation Limited, and The Royal Bank of Scotland PLC as Joint Lead Managers to advise and handle a future international sovereign bond issue.

The appointments have been made after evaluating the proposals received from 7 leading international banks/investment houses.

CBSL Appoints Lead Managers to the Bond Issue

Sri Lanka to get USD 1.5 bn from China Development Bank

China Development Bank Corporation has agreed to finance infrastructure projects in Sri Lanka amounting to USD 1.5 bn over the next three years.

According to government sources the financial assistance will be for bridges, roads, water supply, irrigation and power.



Interest Rates Must Rise Worldwide – BIS

The Bank for International Settlements (BIS) has warned that low interest rates across the globe are a threat to world financial stability and low cost of borrowing had resulted in a credit and property price boom that was fuelling inflation, especially in emerging economies.

Central banks across the globe have cut interest rates in an attempt to boost growth after the 2008 financial crisis.

"Property prices in a number of emerging market economies are advancing at staggeringly rapid rates, and private sector indebtedness is rising fast," the BIS stated. It also warned that the trend was very similar to that triggered by the global financial crisis.

"Emerging market economies managed to escape the worst of the crisis, but many now run the risk of building up imbalances very similar to those seen in advanced economies in the lead-up to the crisis," the bank stated.

Sri Lanka Date of Change Repo (%) RRepo (%)

23.02.2007 10.50 12.00

11.02.2009 10.25 11.75

22.04.2009 9.00 -

21.05.2009 - 11.50

16.06.2009 8.50 11.00

11.09.2009 8.00 10.50

18.11.2009 7.50 9.75

12.07.2010 7.25 9.50

20.08.2010 7.25 9.00

11.01.2011 7.00 8.50

In Sri Lanka the low interest rate scenario can be expected to prevail for the greater part of 2011.

However, interest rates are expected to go up towards the end of 2011.



India's central bank raised its key short-term interest rates by 25 basis points, its 10th hike in 16 months - in a bid to tame high inflation.

The Reserve Bank of India raised the rate - at which it lends to commercial banks to 7.50% (highest since November 2008) and increased the rate - it pays to banks for deposits to 6.50%.

The central bank decision came after data showed annual inflation accelerated to a higher-than-expected 9.06% in May, 2011 from 8.66% in the previous month. This is well above the RBI target of 5.0-6.0%.

India Hikes Interest Rates by 25 Basis Points

CBSL lending rates to banks : - 8.5% The rate CBSL pays to banks for deposits - 7.0%

FED Cuts its US Economic Growth Forecast

The Federal Reserve has cut its growth forecast for the US economy in the face of the impact of higher energy prices.

It now estimates that the US economy will expand between 2.7% and 2.9% in 2011, down from its April forecast of 3.1% to 3.3%.

The US central bank has also warned that unemployment would remain stubbornly high throughout 2011.

Sri Lanka Growth Forecast 2011: 8 % - 8.5 %

S&P Makes Greece its Least Credit-Worthy Country

Sri Lanka’s S&P Rating: B+

French 11’ Debt Outlook Raised to 85.4% of output

Sri Lanka’s Public Debt Projection 2011: 80% of GDP

Standard & Poor's has cut Greece's credit rating, making it its least credit-worthy country. S&P cut Greece three notches from B to CCC and stated the country was likely to default on its debts at least once by 2013..

The French public debt is set to be 85.4% of output in 2011 and 86.9% in 2012.

According to EU and Eurozone rules the debt should not exceed 60% of output, but many members are far above this limit.

The government had estimated previously that the debt would amount to 84.6% of GDP in 2011 and 86.9 % in 2012.



Greece Adopts Austerity Bill

The vote on detailed measures to implement 28 billion euros in spending cuts, tax increases and privatisations passed without any of the wild street battles which marred the vote on an initial austerity bill.

The Eurogroup of euro zone finance ministers is now likely to approve payment of the latest loan instalment this weekend.

Christine Lagarde Named IMF Chief

France's Finance Minister Christine Lagarde, 55, has been named the first woman to head the International Monetary Fund (IMF).

Ms Lagarde fought off Mexico's Agustin Carstens for the job, although an IMF statement said that both candidates "were well qualified".

She received backing from America and Europe and key emerging market nations, including China, India and Brazil.

The post became vacant following the resignation of Dominique Strauss-Kahn.

Before becoming France's finance minister in June 2007, she was minister for foreign trade for two years.

Prior to moving into politics, Ms Lagarde, a former champion swimmer, was an anti-trust and employment lawyer in the US.

The Greek parliament passed a second austerity bill , opening the way for the EU and IMF to release a 12 billion euro loan instalment which Athens urgently needs to stave off bankruptcy.



Mild Slowdown of the Global Expansion, and Increasing Risks - IMF

World activity is slowing down temporarily, and downside risks have increased again. The global expansion remains unbalanced.

Growth in many advanced economies is still weak, considering the depth of the recession. In addition, the mild slowdown observed in the second quarter of 2011 is not reassuring. Growth in most emerging and developing economies continues to be strong.

Overall, the global economy expanded at an annualized rate of 4.3 % in the first quarter, and forecasts for 2011–12 are broadly unchanged, with offsetting changes across various economies.

Projections 2010 2011 2012World Output 5.1 4.3 4.5Advanced Economies 3.0 2.2 2.6

United States 2.9 2.5 2.7Euro Area 1.8 2.0 1.7

Germany 3.5 3.2 2.0France 1.4 2.1 1.9Italy 1.3 1.0 1.3Spain -0.1 0.8 1.6

Japan 4.0 -0.7 2.9United Kingdom 1.3 1.5 2.5

Emerging & Developing Economies 7.4 6.6 6.4Russia 4.0 4.8 4.5Developing Asia 9.6 8.4 8.4

China 10.3 9.6 9.5India 10.4 8.2 7.8ASEAN-5 1 6.9 5.4 5.7

Brazil 5.5 4.7 4.0

Oil Prices (USD) 2 79.03 106.3 105.25Consumer Prices Advanced Economies 1.6 2.6 1.7Emerging & Developing Economies 6.1 6.9 5.6London Interbank Offered Rate (%)3

On US Dollar Deposits 0.5 0.6 0.6On Euro Deposits 0.8 1.7 2.61. Indonesia, Malaysia, Philippines, Thailand, and Vietnam.

2. Simple average prices of U.K. Brent, Dubai, and West Texas Intermediate crude oil per barrel.

3. Six-month rate for the United States & three-month rate for the euro area.

Overview of the World Economic Outlook - IMF




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 chief cause of failure and unhappinessis trading what you want most - for what you want right now.

Zig Ziglar


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Economic Capsule June 2011

Investor Relations