R&D Unit Economic & Business News Summary

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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

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.

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
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.
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

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.
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
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

GDPGrowthEuroZone,US,China,India

TheWorld’sBiggestFirms
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

Singapore Best-Value City for Foreign Business
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.

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…

SNIPPETS - SNIPPETS - SNIPPETS - SNIPPETS - SNIPPETS - SNIPPETS - SNIPPETS - SNIPPETS - SNIPPETS - SNIPPETS - SNIPPETS
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.

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.
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