CAPSULE

1
CAPSULE
Economic
October, 2009
Research Development Unit
2
Contents
ECONOMY BUSINESS NEWS
ANALYSIS FORECAST 

• SL Successfully Prices USD 500 Mn. Sovereign Bond
  Offering 

• Inflation Falls Further to a Five Years Low of
  0.7  

• SLs Rating Outlook Raised to 'Positive' by SP 

• Interest Rates 

• Fitch Revises SLs Sovereign Rating Outlook from
  Negative to Stable 

• Sri Lankan Economy - By Fitch 

• Strengths

• Weaknesses

• WB-IFC Ranks BOI SL as the Best in South Asia 

• Comments

• External Sector Performance August ,2009 

• Forecasts

Economy and Financial Sector Snippets

• ComBank Completes Three CSR Projects in
  Mahiyangana 

• ComBank to Reward e-Exchange Regulars with
  Lanka Bell Connections 

• CBSL Approves 134 Banking Centres in North East.

3
ECONOMY BUSINESS NEWS
Back to Contents
SL Successfully Prices USD 500 Mn. Sovereign
Bond Offering 

• On the 15th October 2009, Sri Lanka (SL) had
  successfully offered a USD 500 Mn. 5-year
  sovereign bond issue (maturing on 22nd January
  2015), with a coupon of 7.40.  

• The offering attracted an order book that was
  oversubscribed by more than 13 times, one of the
  highest levels of over-subscription of any
  sovereign USD bond offering during 2009 (as at
  16th Oct, 2009). 

• Accordingly, it had drawn USD 6.8 Bn. in bids
  from 269 buyers pushing yields lower than
  expected on strong country prospects and high
  demand. 

• This is a clear indication of the favorable
  investor sentiment on the Sri Lankan economy, and
  these positive developments would further enhance
  the attractiveness of Sri Lanka.  

4
ECONOMY BUSINESS NEWS
Back to Contents
Allocation of the USD 500 Mn. Bond Issue
By Geography
By Investor Type

• The coupon of 7.40 is relatively low, compared
  to the coupon of 8.25 on Sri Lanka's inaugural
  US dollar bonds issued in October, 2007. 

• The bonds have been rated B by Standard
  Poors and B by Fitch Ratings, and listed on
  the Singapore Exchange. 

• According to the Central Bank of Sri Lanka
  (CBSL), the government will use the net proceeds
  from the offering to supplement available
  concessional funds to develop infrastructure
  projects that have previously been approved by
  the government and included in the current 2009
  Budget. 

5
ECONOMY BUSINESS NEWS
Back to Contents
SLs Rating Outlook Raised to 'Positive' by SP

• Standard Poor's (SP), on 15th October 2009,
  had raised the outlook on Sri Lanka's credit
  rating to 'positive' from 'stable', citing
  improved government finances after the IMF
  Stand-by-Arrangement of USD 2.6 Bn.

• The outlook change also took into account the
  strengthening of Sri Lanka's Balance of Payments
  (BOP) position.  

• At the same time, SP affirmed Sri Lankas
  long-term local currency sovereign credit rating
  at B, and long-term foreign currency
  sovereign rating at B. 

• According to SP, these ratings on Sri Lanka
  could be raised further on evidence of continued
  implementation of the IMF program, including
  progress in expanding revenue generation.  

6
ECONOMY BUSINESS NEWS
Back to Contents
Fitch Revises SLs Sovereign Rating Outlook from
Negative to Stable  

• Fitch Ratings, on 09th Oct 2009, had revised SLs
  sovereign rating outlook to stable from
  negative, citing the countrys positive changes
  in sovereign credit fundamentals.
• At the same time, the agency had affirmed the
  long-term foreign and local currency Issuer
  Default Ratings (IDRs) and the country ceiling at
  B, and the short-term IDR at B. 
• These recent improvements in the outlook of SLs
  sovereign ratings, would further enhance the
  investor sentiment on the SL economy, and would
  also strengthen the borrowing capability of the
  country. 

7
ECONOMY BUSINESS NEWS
Back to Contents
WB - IFC Ranks BOI - SL as the Best in South Asia

• The World Banks Investment Climate Advisory
  Service has ranked Board of Investment (BOI) of
  SL as the best in South Asia for investor
  promotion and facilitation.  

• In the latest issue of the Global Investment
  Promotion Benchmarking 2009, the BOI has been
  described as the only Good performing
  Investment Promotion Intermediary (IPI) in South
  Asia. 

• BOI having received a score of 64 out of 100 has
  shown a remarkable progress out of 181 countries
  surveyed for the report.  

• According to the BOI, middle-income countries are
  showing immense progress in competing for
  investments particularly Brazil, Botswana,
  Colombia, Lithuania and Turkey. However,
  lower-income countries like Honduras and Sri
  Lanka, which offer strong facilitation services
  to prospective foreign customers, offer evidence
  that a countrys income is not linked to its
  performance. 

8
ECONOMY BUSINESS NEWS
Back to Contents
WB - IFC Ranks BOI - SL as the Best in South
Asia (cont)

• The report, Global Investment Promotion
  Benchmarking 2009, assesses the performance of
  national and sub-national IPIs in 181 countries,
  presenting one of the most comprehensive
  benchmarking tools ever.  

• According to the BOI, including the projected
  figure for 2009, SL has succeeded in attracting
  USD 2.8 Bn. in Foreign Direct Investments (FDIs)
  since 2006, compared to USD 2.7 Bn. received
  during 1997 to 2005. 

• In the first 6 months of 2009, around USD 297 Mn.
  had flowed into the country as FDIs.  

• However, according to BOI officials, SL is in
  line to receive USD 600 Mn. to USD 700 Mn. as
  FDIs in 2009, as fresh applications have begun
  pouring in, after the end of the war. 

9
ECONOMY BUSINESS NEWS
Back to Contents
External Sector Performance August 2009 

• The cumulative expenditure on imports had
  declined by 35.2 to USD 6,178.7 Mn. during
  first 8 months of 2009. 

• The cumulative earnings from exports had
  declined by 17.2 to USD 4,551.3 Mn. during
  first 8 months of 2009. 

• Accordingly, the cumulative trade deficit had
  decreased by 59.6 to USD 1,627.4 Mn. during the
  first 8 months of 2009 from USD 4,032.0 Mn.
  recorded in the corresponding period of 2008.  

10
ECONOMY BUSINESS NEWS
Back to Contents
External Sector Performance August 2009
(cont.) 

• However, according to the CBSL, it is expected
  that exports will continue to increase during the
  remaining months of 2009 and in 2010,
  notwithstanding the uncertainties on the
  continuation of GSP concessions.

• Private remittances had increased by 9.9 to USD
  2,194.7 Mn. during the first 8 months of 2009,
  recording an excess of USD 567.3 Mn. (about 35 )
  over the trade deficit. 

• Gross Official Reserves (GOR) were estimated to
  have recorded around USD 4.5 Bn. as at 13th Oct,
  2009, which were sufficient to finance around 5
  months of imports (average imports per month
  USD 888 Mn.). 

• The significant growth in reserves was mainly due
  to the continuous absorption of foreign exchange
  by the CBSL. The CBSL has absorbed USD 2,529.3
  Mn. from the domestic foreign exchange market
  from end March 2009 to 15th Oct, 2009.  

11
Economy and Financial Sector Snippets
Back to Contents
ComBank to Reward e-Exchange Regulars with
Lanka Bell Connections 
ComBank Completes Three CSR Projects in
Mahiyangana 

• Recipients of remittances via the Commercial
  Banks e-Exchange Instant Money Transfer
  Service can win free Lanka Bell connections (till
  end 2009), under the latest promotion launched by
  CBC. 
• Accordingly, every e-Exchange beneficiary who
  receives at least two remittances of Rs.25, 000
  or more (in two separate months) from Qatar,
  Jordan, Oman or Bahrain during the promotion
  period (1st Sep, 2009 31st Dec, 2009) will be
  entitled to this valuable gift.  
• ComBank e-Exchange is a sophisticated yet low
  cost, real time on-line money transfer facility,
  which is made available to remitters through a
  network of agents in over 50 countries
  worldwide. 
• In another recent promotion, the Bank distributed
  Rs. 1.2 Mn. among 12 lucky recipients of
  e-Exchange remittances during the period 21st
  Dec, 2008 to 15th Apr, 2009, in which the winners
  were selected at five monthly draws and each was
  awarded a cash prize of Rs.100,000. 

• The Corporate Social Responsibility (CSR) Trust
  of Commercial Bank (CBC) had recently completed
  several projects in the Mahiyanganaya area, in a
  further demonstration of its commitment to rural
  communities. 

• These projects included
• Setting up an IT centre for the Rotalawela school
  in Diulapalessa.
• Constructing a school playground and donating
  musical instruments to the oriental band of
  Hobariyawa school in Girandurukotte.
• Refurbishing a health centre at Ulpothagama in
  Hasalaka.
• Constructing a play area for the children of the
  Ulpothagama area.  

Research Development Unit

12
 
Economy and Financial Sector Snippets
Back to Contents
SL Gets South Asias Largest Per Capita
Remittances
CBSL Approves 134 Banking Centres in North East 

• Sri Lanka's average remittances per person had
  recorded USD 131 in 2007, which is the largest
  per capita remittance in South Asia. On average
  remittances per person in South Asia had recorded
  USD 33 in 2007. 
• Remittances are very significant for several
  nations in the region. Most notably in Nepal,
  Bangladesh, and SL worker remittances comprise
  about 16, 10 and 8 of GDP, respectively. 
• SL had received USD 2,910 Mn. as remittances in
  2008 , and further USD 2,195 Mn. during the first
  seven months of 2009. The end 2009 figure is
  expected to be around USD 3 Bn. 
• In the meantime, between 1980 and 2007, Sri
  Lankas Human Development Index (HDI) has risen
  by 0.58 annually, from 0.649 to 0.759, which
  ranked the country at the 102nd position out of
  182 countries, as at end 2007. This index is an
  indicator of the peoples well-being, combining
  measures of life expectancy, literacy, school
  enrolment and GDP per capita. 

• According to the governor of CBSL, there are 259
  banking centres (53 bank branches, 19 extension
  offices and 187 student postal units) in
  operation in the North.
• In the East, a total of 386 banking centres (89
  bank branches, 44 extension offices and 253
  student postal units) in operation at present.
• Since April 2009, the CBSL has given approval for
  26 bank branches and 09 extension offices in the
  East, whereas it has approved 41 bank branches
  and 43 extension offices in the North. In the
  meantime, approval has been given for 15 new
  mobile banking units in IDP camps too.
• According to the governor of CBSL, the banking
  industry in the North East would face the
  problem of a lack of skilled manpower. Therefore,
  finding suitable employees will be a difficult
  task, although there will be more employment
  opportunities in the area. 

Research Development Unit

13
Analysis Forecast 
Back to Contents
Inflation Falls Further to a Five Year Low of
0.7 

• The rate of inflation, as measured by the
  point-to-point change in the Colombo Consumers
  Price Index (CCPI) (2002100), computed by the
  Department of Census and Statistics (DCS),
  further dropped to 0.7 in Sep, 2009 from 0.9
  in Aug, 2009.  

• The annual average inflation rate had also
  continued on its decelerating path observed since
  Nov, 2008 and declined further to 6.6 in Sep,
  2009 compared to 8.5 in Aug, 2009. 

• In October 2009, the point-to-point rate of
  inflation has increased to 1.4, while the annual
  average rate of inflation has come down further
  to 5.2.

• According to the CBSL, worldwide inflation is
  expected to pick up moderately in the ensuing
  months due to the base effects of high consumer
  prices experienced in 2008, as well as the
  firming demand alongside the nascent recovery in
  global markets.  

• Nevertheless, CBSL expects the rate of inflation
  in Sri Lanka to be at subdued levels in the
  approaching months, with current inflation (CCPI
  point-to-point) hovering around 1 during the
  four months up to September 2009. 

• According to the DCS, the point to point change
  in the rate of inflation is expected to be around
  5 to 6 by end 2009, and the annual average
  inflation rate is expected to come down further
  to around 4. 

14
Analysis Forecast 
Back to Contents
Interest Rates 

• So far during the year 2009, market interest
  rates have gradually declined in response to the
  monetary policy relaxation measures of the CBSL. 

• Benchmark yield rates on Treasury bills have
  declined significantly by around 800 865 basis
  points since the end of 2008, up to the first
  week of October 2009. 

• The CBSL expects the downward movement of the
  benchmark yield rates to permeate to other market
  interest rates over the coming weeks, further
  reducing the borrowing costs of economic agents.  

• This, together with the improved outlook for
  economic activity, is expected to result in an
  expansion of credit utilization of the private
  sector, thereby supporting enhanced economic
  performance.  

Research Development Unit

15
Analysis Forecast 
Back to Contents
Sri Lankan Economy - By Fitch 
Strengths 
Despite the escalation of the civil war in the
last few years, real GDP growth in SL remained
strong, and slightly less volatile than the B
rating peer group. 
SLs Human Development Index and Ease of Doing
Business scores are better than the B medians.
Fitch believes these indices reflect some of SLs
long-standing institutional strengths, maintained
despite the difficulties of an extended period of
civil conflict. 
The stand-by-arrangement with the IMF provides a
convincing backdrop for macroeconomic policy in
the short term and also for the immediate
post-war recovery period. 
SL has successfully achieved end-Sep, 2009
performance criteria, under the IMF programme,
allowing for disbursements to continue. 
16
Analysis Forecast 
Back to Contents
Sri Lankan Economy - By Fitch 
Strengths 
Stronger non-debt capital inflows to supplement
sovereign external borrowing would strengthen
SLs external creditworthiness by reducing net
external debt ratios (assuming official reserves
increase) and raising external liquidity.   
Sri Lanka retains an unblemished record in terms
of external debt repayments, never having
rescheduled with commercial or bilateral
creditors. This is unusual among B range
sovereigns, many of whom have engaged in repeated
rescheduling. 
Fitch strongly believes that there will be an
economic peace dividend as investment
opportunities sprout in the conflict areas, costs
such as insurance and transport decline, and the
countrys labour force effectively expands to
include those previously unable to participate in
the formal economy, due to the war.
17
Analysis Forecast 
Back to Contents
Sri Lankan Economy - By Fitch 
Weaknesses  
In Fitchs view, the fiscal targets under the IMF
programme would be difficult to meet.   
There is an extended history of weak public
finances in Sri Lanka. The average annual fiscal
deficit over 1991-2008 was 7.9 of GDP, well
above the 2.5 of GDP median for speculative
grade sovereigns. 
SLs net foreign debt position at 27.3 of GDP in
2008, was the highest among speculative grade
sovereigns, and considerably larger than the B
and BB peer group medians. 
Government debt was 81 of GDP as at end-2008,
much higher than the B median. Sri Lankan
government debt was equivalent to 521 of revenue
in 2008, one of only three sovereigns globally,
in which the debt/revenue ratio is higher than
500. 
18
Analysis Forecast 
Back to Contents
Sri Lankan Economy - By Fitch 
Weaknesses  
Government revenue, at 15.6 of GDP in 2008, was
among the lowest of any rated sovereign. In
Fitchs view, with low revenue and a high debt
stock, SLs fiscal flexibility is relatively
limited.
In 2009, Fitch forecasts, interest payments to
record 35 of government revenue, again exceeded
by only two sovereigns in the world. 
19
Analysis Forecast 
Back to Contents
Sri Lankan Economy - By Fitch 
Comments
A better fiscal outturn, along with a credible
commitment to medium-term fiscal consolidation,
could be important in attracting foreign
investments. 
SL should benefit from a considerable increase in
foreign currency inflows from international
donors, investors, the Sri Lankan diaspora, and
also a recovery of the tourism sector. (tourism
arrivals were up by 34 y-o-y in Aug, 2009 and
non-resident investments in the domestic bond
market jumped in early Sep, 2009). 
In Fitchs opinion, the reduction in inflation
has been critical in stabilizing SLs exchange
rate, thus easing pressures on official
foreign-exchange reserves. 
A presidential commission has been established to
report on ways to improve tax collection,
suggesting the timeline of any major tax policy
changes could be drawn out.  
20
Analysis Forecast 
Back to Contents
Sri Lankan Economy - By Fitch 
Comments
At the same time, immediate spending needs would
be acute, as part of the peace dividend in areas
previously affected by war will require increased
government spending, though international donors
are expected to assist.
Sri Lankas ratings could come under downward
pressure, if the difficulties in meeting fiscal
objectives pressure the authorities to abandon
the IMF programme. 
External finances have improved, but could
deteriorate quickly if investor confidence in
macroeconomic policy waned. 
21
Analysis Forecast 
Back to Contents
Sri Lankan Economy - By Fitch 
Forecasts
A pick-up in gross fixed capital formation as the
government embarks on rebuilding the North
East, and an increase in foreign direct
investments supported by the improved domestic
security situation, would help to bring real GDP
growth rates back to the 6.3 average expansion
rate recorded during 2003 -2008. 
Indeed, a continuation of growth at 6.0-6.5 in
the longer term would be conditional on far
reaching economic reform in SL.
Fitch forecasts, a significant reduction in the
trade deficit in 2009, as lower international oil
prices and weaker domestic economic growth is
expected to result in much lower imports. The
trade deficit is expected to be more than offset
by remittances, which are expected to exceed USD
3 Bn. by end 2009, for the first time. 
Fitch forecasts, GOR to reach USD 5.3 Bn. by end
2009, SLs highest ever, with the largest share
of the increase coming from a surge in
non-resident holding of treasury securities.
22
Analysis Forecast 
Back to Contents
Forecast Summary 
Sri Lankan Economy - By Fitch 
a - CBSL overnight repurchase rate (annual
average) F - Forecast
Source Fitch
23
Economic
Research Development Unit
CAPSULE
October 2009
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.