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ECONOMIC & BUSINESS NEWS

IMF on Sri Lanka

External Sector Performance – July 2013

USD 75 Mn ADB Loan for Better Road Connections to Southern Expressway

The Federal Reserve Surprises Everyone by Changing Nothing…

U.S. Government Shutdown

GDP Growth – Euro Zone, US, China & India

The World’s Biggest Firms

Singapore Best-Value City for Foreign Business

Snippets

Analysis & Forecast

Emerging Inflationary Pressures

Interest Rates

Exchange Rate

C O N T E N T S

Economic & Business News

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IMF on Sri Lanka

Cont…

IMF forecasts GDP growth of 6.5 % in 2013.

Given moderate credit growth, flat budget revenues, and relatively low growth in non-oil imports, it is not yet clear whether the acceleration in economic growth will continue into the second half of the year.

The balance of payments surplus should widen this year.

Non-performing loans have risen somewhat, but the financial system remains relatively strong.

While the rupee has been relatively resilient so far, the balance of external risks for Sri Lanka has shifted to the downside.

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IMF on Sri Lanka (Cont…)

Contingency plans—including a mix of fiscal and monetary policies to counter potential market pressures—should be prepared in anticipation of possible shifts in market conditions.

New external borrowing should be done with a close eye to sustainability, and the need to ensure that investments generate the resources needed to service these obligations.

In light of the risks facing Sri Lanka, the mission recommends that policy rates remain on hold which will also give time to assess the impact of recent easing.

External Sector Performance – July 2013

Jan-July

2012 US$ mn

Jan- July 2013

US$ mn

Growth (%)

Exports 5,674.2 5,518.8 -2.7

Imports 11,108.7 10,818.6 -2.6

Deficit in the Trade Account -5,434.5 -5,299.8 -2.5

Workers’ Remittances 3,417.4 3,763.5 10.1

Foreign Direct Investments 451 540 19.7

Earnings from Tourism 560.4 674.1 20.3

Inflows to Commercial Banks (a) 664.3

Inflows to the Government (b) 3,983.1 3,097.1 -22.2

Treasury Bills and Bonds 1,725.0 2,023.8 17.3

Long term loans 2,193.4 1,054.5 -51.9

(a) Inflows to commercial banks in 2012 amounted to USD 973 mn. (b) Inflows to the Government include capital and current transfers to the government, inflows from the sale of Treasury Bills and Treasury Bonds and long term loans of the Government.

Source: CBSL

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Cont…

External Sector Performance – July 2013 (cont…)

NSB Bond Issue: Meanwhile, the National Savings Bank (NSB) raised USD 750 mn by issuance of an international bond in foreign capital markets in September 2013. With the receipt of USD 750 mn, the financial account of the BOP strengthened further, and the gross official reserve position is estimated to have surpassed USD 7.0 bn by 23 September 2013.

Earnings from Tourism: Cumulative earnings from tourism during the first eight months of 2013 recorded a growth of 22.1 %, to USD 784 mn, from USD 642 mn recorded during the corresponding period in 2012.

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Net Inflows to Govt: The Colombo Stock Exchange (CSE) received net inflows of USD 128.8 mn during the first seven months of 2013. As of 23 September 2013, net cumulative foreign inflows to CSE amounted to USD 150 mn.

Reserves: Sri Lanka’s gross official reserves stood at USD 6.3 bn at end July 2013.

Cont…

External Sector Performance – July 2013 (cont…)

Exchange Rate Behavior by 23 September 2013;

LKR has appreciated against

LKR has depreciated against

US dollar by 3.8 %

Pound Sterling by 3.2 %

Euro by 6.1 %

Chinese yuan by 5.5 %

Japanese yen by 11.1 %

Indian rupee by 8.7 %

Australian dollar by 5.8 %

Source: CBSL< Research & Development Unit >

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USD 75 Mn ADB Loan for Better Road Connections to Southern Expressway The Asian Development Bank’s (ADB) Board of Directors has approved a USD 75 mn loan to

the Sri Lankan government for its Southern Road Connectivity Project .

Estimates suggest road capacity in Sri Lanka will need to be doubled every eight to 10 years to meet rising demand.

ADB’s loan will improve 33.5 kilometers of national highways that link to three interchanges on the Southern Expressway. The roads that will be developed under the project are as follows:2.5 km of the Moratuwa–Piliyandala road (B295), 2.1 km on the Ratmalana-Mirihana road (B389), 12.4 km on the Southern Expressway–Mathugama road (B157), 2.1 km on the Kirulapona–Homagama road (A004), and 14.4 km on the Kesbawa–Pokunuwita road (B084).

The Federal Reserve Surprises Everyone by Changing Nothing…

Investors responded by propelling U.S. stocks to record highs and driving down bond yields. Yields on U.S. Treasury debt had risen over the summer on expectations the Fed would cut back its $85 bn a month in bond purchases that have been the cornerstone of its efforts to spur the economy.

Furthermore, Fed Chairman Ben Bernanke refused to commit to begin reducing the bond purchases this year, and instead went out of his way to stress the program was "not on a preset course." In June he had said the Fed expected to cut back before year end.

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The U.S. Federal Reserve defied investor expectations by postponing the start of the wind down of its massive monetary stimulus, saying it wanted to wait for more evidence of solid economic growth.

Cont…

The Federal Reserve Surprises Everyone by Changing Nothing (cont…)

The Reaction The reaction in markets was swift and sharp. The U.S. dollar fell to a seven-month low against major

currencies and the price of gold, a traditional inflation hedge, soared more than 4.0 %.

In fresh quarterly forecasts, the Fed cut its forecast for 2013 economic growth to a 2.0 % to 2.3 % range from a June estimate of 2.3 % to 2.6 %. The downgrade for 2014 was even sharper.

"The (policy-setting) committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases," the Fed added.

U.S. Government Shutdown

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Large sections of the U.S. government closed down on 1 October after Congress was unable to reach an agreement on funding for the new fiscal year because of a standoff over healthcare reforms.

Federal workers and government functions have been divided between essential and non-essential services, and the effects will be felt in various ways - some acute, others barely noticeable.

The economic damage will at first be modest. Each week the government remains shuttered will knock an estimated 0.1-0.2% off the annualised fourth-quarter growth rate

Until some agreement can be reached, all government functions deemed non-essential are suspended. To get a sense of where that line is drawn, consider NASA. The agency is closed but the people supporting the astronauts currently on the International Space Station are going to work.

Source: The Economist

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BACK in September 2009,of the world’s ten largest quoted firms by market value, only three were American—Exxon Mobil, Microsoft and Walmart. The list was dominated by state-controlled giants such as PetroChina, China Mobile and ICBC, a Chinese bank. Petrobras, an oil-and-gas firm run by the Brazilian government, had just made it into the ninth slot.

Today nine of the ten most valuable companies are American. The country has not been as dominant for a decade.

Source: The Economist< Research & Development Unit >

Singapore Best-Value City for Foreign Business

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The Chart shows the total costs to set up a business in 10 major cities, comprising home and office rentals, and related transaction costs, divided by per-capita gross domestic product of a city or country, which is an indicator of business potential.

Singapore’s ratio of 16.1 was the lowest, while the 74.7 score for India’s business capital ranked it last on the “value for money” scale.

Singapore, offers businesses the best property-rental value compared with the size of its economy, while Mumbai ranks last, according to Savills Plc.

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

China-Sri Lanka FTA Sri Lanka and China will finalise a free-trade agreement ahead of the Commonwealth

Summit in Colombo in November, according to Investment Promotion Minister Lakshman Yapa Abeywardena .

The minister gave no details of the pact with China, but said Sri Lanka's USD 3.7 bn garment manufacturing industry would feature strongly. Trade is currently heavily skewed in China's favour, with the powerhouse exporting USD 2.66 bn worth of goods to Sri Lanka last year, and Sri Lanka's exports to China totaling USD 113 mn.

Sri Lanka Shangri La Hotel to Start Building in October A USD 450 mn project by Hong Kong based Shangri La in Sri Lanka's capital

Colombo will begin construction by end October according to Investment Promotions Minister Lakshman Abeywardene. The project is still in the planning stages with promoters saying soil conditions required design changes.

Cont…

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Second New Kelani Bridge Project A new six-lane bridge over the Kelani river adjacent to the Kelani

bridge (Japan Friendship Bridge) will be constructed at a cost of USD 321 mn around the Peliyagoda area and Baseline Road.

The objective of this project is to increase the transport efficiency around the existing new Kelani Bridge and to establish a link between Colombo Katunayaka Expressway (CKE) and the city transport network. The project is expected to be completed within three years.

Mr. Dhammika Perera has submitted an application to the Board of Investment to set up what will be his flagship business venture to date – the USD 350 mn Queensbury Integrated Resort and Casino.

Located on a two-and-a-half acre property down D.R. Wijewardena Mawatha, Queensbury will stand 40 floors tall and have 500 luxury rooms, multiple ballrooms, a mini-convention centre and a shopping mall among others. Inputs from Mike Hong, the world-famous designer of Las Vegas Ballagio, have gone into the planned Queensbury.

Analysis & Forecast

Emerging Inflationary Pressures

IMF has expressed its serious concern about the aggressive monetary policy easing pursued by the authorities to spur growth amid looming inflationary pressures.

A too aggressive loosening in monetary policy will be costly both in terms of its effects on exchange rates and the rate of inflation.

The loosening monetary policy may lead to repeating the credit cycle the country had to undergo during the second half of 2011 and early part of 2012, which led to a credit bubble resulting in a rapid acceleration in imports and a Balance of Payment crisis ultimately costing as much as USD 2.0 bn in reserves.

Sep:7.8

Sep:6.2

Interest Rates

If aiming for high growth is going to mean further easing of monetary policy and a lowering of interest rates, it will have to be considered in the backdrop of external tapering of QE in the US and possibility of foreign investors exiting the bond markets of emerging countries. In such a situation, a lowering of interest rates in Sri Lanka will aggravate the capital outflow from its bond market.

Therefore it is our view that there are limits to lowering interest rates and we believe that the current interest rate regime will more or less continue till the end of 2013.

Policy rates (Repo @ 7%, RRepo @ 9%) likely to remain unchanged until at least 1Q, 2014.

A stronger US economy is good for the world economy – but higher interest rates may continue to exert pressure in Europe and weaker emerging countries.

Exchange Rate The LKR has been falling since early July with foreign investors pulling out of treasury bonds as US

treasury yields rose on expectations that the Federal Reserve would soon begin to taper its bond buying programme.

The LKR hit a record low of Rs. 135.20 per USD on Aug. 28, before recovering.

The currencies of many of Sri Lanka’s competitors have depreciated and this will affect the competitiveness of Sri Lanka’s exporters.

The LKR has depreciated by around 2.8% vis-à-vis the USD so far this year after recording 10% depreciation in 2012. The Indian currency, which touched an all-time low of 68.8450 on Aug. 28 vis-à-vis the USD, has plunged almost 12 % this year on concern over India’s widening current-account deficit and slowing growth.

However, on the positive side, the US is set for faster growth in the long-term and it will have a positive impact on Sri Lanka’s exports to the US.

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.

Research & Development Unit