ECONOMIC CAPSULE May 2011

Research & Development Unit

Commercial Bank Announce Rs. 9.7 bn Rights Issue

Economic & Business News

Financial Sector News

Sri Lanka Aims for Better Rating before USD 1 bn Bond Sale

Sri Lanka Seen more Expensive than Rival Tourist Destinations

New Inflation Index Awaits Cabinet Approval

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Analysis & Forecast

Emerging Markets Redefining Global Economic Structure - World Bank

Where will the Next $ 10 trillion of GDP come from?

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Back to ContentsCommercial Bank Announce Rs. 9.7 bn Rights Issue

CBC announced a Rs. 9.7 bn Rights Issue followed by a share sub division.

Expected to raise: By issuing: in the ratio of : At an issue price of:

Ordinary Voting Shares Rs. 4,627,388,430.00 25,474,200 shares 1:14 Rs. 181.65 each

Ordinary Non Voting Shares Rs. 227,141,264.35 1,745,495 shares 1:14 Rs. 130.13 each

The objective of the Rights Issue is to increase the Tier 1 Capital of the Bank in order to accommodate & facilitate the future business growth of the Bank.

Post Rights the share of CBC will be subdivided on the basis of one for one (1:1).  

Research & Development Unit Reasonable care has been taken to maintain accuracy of information. However Commercial Bank of Ceylon PLC and/or its employees should not be held responsible for any loss or damage suffered in consequence of using such information

Economy & Business News > >

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Sri Lanka Aims for Better Rating before USD 1 bn Bond Sale

With favourable recommendations expected from Standard and Poor’s (who have just paid a visit to Sri Lanka) , Fitch and Moody’s (expected to visit Sri Lanka during June-July 2011) , Sri Lanka is looking forward to an upward revision in sovereign ratings.  

Rating Agency

Current Rating

Current

Outlook

S&P B+ Stable

Fitch B+ Positive

Moody’s B1 Stable

Central Bank has set its sights on Sri Lanka achieving a rating of at least “BBB” just one notch below investment grade by 2014 to allow it to borrow at cheaper interest rates on the international market.

Sri Lanka currently has a “B+” grade, five notches below investment grade, from global ratings agency Standard and Poor’s.

According to the central bank governor, the planned bond will carry a tenure of 10 years or more and roadshows have been lined up in June, 2011 in London, Singapore and New York.

It will be Sri Lanka’s fourth international bond offering, known as a eurobond, since it first tapped foreign capital markets in 2007.

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Research & Development Unit Reasonable care has been taken to maintain accuracy of information. However Commercial Bank of Ceylon PLC and/or its employees should not be held responsible for any loss or damage suffered in consequence of using such information

Back to ContentsSri Lanka Seen more Expensive than Rival Tourist Destinations Back to

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According to a report done by Capital Alliance, Sri Lanka appears to be priced at the top tier in hotel room rates compared to its regional rivals.

On average, Sri Lanka is only more economical than its competitor markets for three-star rated beach resort hotels. For all other categories (3+, 4, 4+), Sri Lanka is more expensive than the non-Sri Lanka market segments.

It compared room rates in Sri Lanka, which have gone up following an influx of tourists after the end of the war, with those in Thailand, Indonesia, Vietnam and Kenya.

According to the report, tourism industry in Sri Lanka in the past has mainly attracted "low to middle income travellers who have a greater income elasticity of demand on recreational activities." It noted that the government now intends moving away from mass scale tourism to attract upscale travellers.

 

Sri Lanka Tourist Arrivals up 67 % in April, 2011

Tourist arrivals into Sri Lanka rose 66.7 % to 63,835 in April 2011 from a year ago with sharp increases in visitors from South Asia and the traditional Western European markets.

The number of visitors from Western Europe, rose 70% to 23,226 and tourists from south Asia grew strongly mainly driven by Indians whose numbers rose 90 % to 14,705 in March 2011 from a year ago.

Total arrivals were up 40.4% to 278,959 in the four months to April, 2011.

Earnings from tourism during Jan – April 2011 increased by 54.7% to USD 270.6 mn compared to the corresponding period of 2010.

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Research & Development Unit Reasonable care has been taken to maintain accuracy of information. However Commercial Bank of Ceylon PLC and/or its employees should not be held responsible for any loss or damage suffered in consequence of using such information

World Travel Industry looks to China, India and Brazil for Boom China, India and Brazil are poised to fuel an

explosion in international tourism in the coming years, showering money and jobs on countries ready for it, and trouble for those that aren't, according to the CEO of the World Travel and Tourism Council.

With an estimated two billion new middle class consumers expected to come into the markets from those emerging powerhouses over the next two decades, the travel industry sees a potential gold rush ahead.

China outbound travel is growing at around 20% per annum. The number of outbound Chinese travelers recorded 58 mn in 2010.

The soaring Brazilian economy has induced an outbound travel boom. The Chinese and the Brazilian travelers are the highest spenders. They have outpaced other travelers in the world by 25 to 50 % per person.

China has replaced Spain as the world's third most visited country, behind France and the United States, figures from the UN World Tourism Organisation showed.

China had 55.98 mn international arrivals in 2010, up 10 %, edging past Spain, which received some 53 mn foreign tourists, a rise of 1.4 %.

France remained in top spot, with 78.95 mn visitors, followed by the the United States with 60.88 mn, up 2.8 % and 10.9 % respectively.

In 2008, the United States overtook Spain to become the number two destination.

International tourist arrivals by country of destination 2010

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Research & Development Unit Reasonable care has been taken to maintain accuracy of information. However Commercial Bank of Ceylon PLC and/or its employees should not be held responsible for any loss or damage suffered in consequence of using such information

New Inflation Index Awaits Cabinet Approval

Sri Lanka plans to introduce a new inflation index from June, 2011 to reflect the latest consumption and economic pattern, according to the Department of Census and Statistics.

The New Index > > > The new Colombo Consumer Price Index (CCPI) will use surveys done in 2006 and 2007

and replace 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 41.05% from 46.71%, while the weight on housing, water, electricity, and gas has increased to 23.74% from 18.29%.

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

The proposed index, similar to the existing one, will cover only the greater Colombo area and the base years will be 2006/7 as compiled data on the consumer surveys done in 2010 are not available yet.

The new index comes at a time when the current index shows an year-on-year decrease of 8.8 % in May 2011 compared to 9.8 % in April 2011 while the annual average inflation rose to 6.9% in May 2011 from 6.6 % in April, 2011.

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Sri Lanka to enable lending against moveable assetsSri Lankan banks will soon be able to lend against moveable property with a new initiative by the Credit Information Bureau (CRIB).The CRIB plans to set up a 'secured transaction registry' from June 01, 2011 that will enable registration of moveable assets against which banks can give loans. Sri Lankan banks usually lend only against fixed asset collateral such as land and buildings as they can be traced through land registries.

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Branch openning

Softlogic plans to raise Rs.4 bn through IPO Softlogic plans to raise Rs. 4 bn through an initial public offering in June, 2011 and the shares will be priced at Rs. 29 each. Softlogic, which is selling 137.9 mn shares or 17 % of the company, is the exclusive distributor for Nokia handsets and Dell computers in Sri Lanka. It also

has operations in information and communication technology, healthcare, retail, auto mobile, leisure, and financial sectors.

Indian rating agency to offer services in SL India’s rating major ICRA Limited (ICRA) is poised to offer credit rating services in Sri Lanka, following the licence granted to ICRA Lanka Limited (ICRA

Lanka), a wholly-owned subsidiary of ICRA, by the Securities and Exchange Commission of Sri Lanka. The Lankan venture was incorporated in early 2011 and will be offering its services in the local market, using parent ICRA’s accumulated experience in

the areas of credit rating, grading and investment information.

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CIC Agri Businesses ventures overseas CIC Agri Businesses, formed a joint venture with Rahimafrooz (Bangladesh) Private Limited, a reputed business house in Bangladesh in a bid to expand

it’s agri business operations in that country. The joint venture company known as Rahimafrooz CIC Agri will see a replicate of the CIC Agri Business model in Sri Lanka evolving in Bangladesh.

Accoridingly Rahimafrooz CIC Agri will commence operations in fertilizer, agri machinery, agro chemicals and also produce seed paddy, vegetable seeds, fruits and vegetables.

Apart from infusing capital, CIC Agri Businesses is expected to train the human resources and provide technical input for the joint venture operation.

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Disbursement of Loans on a “fast track” approval basis in N &E Provinces by the Central Bank - 2009/2010

Province No. of households benefitted

Total amount granted (Rs. mn) (as

at 31 March 2011)

Eastern 26,577 2,170

Northern 38,277 4,097

Bank Branch Openings in Jaffna, Killinochchi, Mannar and Vavuniya

May 2009 – May 2011

District wise Branch Openings

Category

Total as inMay 2011

Branches Extension Offices

N&EProvinces

Jaffna 24 10 Bank Branches 228

Killinochchi 3 1 Other Banking Outlets 111

Mannar 3 3 ATMs 187

Vavuniya 6 8 RFC Branches 49

Mullaitivu 1 - SLC Outlets 23

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Analysis & Forecast > >

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ANALYSIS & FORECAST

The Central Bank in its May, 2011 Monetary Policy Review has stated that with the continuation of the momentum in the industry and services sectors led by trade related activity and tourism, as well as the continuous improvements in productivity, the growth in real GDP during the first quarter of 2011 was largely within targets, although there was a setback in the Agriculture sector.

Domestic supply conditions have recovered from the impact of floods in early 2011, and the current weather conditions are favourable for agricultural activity and hydropower generation.

The upward trends that were observed in international commodity prices have decelerated, although prices of many commodities still remain high. The geopolitical disturbances observed in many oil producing economies seem to have subsided, stabilising international crude oil prices.

The rate of inflation as measured by the CCPI on a Year on Year basis decreased to 8.8 % in May 2011 from 9.8 % recorded in April 2011. Sri Lanka’s 12 month moving Average inflation as measured by the CCPI settled in the month of May at a single digit figure of 6.9 % for the twenty second consecutive time since August 2009.

On a year to year basis, the highest contribution to the overall increase of around 68 % cent came from food commodities which increase by 6 % in May 2011. The combined effects of both domestically produced and imported food commodities contributed to the increase in the food sub Index.

The current turmoil in the Middle East might increase the pressure on oil prices with its pass through effects on other imported items such as food which in turn could significantly affect the country’s rate of inflation.

However, a slight appreciation in the LKR/USD exchange rate is likely to mitigate the impact of these pressures.

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ANALYSIS & FORECAST

With the high anticipated international commodity prices, the trade deficit is likely to widen in 2011, while higher earnings from the tourism industry, workers’ remittances, and higher capital inflows are expected to have a positive impact on the overall balance of payments.

As per the provisional estimates, the gross official reserves (without ACU receipts) had increased to USD 7,120 mn by 12 May 2011 from USD 6,993 mn recorded at end March 2011.

So far, this year, in the domestic foreign exchange market, the rupee had appreciated by 1.08 % against the USD and by 1.22 % against the Indian rupee, while depreciating against the Euro (4.61 %), the Sterling pound (3.51 %) and the Japanese yen (0.39 %). 

In 2010 the rupee had gained 3.2 % against the US Dollar and the Central Bank is expected to allow a gentle appreciation in 2011, according to the Governor of the Central Bank.

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Research & Development Unit Reasonable care has been taken to maintain accuracy of information. However Commercial Bank of Ceylon PLC and/or its employees should not be held responsible for any loss or damage suffered in consequence of using such information

ANALYSIS & FORECAST

Government revenue during the first three months of 2011 increased by 19.5 % compared to the same period in 2010.

The recent revision in the Excise duty on the importation of motor vehicles effective from 24 April 2011 is likely to improve Government revenue.

Fiscal consolidation measures are expected to continue, and the fiscal deficit target announced by the Government is expected to be within reach.

Although Growth of broad money (M2b), declined marginally in March 2011, it has remained relatively high at 17.5%, primarily due to the rapid increase of credit granted to the private sector.

The growth rate of credit is likely to subside from April 2011, due to the effect of a high base and also with the dissipating high demand for credit to certain sectors, such as the heavy purchase of motor vehicles that was observed in the past few months.

At the same time, the market is responding to the change in Statutory Reserve Ratio (SRR) implemented with effect from 29 April 2011, which resulted in absorbing Rs. 18 bn from the banking system. 

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Research & Development Unit Reasonable care has been taken to maintain accuracy of information. However Commercial Bank of Ceylon PLC and/or its employees should not be held responsible for any loss or damage suffered in consequence of using such information

Emerging Markets Redefining Global Economic Structure

By 2025, six major emerging economies - Brazil, China, India, Indonesia, South Korea, and Russia - will account for more than half of all global growth, with the international monetary system likely to be no longer dominated by a single currency.

As economic power shifts, these successful economies will help drive growth in lower income countries through cross-border commercial and financial transactions.

As a group, emerging economies will grow on average by 4.7% a year between 2011 and 2025.

Advanced economies, meanwhile, are forecast to grow by 2.3% over the same period, yet will remain prominent in the global economy, with the euro area, Japan, the United Kingdom, and the United States all playing a core role in fueling global growth.

Over the next decade or so, China’s size and the rapid globalization of its corporations and banks will likely mean a more important role for the renminbi. The most likely global currency scenario in 2025 will be a multi-currency one centered around the dollar, the euro, and the renminbi.

Source: Global Development Horizons 2011—Multipolarity: The New Global Economy, May 2011 – World Bank 

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Where will the Next $ 10 trillion of GDP come from?

World GDP over the past 12 months was about $65 trillion.

In the year to September 2013, global output will be about $10 trillion bigger, according to the IMF’s projections.

But where will that next $10 trillion be added?

That depends on the size of a country’s economy, its growth rate and the appreciation of its real exchange rate.

Focusing on any one of those things, to the exclusion of the others, can be a misleading guide to a market's potential. For example, China’s economy in 2013 will still be smaller than America’s. But because it is growing so fast, it will add $1.65 trillion compared to America’s $1.43 trillion. Japan—a slow-growing economy—will contribute $410 billion, less than Russia ($698 billion) or Brazil ($461 billion). But because Japan is so big, it will still contribute more than India ($392 billion). 

GDP is of course a "flow" not a "stock". It measures the flow of production over a period of time, usually a year. Over the past 12 months, the world economy has produced about $65-trillion worth of goods and services. Over the 12 months to September 2013, it will produce roughly $75 trillion-worth. The chart shows where that extra $10 trillion will be produced.

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Source: The Economist

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

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.

Honesty is the first chapter in the book of wisdom Thomas Jefferson

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