Economic Capsule February 2012

ECONOMIC CAPSULE
February 2012

< Research & Development Unit >

Contents

COMMERCIAL BANK NEWS ECONOMIC NEWS 
 Group Results for the 12 Months ended 31.12.2011
S&P Revise Sri Lanka’s Outlook
 Commercial Bank Launches Web Services for Instant Remittance Solutions with ‘Xpress Money’
Tourist Arrivals up by 27% in February
 Commercial Bank Debenture Issue Fuel & Electricity Price Hike

Analysis & Forecast
 Exchange Rate


Commercial Bank of Ceylon PLC
- Group Results for the 12 Months ended 31.12.2011
− Loan Book by: Rs 59.6 bn.
− Deposits  by: Rs 58.6 bn.
Commercial Bank Breaks Rs. 10 bn Barrier − Revenue: Rs 45.4 bn.
in Profit Before Corporate Tax − Assets: Rs 441 bn.
− Total dividend of Rs 6 per share
The Commercial Bank of Ceylon PLC has achieved
outstanding growth in 2011.

For the 12 months ending 31st December 2011,
Commercial Bank exceeded Rs. 10 bn in Profit Before
Corporate Tax reaching a new milestone by growing
PBT by 17.9% to Rs. 10.987 bn in the review period.

Profit After Tax grew by a robust 45.7% to reach Rs. 8
bn (Rs 8.047 bn) from Rs. 5.523 bn for the previous
year.

Cont…

Commercial Bank - Group Results for the 12 Months ended 31.12.2011 (Cont…)


Commercial Bank News 

Commercial Bank Launches Web Commercial Bank Debenture Issue
Services for Instant Remittance Solutions  Commercial Bank will open its Rs. 1 bn debenture
with ‘Xpress Money’ issue on 27 March, 2012. CBC will offer 500,000
 CBC launched a new web service in association unsecured, subordinated, redeemable debentures
of Rs. 1,000 each with the option to issue another
with ‘Xpress Money’ to offer a faster and more
500,000 if the issue is oversubscribed.
efficient process of receiving remittances from
overseas.  The Colombo Stock Exchange has approved an
 Commercial Bank has integrated its systems application for the listing of the debenture on the
with those of ‘Xpress Money’ - a global money main board.
transfer brand - to introduce a new dimension in
 Interest Rate for the above debenture is 12.75% per
speed, reliability and convenience to recipients
annum, while Fitch Ratings Lanka Ltd., has
of remittances in Sri Lanka.
affirmed the national long-term Rating of AA- (lka)
 Remittances made via ‘Xpress Money’ can now for the subordinated debt issue.
be received instantly by beneficiaries, without
incurring deductions of commissions CBC Service
or charges. 214 Marawila
Point Openings


Economic News 

S&P Revise Sri Lanka’s Outlook Sri Lanka 2012 Economic Growth
 Standard & Poor's (S&P) Ratings Services revised its outlook on
Revised Downward to 7.2%
the long-term foreign currency sovereign credit rating on Sri  CBSL projections now indicate that Sri
Lanka to stable from positive. At the same time, S&P affirmed its Lanka's GDP is likely to record a growth
'B+' foreign currency sovereign credit ratings on Sri Lanka. of 7.2% in 2012, compared to the earlier
projection of 8%, made in CBSL’s
▬ Reasons for the outlook revision: the ratings are constrained by weak
monetary policy statement.
external liquidity, moderately high and increasing external debt,
fundamental fiscal weaknesses, the attendant high public debt and  Slower credit GDP Growth (%)
interest burden, and political institutions that, in some cases, lack growth, higher
transparency and independence. energy prices
and lower
▬ S&P may raise the rating if there is evidence of: progress in
imports are
addressing the external weaknesses and domestic problems, such
expected to
as fiscal or structural economic reforms that reduce the vulnerabilities
reduce
from high debt and interest burdens and the still-narrow economic
economic
profile.
activity this
▬ Conversely, S&P may lower the rating if: there is substantial further year.
deterioration of the country's external liquidity, or if Sri Lanka's Source: CBSL e-estimate, f-forecast

growth and revenue prospects fall below S&P’s current expectations.

< Research & Development Unit > The views expressed in Economic Capsule are not necessarily those of the Management of Commercial Bank of Ceylon PLC

Tourist Arrivals up by 27% in February

 Sri Lanka’s tourist arrivals rose  According to United Nations
by 27% to 83,549 in February, World Tourism Organization
2012 compared to the (UNWTO) predictions, by end
corresponding month in 2011, 2012 more than one billion
continuing the growth people, almost 14% of the
momentum established in 2010. world population, is expected
to cross international borders
 Data released by the Sri Lanka as tourists.
Tourism Development Authority
indicate arrivals topping 169,423  In 2011, more than 980 mn
during the first two months of tourist arrivals were recorded
2012, a 21% increase compared across the world and 12 mn of
to the corresponding period in them came to the South Asian
2011. region, contributing to 6% of
the region’s GDP.
 The largest arrivals from a single
country came from neighbouring  UNWTO predicts that South Source: CBSL/ Sri Lanka Tourism Development Authority

India, which recorded an arrival Asia will attract 18.8 million
figure of 11,342 in February, tourists by 2020, of which Sri
2012, a 12.6% increase from Lanka will get a share of 03
February 2011. million.


Economic News 

Fuel & Electricity Price Hike
Fuel (w.e.f. - 12.02.2012) Previous Price Rs./Ltr. Present Price Rs./Ltr.
Petrol—90 137.00 149.00
Petrol—95 155.00 167.00
Diesel—LAD 84.00 115.00
Diesel—Super 106.30 142.00
Kerosene—Domestic 71.00 106.00
Kerosene—industrial 76.00 111.00

Electricity (w.e.f. - 16.02.2012) Fuel Adjustment Charge %
Domestic—0-30 (units/month) 25%
Domestic—31-60 (units/month) 35%
Domestic—above 60 (units/month) 40%
Industrial & Hotel 15%
General Purpose & Gov. 25%


Exchange Rate
Reserves Under Pressure

 A combination of an overvalued exchange rate (the Real Effective Exchange Rate overvalued by 25% in 2011) which makes
imports cheaper and a low interest rate regime which led to a sharp rise in credit, which in turn, fuelled demand for imports,
led to an unsustainable increase in the trade deficit.
 The deterioration in the trade and current account balances was not compensated for adequately by the increase in
remittances, tourism earnings and FDI.
 Further, access to borrowed and non-borrowed capital flows have also become more constrained due to increased risk
aversion in global markets.
 These factors exerted pressure on the Rupee to depreciate and the Central Bank of Sri Lanka (CBSL) tried to prop up the
rupee by selling foreign exchange in the market. The outcomes have been:
5) A loss of a quarter of the country’s gross official reserves (reserves declined from around USD 8.2 bn in August, 2011 to USD
5.9 bn by the end of 2011); and
6) The Government’s obligations in relation to Eurobonds, foreign holdings of Treasury Bills and the IMF stand-by loan now
exceeding its reserves.
 These trends have resulted in a liquidity crunch that has resulted in the Government:
8) Seeking to borrow abroad to meet the oil bills; and
9) Encouraging commercial banks to raise tier-two capital through foreign borrowing.

Cont…

Exchange Rate (Cont…)
Measures taken by the Treasury/CBSL Expected Implications
 Further, the losses of some state-owned
enterprises, particularly those of the Ceylon The CBSL increased the policy interest rates The increase in borrowing cost would restrain credit
by 50 basis points with effect from 3rd growth leading to a reduction of demand for imports.
Petroleum Corporation (CPC) and Ceylon February 2012.
Electricity Board (CEB), accumulated due to
the non-passing through, until very The CBSL direction to commercial banks to
limit their credit expansion in 2012 to 18 % To reduce the quantity of credit granted by
recently, of the increase in international oil [23 % if additional funds above 18% growth commercial banks.
prices and also due to other operational could be raised from abroad] of the
inefficiencies. outstanding credit balance at the end of 2011.

 It remains to be seen how much more has The CBSL has decided to limit the supply of foreign
The CBSL decided to limit its intervention in exchange to the extent needed to settle the bulk of
to be done by way of exchange rate petroleum import bills, and to absorb surplus forex
depreciation, interest rate increases, and the forex market with effect from 10th liquidity that would flow into the market from various
February 2012. sources thereby allowing a more market determined
fiscal measures.
exchange rate.
The CPC Increased the domestic prices of To encourage energy conservation and help reduce
petroleum products with effect from 12th the use of petroleum products, thereby aiding to keep
February 2012. import expenditure under control.

Recent Policy Measures The CBSL imposed a 90 day cap on forward
foreign exchange deals with effect from 01st To reduce the volatility in the forex market.
The recent policy measures introduced by the March,2012
Treasury and CBSL have hopefully prevented
The CBSL direction to reduce overnight
an external payments crisis. These policy foreign exchange positions held by
measures are summarized below commercial banks for trading to 1/3 of such To reduce the volatility in the forex market.
amounts held by each bank on 01.03.2012.

Cont…


 The impact of the correction began to be felt with the CBSL deciding to
limit its intervention in the forex market with effect from 10 February
2012 and resultant rapid depreciation of the LKR vis-à-vis the USD
thereafter.
 Bus fares have increased and the prices of bakery products including
bread have also increased. Other such price increases could unfold in
the near future.
 However, the medium-term prospects of the country remain favourable,
provided there are no policy reversals, effective action is taken to
stabilize the economy and structural reforms are introduced to increase
the competitiveness of the economy, particularly in relation to exports.

Impact and Implications
 The exchange rate depreciation will have a negative impact on
investment, growth and employment in the short-term mainly
due to a, initial decline in output as a result of a reduction in
economic activity due to a rise in the rupee costs of imports.

Cont…


 The exchange rate depreciation will have a negative impact on investment, growth and employment in the
short-term mainly due to a, initial decline in output as a result of a reduction in economic activity due to a
rise in the rupee costs of imports.

 Sri Lanka will not be able to sustain a higher growth trajectory, without fundamentally altering the anti-
export bias it has usually had in its policy-mix over several decades. With the increase of policy interest
rates by 50 basis points, market related interest rates i.e. T-bill yields, deposit rates, and lending rates
have all increased much more than the increase in the policy rates.

 The higher interest rates will increase the cost of funds and will thereby dampen growth and employment
in the short term through its impact on investment.

 Oil price increases will also apply downward pressure on growth through an increase in the cost of
production. However, the increase in the price of fuel and electricity will reduce the losses of CEB and
CPC thereby helping to reduce the pressure on the government budget deficit and the balance sheets of
state banks i.e. BOC and PB.

 According to finance ministry data, the CPC had incurred a loss of Rs. 90 bn in 2011 and if the fuel prices
had not been increased, the loss by the end of 2012 could exceed Rs. 200 bn.

< Research & Development Unit > The views expressed in Economic Capsule are not necessarily those of the Management of Commercial Bank of Ceylon PLC Cont…


 In 2011 around 82% of the increase in imports was driven by imports of intermediate and investment-related
goods compared to 71 % in 2010. The demand for these goods are largely inelastic in nature. Therefore, the
importation of those items is not expected to reduce much as a result of the depreciation in LKR. However,
the importation of consumer items is likely to experience a greater reduction due to the increase of LKR price
of those items and resultant decrease in demand for those items.

 In due course, a more competitive exchange rate will provide a boost to export growth, provided
macroeconomic stabilization is achieved and a conducive investment climate is maintained.

 The higher finance costs and the rise in import prices will exert considerable pressure on the operations of
some businesses. Therefore, the private sector will have to meet the short-term challenges through
efficiency/productivity improvements and position itself to take advantage of the more propitious medium-
term prospects.

 The increase in the Rupee value of remittances, as a result of the depreciation of the LKR, will serve to boost
the domestic demand generated by the beneficiaries of such remittances.

 The 90 day cap on forward foreign exchange deals and the CBSL’s direction to reduce overnight foreign
exchange positions held by commercial banks for trading to 1/3 of such amounts held by each bank on
01.03.2012, will help to settle the market in the short term. However, the exporters may not want to convert
their USD to LKR and this could cause a shortage of dollars. The foreign exchange market could also be
volatile since everyone will be focusing on the short term as a result of the cap.



THE WAY FORWARD 
The aggregate demand in the economy has to be necessarily reduced; this means that
policies have to be introduced to ensure the country lives within its means.
The increase in prices will inevitably lead to wage and income pressures. However, any
wage/income increases should not undermine the intended gains from the corrective
measures taken, thereby derailing the overall stabilization programme. Sources:
−Commendable Start: Now for the
The country should strive to have a healthy trade/current account balance to attract more Finish, Pathfinder (This is the 25th in
the series of Economic Alert articles
foreign investments, since investors mostly prefer to invest in countries which have lower published by the Pathfinder
current account deficits due to resultant lesser fluctuation in exchange rates of such Foundation.)
countries. −Way out to fix the sick external
sector: Getting back to IMF’s fold a
The country should also focus on reducing the budget deficit to sustainable levels to reduce must now, Island (5th March 2012)
the pressure on interest rates. The Budget deficit for 2011 is likely to record around 7.8 %. −CBSL Press Releases
Since the price of oil has become a major issue both in relation to the trade deficit and the −The seminar organized by the
budget deficit, the manufacturing sectors should focus more on energy efficient production Exporters Association of Sri Lanka on
“Flexible Exchange Rate: Capitalizing
processes with a view to reducing fuel consumption (thereby reducing the cost of on Opportunities and Managing
production). Challenges”, 28 February, 2012
−www.treasury.gov.lk


The best way to predict the future is to invent it…
- Steve Jobs

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

Economic Capsule February 2012

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