Economic Capsule - August 2013

< Research & Development Unit >
Economic
Capsule
August 2013
200th Issue

FINANCIAL SECTOR NEWS 
 President Declares Open Commercial Bank Funded Kilinochchi Railway Station
 Commercial Bank 1H, 2013 Performance
 Commercial Bank Adjudged SL’s ‘Best Trade Bank’ for 4th time
 Commercial Agri Loans For Professionals
 Central Bank Imposes 100% Margin Deposit Requirement for Vehicle Imports
 Gold's Losing Luster Reveals the Cracks in Sri Lanka's Pawning Segment
ECONOMIC & BUSINESS NEWS 
 Sri Lanka's Economy Grows 6.8 % in 2Q, 2013
 Provincial Gross Domestic Product – 2012
 A New Loan Scheme to Support Dairy Entrepreneurs
 Dutch Investor Proposes USD 25 mn Project to Start Three Hi-tech
 Sri Lanka Moves up in the Global Competitiveness Index
 Switzerland Remains the Most Competitive Economy
 Euro Zone Returns to Growth
 BRICS Economies Plan USD 100bn Reserves Fund
 US GDP Growth Beats Forecasts
 Raghuram Rajan Joins the RBI
 RBI Governor Rajan's New Proposals
 Emerging Economies Vulnerable to U.S. Tapering - IMF
C O N T E N T S

President Declares Open Commercial Bank Funded Kilinochchi Railway Station
 The Kilinochchi Railway Station, rebuilt by the Corporate Social
Responsibility Trust of Commercial Bank of Ceylon as a
demonstration of the Bank’s commitment to the people of Sri
Lanka, was ceremonially declared open by His Excellency President
Mahinda Rajapaksa on Saturday 14th September 2013.
 The Commercial Bank’s reconstruction of this important station
along the northern railway line is an acknowledgement of the
major part Kilinochchi has played in the economic activities of the
Northern Province as one of the major agrarian cultivation
destinations in the Island from pre-historic times.
 Located in the heart of Kilinochchi town, the station has been built
with access for disabled people as well. The Bank also has
constructed ladies’ and gents’ rest rooms and wash rooms with
disabled access and built the station to standards stipulated by
Sri Lanka Railways.
 Commercial Bank has also installed an Automated Teller Machine
(ATM) at the Kilinochchi Railway Station in a gesture of support to
the commuters who will use the northern railway line.

Commercial Bank 1H, 2013 Performance
 Commercial Bank has reported gross income of Rs 34.7 bn and Interest Income of Rs 30.2 bn at the end of
its second quarter, achieving growth rates of 12.10% and 22.58% respectively through strong operational
growth in the six months ended 30th June 2013.
 The Bank reported pre-tax profit of Rs 6.5 bn and post-tax profit of Rs 4.5 bn for the six months, as against
Rs 7.5 bn and Rs 5.2 bn respectively for the corresponding period of last year, during which period
translation gains on foreign exchange earnings were a major contributor to profits. In contrast, during the
1H, 2013, a reduction in exchange profit was recorded compared to the 1H, 2012.
 Net interest income for the period improved by 6.24% to Rs 11.932 bn. However, interest expenses grew
by 36.30% to Rs 18.236 bn, narrowing margins. The rise in interest expenses in the review period was
largely due to a noteworthy 8.64% growth in total deposits which increased by Rs 34.162 bn over the six
months to Rs 429.537 bn as at 30th June 2013, reflecting an average growth of Rs 5.7 bn per month.
 Loans and receivables to other customers of the Bank grew by 4.44% from Rs 373.544 bn at 31st December
2012 to Rs 390.119 bn at the end of the half year.
 Total assets of the Bank increased by 9.06% from Rs 511.7 bn at 31st December 2012 to Rs 558.1 bn at
30th June 2013.

 The Commercial Bank of Ceylon has been adjudged the ‘Best Trade Bank’ in
Sri Lanka by Trade Finance magazine of the UK, following an independent
poll of services provided by banks.
 The 2013 Award won by Commercial Bank is its fourth Best Trade Bank
Award since Trade Finance began presenting such an award in 2009.
 According to Trade Finance, which is published by Euromoney PLC, London,
there was a revamp of the country categories in this year’s Asia Pacific
awards to reflect the heightened role that local and regional banks play in
trade finance.
Commercial Bank Adjudged SL’s ‘Best Trade Bank’ for 4th time

Commercial Agri Loans For Professionals
Commercial Agri Loans for Professionals is the latest credit scheme from
Commercial Bank to empower professionals to invest in the field of
agriculture to revolutionize the agriculture industry in Sri Lanka.
If you are a qualified professional or an executive with a service
history of over 3 years, and if you are planning to invest in commercial
agriculture, our loan scheme is especially for you.
The Essentials
− Purchase agriculture estates or bare lands for agriculture development
− Loans with a lower interest rate
− Flexible repayment programs to suite your capacity
 For more info visit - http://www.combank.net/newweb/business/sme?product=145

Central Bank Imposes 100% Margin Deposit Requirement for Vehicle Imports
 CBSL has imposed a 100 % margin deposit requirement against the
Letters of Credit opened with the commercial banks for the import of
motor vehicles, other than buses, ambulances, lorries and trucks.
 Accordingly, Letters of Credit for the importation of specified vehicle
categories could be done only with a minimum cash margin of 100 %,
with immediate effect.
 The Central Bank has noted that, during the year 2013, the currencies of
several trading partner economies have sharply depreciated against the
Sri Lankan rupee. As a consequence, there has been a growing possibility
of importation of motor vehicles into Sri Lanka accelerating in the period
ahead.

Gold's Losing Luster Reveals the Cracks in Sri Lanka's Pawning Segment
Standard & Poor‘s
The recent reversal in gold's fortunes could prove painful for Sri Lankan banks. As
gold prices soared over the past few years, Sri Lanka's banks substantially expanded
their pawning loans (gold-backed loans).
Standard & Poor's Ratings Services believes that this has exposed Sri Lanka's banking
industry to the risk of high credit costs (provision in expenses related to non
performing loans [NPLs]) because of the recent about-face in gold prices.
 S&P expects defaults in pawning loans to increase over the next 12 months unless clear signs of gold prices
stabilizing emerge. Nevertheless, banks' overall earnings will likely offer sufficient cushion against higher
credit costs in the pawning segment.
 Banks' pawning loans grew at a steep average annual rate of about 50% over the past three years, compared
with average annual loan growth of 25% for the banking industry.
 Pawning loans constituted 14.4% of the total loan book of Sri Lanka's banks as of March 31, 2013.
This is the largest sectoral exposure for Sri Lankan banks.

Sri Lanka's Economy Grows 6.8 % in 2Q, 2013
 The economic output of Sri Lanka as measured
by Gross Domestic Product(GDP) for the Q2
(April ‐ June), of 2013 at constant (2002) prices is
estimated at Rs. Mn 779,974 as against Rs. Mn
730,641 in the Q2 of 2012, registering a 6.8 %
growth.
 The agriculture sector, one of the three major
sectors of the economy recorded a negative (1.1
%) growth in the reference quarter. Industry and
Services sectors recorded 10.1 % and 6.6 %
increases respectively in the reference quarter.
 The percentage share of the three major sectors,
the Agriculture, Industry, and Services to the tot
al GDP reported as
usual at 10.7%, 30.2 %, and 59.1 % respectively.

Provincial Gross Domestic Product – 2012
Salient Features of the Gross Domestic Product (at current market prices) by Provinces – 20111
and 20122
Item/Province Year Western Central Southern Northern Eastern
North
Western
North
Central
Uva S'gamuwa Island
GDP (Rs.Bn)
2011 2,895 644 719 243 379 655 306 297 406 6,544
2012 3,292 743 872 305 474 730 355 343 467 7,582
GDP Growth (%)
2011 15.2 14.5 20.0 27.8 13.5 22.5 14.6 17.5 15.7 16.8
2012 13.7 15.3 21.3 25.9 25.0 11.4 15.9 15.4 15.2 15.9
GDP Share (%)
2011 44.2 9.8 11.0 3.7 5.8 10.0 4.7 4.5 6.2 100.0
2012 43.4 9.8 11.5 4.0 6.3 9.6 4.7 4.5 6.2 100.0
Per capita income3
(Rs '000)
2011 489 237 285 202 239 277 244 222 207 314
2012 564 289 353 288 304 307 281 271 243 373
Per capita income ratio4
2011 1.6 0.8 0.9 0.6 0.8 0.9 0.8 0.7 0.7 1.0
2012 1.5 0.8 0.9 0.8 0.8 0.8 0.8 0.7 0.7 1.0
1. Revised 3. Calculated using mid-year population estimates prepared by the Registrar General’s Department
2. Provisional 4. Ratio between per capita income of the province to that of all Island
Source: CBSL

A New Loan Scheme to Support Dairy Entrepreneurs
 Central Bank of Sri Lanka launched its newest loan scheme ‐
“Commercial Scale Dairy Development Loan Scheme (CSDDLS)” ‐ aimed
at ensuring self sufficiency in milk and milk products in the country.
 The Participating Financial Institutions of the CSDDLS are Bank of
Ceylon, People's Bank, Commercial Bank of Ceylon PLC, Hatton
National Bank PLC, Sampath Bank PLC, Seylan Bank PLC, Pradesheeya
Sanwardhana Bank, Sanasa Development Bank PLC, National
Development Bank PLC, DFCC Bank, and Lankaputhra Development
Bank Ltd.
 This scheme is operative Islandwide with a maximum loan facility of
Rs. 25 mn and the applicable rate of interest is 8 % per annum.

Dutch Investor Proposes USD 25 mn Project to Start Three Hi‐tech
Dairy Farms in SL
 Velema Holdings, a Dutch investment company, signed a letter of
intent at the BOI to set up three top‐end dairy farm and processing
facilities with land for the purpose to be provided by authorities here.
 The farms would require 1,500 hectares to be provided for the project
estimated to cost USD 25 mn. The proposed farms would have 500
high yield cows each, and would be managed in Sri Lanka. The project
only needs suitable land and clean water to get off the ground.
 The farms would be climate controlled using techniques such as
misting and would not need to be located at high altitudes upcountry.
“We can use wind‐power and solar cells to run farms,” the Dutch
businessman added.

Sri Lanka Moves up in the Global Competitiveness Index
 Sri Lanka has moved up three places to number 65 in the
2013/14 Global Competitiveness Index compiled by the
influential World Economic Forum.
 Sri Lanka’s rank of 65 is out of 148 countries but the score of
4.2 (from a range of 1 to 7) remains unchanged from the
previous year’s index.
 Though year on year there is an improvement, Sri Lanka is
yet to catch up to the higher rank of 52 (out of 142
countries) enjoyed two years ago (2011/12 Index).
 At present Sri Lanka remains among 20 countries which are
in transition from Stage 1 (factor driven economies) to Stage
2 (efficiency driven nations).
Cont…
Source: The Global Competitiveness Report 2013/14

Sri Lanka Moves up in the Global Competitiveness Index (cont…)
Note: From the list of
factors above, respondents
were asked to select the
five most problematic for
doing business in their
country and to rank them
between
1 (most problematic) and 5.
The bars in the figure show
the responses weighted
according to their rankings.

Switzerland Remains the Most Competitive Economy
 Switzerland remained the most competitive economy as
the U.S. and Germany gained ground lost in recent years,
the World Economic Forum stated.
 Switzerland held the top spot for a fifth year, while
Germany and the U.S. rose two slots to fourth and fifth
respectively in the Geneva-based organization’s 148-
nation league. Singapore and Finland retained their
second and third positions.

US GDP Growth Beats Forecasts
The US economy accelerated sharply in the
second quarter thanks to a surge in exports,
bolstering the case for the Federal Reserve to
wind down a major economic stimulus
program.
US gross domestic product grew at a 2.5%
annual rate in the April-June period, according
to revised estimates released by the
Commerce Department. That was more than
double the pace clocked in the prior three
months.
Euro Zone Returns to Growth
The euro-area economy returned to growth in
the 2nd quarter after a record-long recession,
driven by a rebound in exports from the 17-
nation currency bloc.
GDP rose 0.3% in Q2 (qoq), the European
Union’s statistics office in Luxembourg said.
The European Central Bank forecasts a 0.6%
contraction this year before the region returns
to growth in 2014.
BRICS Economies Plan USD 100bn Reserves Fund
Leaders of the BRICS group of nations - Brazil, Russia, India, China
and South Africa - have stated they will set up a $100bn fund to
guard against financial shocks.
The move comes as emerging economies across the world have
been hit by speculation that the US may scale back its key economic
stimulus programme soon.
Q2: 2.5%

Raghuram Rajan Joins the RBI
Date of Birth: Feb 3, 1963
Term: Three years starting Sept 4 2013
Key facts:
−A prominent economist who has spent a significant part of his career in the US, Rajan was appointed the
23rd governor of the Reserve Bank of India (RBI) and is the second-youngest to hold the post.
−Rajan, who took office days after the rupee tumbled to a record low amid the country's worst economic
crisis since the early 1990s, had worked since late 2012 as chief economic adviser to the finance ministry in
New Delhi.
−Rajan is the Eric J. Gleacher Distinguished Service Professor of Finance at the University of Chicago's Booth
School of Business, a post he has held since 2007.
−Rajan was the chief economist at the International Monetary Fund between 2003 and 2006.
−During a 2005 conference at Jackson Hole, Wyoming, Rajan now-famously presented a paper outlining
looming dangers in the financial system, risks that were borne out in the global financial crisis of 2008.
−Rajan is the author of Fault Lines: How Hidden Fractures Still Threaten the World Economy, which was
awarded the Financial Times-Goldman Sachs prize for best business book of 2010.
−Rajan chaired a government of India committee on financial sector reforms in 2008, recommending
several monetary policy reforms including inflation targeting and hiving off the RBI's government debt
management function.
Position: Governor of the
Reserve Bank of India

MONETARY POLICY
•To set up a panel on how to strengthen monetary policy framework, which will submit report in three months
RUPEE, CAPITAL INFLOWS
•To allow exporters to re-book cancelled forward currency contracts up to 50 pct of the value of cancelled contracts and up to 25 % for
importers
•Will push for more trade settlements in rupees, open up financial markets for those who receive rupees to invest back in
•Will offer a special window for swapping foreign currency non-resident (FCNR) deposits with a minimum tenor three of years and
more, at a fixed rate of 3.5 % per year
•Will raise overseas borrowing limit of 50 % of unimpaired Tier I capital to 100 % for banks
•Borrowings mobilized under this provision can be swapped with RBI at a concessional rate of 100 basis points below the ongoing swap
rate prevailing in the market
•Above schemes will be open till November 30, 2013
RBI Governor Rajan's New Proposals
DEBT / BROADER MARKETS
•Will introduce cash-settled 10-year interest rate future contracts
•Will examine introduction of interest rate futures on overnight interest rates
•Will steadily but surely liberalise markets, restrictions on investments and position-taking
•To issue inflation-indexed savings certificates tied to CPI to retail investors by end November
•Need to reduce requirement for banks to invest in government securities in a calibrated way
Cont…

BANKING SYSTEM
•To set up external committee to screen bank license applicants
•Hopes to announce licenses within, or soon after, January 2014
•Will push foreign banks to set up wholly-owned subsidiaries
•Will look at continuous or on-tap bank licensing system for applicants
•Will issue guidelines to free rules on setting up bank branches for domestic commercial banks
•To look at rising non-performing assets and restructuring/recovery process
•Need to accelerate the working of debt recovery tribunals and asset resconstruction companies
•Proposes to collect credit data, examine large common exposures among banks
•Will encourage banks to clean up their balance sheets.
•Will encourage banks to commit to raising capital when necessary
•Bad loan problem is not alarming yet, but will fester if unaddressed
•To set up committee that will access every aspect to financial inclusion
RBI Governor Rajan's New Proposals (cont…)
Source: Reuters

Emerging Economies Vulnerable to U.S. Tapering - IMF
Global growth remains subdued but its underlying dynamics are changing
•Global growth remains lackluster, averaging about 2.75 % in the first half of 2013. Major economies are seeing increasingly different growth
dynamics and their relative cyclical positions are changing. Recent indicators have been encouraging for advanced economies.
•U.S. private demand continues to strengthen with improving housing and labor markets.
•Euro area activity is growing again, while emerging economies have slowed.
•Looking ahead, global activity is expected to strengthen moderately, with global growth projected to increase in 2014 from 2013.
•Momentum is projected to come mainly from advanced economies, where output is expected to accelerate. This reflects a stronger U.S.
economy, significantly less fiscal tightening (except in Japan), and highly accommodative monetary conditions
Specifically:
− The U.S. and Japan are broadly advancing as expected. U.S. growth surprised on the downside in Q1, but private demand remains relatively
robust in the face of fiscal tightening. Growth is projected to pick up next year as fiscal policy becomes less restrictive. In Japan, the adoption of
fiscal stimulus and aggressive monetary easing has led to an impressive pick-up in output.
− The euro area is emerging from recession but activity is expected to remain subdued. After six quarters of contraction, activity expanded in
Q2 (by 0.3 % qoq). While this partly reflects one-off effects (e.g., weather related factors), recent indicators show a continued improvement in
business indicators, suggesting a continuation of the recovery in Q3.
− Emerging and developing economies show slower momentum. Emerging economy growth is some 2½ percentage points below 2010
levels, with Brazil, China and India mainly accounting for this growth slowdown. The outlook for many commodity exporters
(including those among the BRICS) has also deteriorated due to lower commodity prices.
Cont…

Emerging Economies Vulnerable to U.S. Tapering – IMF (cont…)
Emerging economies hardest hit
•Emerging economies were hardest hit following Fed “tapering” remarks and external financing
pressures remain heightened in some economies (e.g., Brazil, India, Indonesia, Turkey and South Africa).
•Initially, portfolio outflows from emerging markets in May-June was more broad based, while more
recently market pressures have been more concentrated on particular economies with important
financial or macroeconomic vulnerabilities.
•Volatility and local bond yields increased sharply, equity markets and currencies fell (depreciating 6½
percent on average since May 22), and some emerging economies saw liquidity pressures and a reversal
of capital flows.
• Fed “tapering” is now seen as a possibility as early as September. U.S. 10-year yields are up by 80 bps to nearly 3 % since May 22nd.
• Deteriorating fundamentals in some emerging economies have also played a role. Recent indicators point to lower growth driven by
weaker domestic and external demand.
• Increases in interest rates (i.e., changes in risk premia) and exchange rate depreciation pressures have been differentiated across
countries, with high inflation or high external deficit economies being most affected.
• Some continue to see heightened market pressure. In particular, the situation has been exacerbated by disappointing news about
emerging market growth and existing or rising domestic financial and/or macroeconomic vulnerabilities (e.g., high inflation, balance of
payment pressures, India, Brazil, Indonesia, Turkey, South Africa; still rapid credit growth, Brazil, China, Turkey). Cont…

Emerging Economies Vulnerable to U.S. Tapering – IMF (cont…)
Global demand rebalancing
•While global imbalances have narrowed last year, and, despite some further progress, policies have played a relatively minor role.
•To foster rebalancing that is supportive of growth, structural reforms that increase internal demand in surplus economies on a sustained
basis (in particular, private consumption in China and private investment in Germany) and raising external competitiveness in deficit
economies (e.g., Brazil, India, euro area periphery, and the United Kingdom) remain necessary.
•More broadly speaking, to raise productivity and employment, important structural reforms and full implementation of past commitments
in key areas (e.g., infrastructure investment, removal of entry barriers in product and services markets) should be a priority.

Source: IMF UPDATE ON GLOBAL PROSPECTS AND POLICY CHALLENGES, G-20 Leaders’ Summit September 5–6, 2013

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 - August 2013

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