economic capsule april 2012

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ECONOMIC CAPSULEApril 2012

FINANCIAL SECTOR NEWS Commercial Bank Joins Central Bank to Promote Financial Literacy Among SMEs

Commercial Bank Service Points Openings

Bank of Ceylon Raises USD 500 mn Through Bonds

HNB Raises 8-year Tier II Funding from Germany

ECONOMIC & BUSINESS NEWS Fitch Affirms Sri Lanka at 'BB-'; Outlook Stable

Sri Lanka and India Ratings Could be Hurt by Oil Subsidies: S&P

IMF Releases the Eighth Tranche of USD 427 mn Under the SBA Facility

CBSL Raises Interest Rates

Tax Hikes

Price Hikes

Inflation – April 2012

Sri Lanka Revise Tourism Targets

Real Estate in Sri Lanka – Prospects and Potential

ANALYSIS & FORECAST Sri Lanka: Medium Term Macroeconomic Framework

Sri Lanka Outlook and Risks – IMF

World GDP Forecasts

Asia Faces Stronger Growth: IMF

The not-for-profit sector


Sri Lanka # 71 in the Networked Readiness Index

Sri Lanka # 22 in the Change Readiness Index

Process Changes at BOI

GLOBAL UPDATE Eurozone Unemployment Hits Record High

Euro-Region Debt Rises to Highest in Currency's History

S&P Downgrades Spain

S&P Cuts India Outlook

C O N T E N T S

FINANCIAL SECTOR NEWS


Commercial Bank Joins Central Bank to Promote Financial Literacy Among SMEs

Commercial Bank has conducted a seminar in Thambuththegama for entrepreneurs who operate in the SME and Micro Enterprise sectors under a series of such events organised by the Bank in collaboration with the Central Bank.

Officials from the Central Bank Regional Office - North Central Region, representatives from Commercial Bank and around 60 entrepreneurs were present at this event.

Presentations were made by representatives from the Development Credit Department of Commercial Bank and the Central Bank on aspects pertaining to banking services, savings and debt management, at this seminar.

In addition to the presentations, participants were also educated on these subjects through group discussions and individual activities.

The inaugural seminar under this programme took place at Wennappuwa. Similar seminars have also been conducted in Jaffna, Kilinochchi and Vavuniya by the two organisations and have benefited more than 300 entrepreneurs to date.

Arrangements have been made to conduct further programs for the benefit of entrepreneurs operating in other parts of the country during this year.

Commercial bank is one the first private sector banks in the country to join forces with Central Bank in an initiative to enhance financial literacy among Small and Medium Scale Enterprises (SMEs).


Commercial Bank Service Points Openings

Pelawatte

Talawakelle

215

216


Bank of Ceylon Raises USD 500 mn Through Bonds

The Bank of Ceylon’s USD 500 mn international five-year bond issue was over-subscribed 7.7 times with a total order value of USD 3.86 bn. According to the bank, the issue was priced at a yield of 6.875% with the money to be used for 'general corporate purposes'.

Bank of America, Merrill Lynch, Citi and HSBC were the Joint Lead Managers and book runners for the issue.

The investment have come from global hedge funds with a wide spread in Asia, Europe and the USA.

The bond was rated B1 with a stable outlook by Moody’s and BB- with a stable outlook by Fitch in line with the country’s sovereign rating.

HNB Raises 8-year Tier II Funding from Germany

HNB entered into an agreement with the German Development Finance Institution, to raise USD 25 mn through a 8-year subordinated loan which forms part of tier II capital of the bank. According to the bank, the funds would be utilised to finance the growth in small and medium enterprises.

The Central Bank recently issued guidelines enabling commercial banks to independently seek foreign funds from outside sources, particularly for tier II capital.

ECONOMIC & BUSINESS NEWS


Fitch Affirms Sri Lanka at 'BB-' ; Outlook Stable

Fitch Ratings has affirmed Sri Lanka's Foreign and Local Currency Issuer Default Ratings at 'BB-'.

The Outlook for both ratings is Stable.

The Country Ceiling has also been affirmed at 'BB-'.

Fitch Ratings Views: According to Fitch, the ratings reflect the authorities have taken the appropriate action to correct recent pressure on the balance of

payments and place it on a more sustainable trajectory.

Given the weakened state of Sri Lanka's external finances and a heavy external debt refinancing schedule through to 2013, the authorities' ability to persist with policies that address existing macroeconomic imbalances and improving external liquidity is crucial.

Although Sri Lanka was able to record real GDP growth over 8% for the second consecutive year in 2011, such economic performance, coupled with policy missteps, resulted in the current account deficit rapidly widening to 7.8% of GDP from 2.2% in 2010.

This, in conjunction with deterioration in the external economic environment and limited currency flexibility, led to balance of payment pressures and in turn a sharp depletion of foreign exchange (FX) reserves to USD5.8bn (3.4 months of imports) in January 2012 from USD8.1bn (equivalent to 5.7 months of imports) in July 2011.

The pace of deterioration in external buffers, rather than their level, is Fitch's main focus. The level of FX reserves meets with international conventions and does not indicate an immediate risk of substantial balance of payments stress.

Rating Outlook Last Change

S&P B+ StableFeb12 – Downgraded outlook from Positive to Stable

Fitch BB - Stable May12 – Affirmed the rating & outlook

Moody’s B 1 PositiveJuly11 – Upgraded outlook from Stable to Positive

Cont…


Fitch Affirms Sri Lanka at 'BB-'; Outlook Stable (cont…) Fitch Ratings Views: (cont…) However, Fitch believes the rapid depletion of FX reserves in 2H,11 has heightened the vulnerability of the Sri Lankan sovereign credit

profile to a spike in global risk aversion.

Therefore, the resumption of IMF tranche disbursements following the implementation of policy measures aimed at macroeconomic rebalancing is a positive development.

More importantly, measures implemented by the Central Bank of Sri Lanka and the government since February 2012 have tightened monetary conditions and could help Sri Lanka to return to a more sustainable GDP growth trajectory over the long-term.

In the near-term, certain policy measures have resulted in adverse risks to both growth and inflation that have the potential to impact policy consistency.

Due to the authorities' progrowth bias and the fragile balance of payments, Fitch believes developments in the coming months warrant close monitoring.

Fitch notes that the government has been able to rationalise expenditure and continue consolidation efforts despite lower-than-expected fiscal revenues.

As a result, the fiscal deficit (including grants) narrowed to 6.9% of GDP in 2011 from 8% in 2010 and public debt declined to 78.5% of GDP from 81.9%. Further simplification of the tax system could bolster measures announced in previous budgets and aid in the attraction of greater foreign direct investment inflows.

Successful implementation and persistent application of policies aimed at improving external liquidity, including further monetary tightening if required, would support the ratings.

Concerted efforts to persist with fiscal consolidation, by both enhancing the tax revenue base and rationalising expenditure, in tandem with lowering public debt would be supportive of Sri Lanka's ratings.

Source: Fitch Ratings


Sri Lanka and India Ratings Could be Hurt by Oil Subsidies: S&P

According to Standards & Poor’s (S&P), a further large increase in crude oil prices would adversely affect most Asia-Pacific economies.

The region is a large net importer of oil, much of which comes from the Middle East .

If average oil prices stay above USD 150 per barrel for more than a year, an event S&P consider to have a modest likelihood at this time, it could trigger negative credit rating actions for some Asia-Pacific sovereigns.

Sovereigns that subsidize oil consumption are the most vulnerable to downgrades.

In India and Sri Lanka, S&P expect fuel and related subsidies to markedly worsen fiscal and external deficits unless subsidy levels fall.

In the absence of offsetting positive developments, these sovereigns could see negative rating actions as a result.

(S&P base average oil prices on the equal-weighted average price of U.K. Brent, Dubai medium and Texas heavy blends, as computed by the U.N. Conference on Trade and Development.)

Cont…


Sri Lanka and India Ratings Could be Hurt by Oil Subsidies: S&P (cont…)

High oil prices are a bigger drag on growth in economies that rely heavily on the commodity as an energy source.

Car ownership is often prevalent in such economies, reflecting oil's importance as a fuel for motor vehicles.

Growth Of Energy-Intensive Economies Will Be Hit

Cont…


Surging oil prices could damage external indicators that underpin sovereign credit ratings. The external trade balance, for instance, could weaken significantly.

The external balances of India and Sri Lanka are likely to markedly deteriorate if oil prices exceed USD 150 per barrel without a significant reduction in oil subsidies.

Their net oil trade deficits could rise to 6%-7% of GDP in this scenario, up from about 4%-5% in recent years. Both economies had current account deficits above 2% of GDP in 2011.

These levels could worsen to more than 4% of GDP if oil prices are sustained at above USD150. Such developments undermine their sovereign creditworthiness.Source: The Asia-Pacific Sovereign Seesaw: If Oil Prices Soar, Some Ratings Could Fall – Standard & Poor’s – April 26 2012

Sri Lanka and India Ratings Could be Hurt by Oil Subsidies: S&P (cont…)


IMF Releases the Eighth Tranche of USD 427 mn Under the SBA Facility

The Executive Board of the IMF on 02.04.12 completed the seventh review of Sri Lanka's economic performance under a program supported by a Stand-By Arrangement (SBA).

The completion of the review enables the immediate disbursement of an amount equivalent to SDR 275.6 mn (about USD 426.8 mn), bringing total disbursements under the arrangement to an amount equivalent to SDR 1.378 bn (about USD 2.13 bn).

In addition, the Executive Board approved an extension of the arrangement period to July 23, 2012, to allow time for the completion of the eighth and final review.

Received on Tranche USD mn

July, 2009 1st 322.0

Nov, 2009 2nd 329.0

June, 2010 3rd & 4th 407.8

Sep, 2010 5th 212.5

Feb, 2011 6th 216.6

April, 2011 7th 218.3

April, 2012 8th 426.8

Total Funds Received up to now 2,133.0

Funds to be Received 466.4

Full Amount of the IMF SBA 2,599.4

According to CBSL, with the IMF disbursement, as well as other inflows, the gross official reserves as at 04 April, 2012 recorded USD 6.1 bn, which was equivalent to 3.6 months of imports.


CBSL Raises Interest Rates

According to Central Bank of Sri Lanka;

Notwithstanding the increase in the Central Bank policy interest rates in February 2012 (by 50 basis points) and the Direction issued to restrain the growth of credit extended by licensed banks, there are still some signs that credit growth is continuing at an undesired pace.

Therefore, the Monetary Board was of the view that a further adjustment of policy rates of the Central Bank was warranted to ensure a smooth deceleration of credit growth through the year in order to achieve the target set for end year, and to anchor inflation expectations.

Accordingly, on 5th April 2012, CBSL increased the policy rates. (last row of table).

Policy Rate Changes 2007-2012

Date of Change Repo (%) RRepo (%)

23.02.2007 10.50 12.00

11.02.2009 10.25 1 1.75

22.04.2009 9.00 -

21.05.2009 - 11.50

16.06.2009 8.50 11.00

11.09.2009 8 .00 10.50

18.11.2009 7.50 9.75

12.07.2010 7.25 9.50

20.08.2010 - 9.00

11.01.2011 7.00 8.50

03.02.2012 7.50 9.00

05.04.2012 7.75 9.75

Credit extended to the private sector increased, year-on-year, by 35.0 % in March, 2012 following a 34.4% increase in February, 2012.


CBSL Raises Interest Rates (cont…) Other market interest rates have also shown some upward adjustment from the latter part of 2011 with a marked increase so far in 2012, in response to the policy rate increases as well as the tight liquidity conditions.


Tax Hikes – w.e.f. 31 March 2012

With a view to reducing import expenditure, and fuel consumption, the Government has raised taxes on motor vehicles, three wheelers and motorcycles.

2009 2010 2011 % Cha. 09/10 % Cha. 10/11

Motor Cars 3,421 37,134 54,285 985 46

Vans & Cabs 170 9,504 12,838 5,491 35

Three Wheeler 34,563 91,230 137,816 164 51

Motor Cycles 139,000 224,998 252,318 62 12

Others (Bus, trucks…) 34,525 106,341 66,706 208 (37)

Total 211,679 469,207 523,963 122 12

Motor Vehicle Imports 2009-2011

Source: Ministry of Finance


Tax Hikes – w.e.f. 31 March 2012 (Cont…)

Motor vehicle category Old Tax New TaxHybrid vehicles

Below 2000 cc 51 % 60 %

2000 cc and above 75 % 100 %

3000 cc above 100 % 125 %

Petrol cars

Below 1000 cc 120 % 200 %

1000 cc to 1600 cc 129 % 200 %

1600 cc to 2000 cc 136 % 200 %

2000 cc and above 154 % 250 %

3000 cc and above 189 % 275 %

Diesel cars

Below 1600 cc 180 % 250 %

1600 cc to 2000 cc 250 % 275 %

2000 cc to 2500 cc 267 % 300 %

2500 cc and above 291 % 350 %

Petrol vans

13-20 seats 103 % 125 %

Below 13 seats 172 % 200 %

Diesel vans

13-20 seats 112 % 125 %

Below 13 seats 230 % 250 %

Reconditioned vehicles

Petrol 189 % 300 %

Diesel 291 % 350 %

Motor tricycles

Petrol, Gas 51 % 100 %

Diesel 61 % 100 %

Electric 27 % 50 %

Double cabs

Below 1500 Kg 93 % 150 %

1500 Kg above 110 % 150 %

Motor cycles 61 % 100 % Source: Ministry of Finance

Item UnitIncreased by (Rs.)

Effective Date

All brands of cigarettes per cigar 1.00

31.03.12Imported beer per Liter 50.00

Local beer (per Liter ) per Liter 5.00

Hard liquor (per Liter ) per Liter 60.00

Wheat flour 1 Kg 8.50 27.04.12

Loaf of bread 450 g 3.00 30.04.12

Imported milk powder (except infant milk powder) (A 15% tax or a maximum of Rs. 92 per Kg, which ever is higher)

400 g pack 61.00

05.05.121 Kg pack 161.00

LP gas cylinder (both Litro and Laugfs) 12.5 Kg 350.00

Bag of cement 50 Kg 70.00

Price Hikes


Inflation – April 2012

Period

CCPI (%) CCPI Core* (%)

Y-o-Y A.A. Y-o-Y A.A.

March 12 5.5 5.9 4.9 6.5

April 12 6.1 5.7 5.2 6.3

* The price movement excluding Fresh Food, Energy, Transport, Rice and Coconut in the CCPI basket.

Source: CBSL


Sri Lanka Revise Tourism Targets Sri Lanka's tourist arrivals rose 21.3 % to 91,102

in March, 2012 from a year earlier with arrivals in the first

three months up 21.1 % to 260,525.

Tourism earnings for the Jan-Mar 2012 period

recorded an increase of 28.6% to USD 268.3 mn compared to USD 208.7 mn in the corresponding period of 2011.

Sri Lanka revised up its targets for tourist arrivals and leisure industry revenue after the sector outperformed targets for the first quarter with a more than 20 % rise in arrivals.

Going by data up to March 2012, 1 million tourist arrivals are expected for 2012, higher than the earlier target of 950,000.

Earnings from tourism are expected to be well over USD 1 bn for 2012.


Real Estate in Sri Lanka – Prospects and Potential

According to a report compiled by Jones Lang LaSalle, an international property services company, Colombo’s demand for office space is primarily driven by growth in the banking, financial services, IT/ITES and tourism sectors.

Apart from the iconic World Trade Centre (WTC), which offers office space at LKR 260 per sq ft per month, the majority of office space in the CBD and SBD (central and secondary business districts of Colombo) is available on a rental range of LKR 100 – 150 per sq ft per month.

Office space in WTC was being leased at LKR 135 - 150 per sq ft per month during 2009, which indicates the rapid appreciation in rents witnessed by Colombo CBD during the last three years. Occupancy of office space in Colombo had increased from a low 60 % in 2009 to 90 % in 2011.

Land prices in Colombo have appreciated rapidly in the last four years. With prime land parcels in the CBD (Colombo 01 and 02) being offered at LKR 8-9 mn per perch (USD 268-301 per sq ft), construction of offices in the core of the city will imply a high rental expectation. Land in SBD locations is also expensive, and is available at LKR 4-5 mn per perch (USD 134–167 per sq ft).

Source: Real Estate in Sri Lanka – Prospects and Potential: Transforming Economic Growth into Real Developments in Colombo - Jones Lang LaSalle


Sri Lanka was ranked 22 in the recently published Change Readiness index based on research by KPMG and the Overseas Development Institute which offers a new and unique perspective on the ‘change readiness’ of 60 developing and emerging economies.

The Change Readiness Index captures government capability and the capability of a country as a whole - including the private sector and civil society - to manage and respond effectively to change.

Sri Lanka was ranked at # 71 (out of 142 countries) in the Networked Readiness Index 2012 compiled by the World Economic Forum and the global business school INSEAD. (2011 ranking – # 66)

The Networked Readiness Index has been measuring the degree to which economies across the world leverage ICT for enhanced competitiveness.

Sri Lanka # 22 in the Change Readiness Index

Source: The Global Information Technology Report - April 2012 - World Economic Forum

Some Selected Country Rankings

China 13

India 23

Indonesia 30

Brazil 31

Thailand 32

Vietnam 49

Source: Change Readiness Index 2012 - KPMG

Sri Lanka # 71 in the Networked Readiness Index


Process Changes at BOI

In line with the automation process taking place at Sri Lanka Customs and the Sri Lanka Ports Authority, the Board of Investment (BOI) too will implement new systems to clients to work online, in respect of operations, documents and payments for shipments.

The BOI will start the trade facilitation process changes from 15 May, 2012 once the customs export process is tested. The Customs will work hand in hand to facilitate BOI clients with the ASYCUDA World online documentation system.

According to the CEO of the Shippers’ Academy Mr. Rohan Masakorala, these new processes will reduce the transaction cost of exporters and streamline the process of clearing exports and imports with less work for companies.

GLOBAL UPDATE


Eurozone Unemployment Hits Record High The 17 countries that use the euro are facing the highest unemployment rates in

the history of the currency as recession once again spreads across Europe, pressuring leaders to focus less on austerity and more on stimulating growth. Unemployment in the eurozone rose by 169,000 in March 2012, taking the rate up to 10.9 % its highest level since the euro was launched in 1999.

Austerity has been the main prescription across Europe for dealing with a debt crisis that's afflicted the continent for nearly three years and has raised the specter of the breakup of the single currency. Three countries Greece, Ireland and Portugal have already required bailouts because of unsustainable levels of debt.Eight eurozone countries, including Greece, Spain and the Netherlands, have seen their economies shrink for two straight quarters or more, the common definition of a recession.

The debt of the euro region rose in 2011 to the highest since the start of the single currency as governments increased borrowing to plug budget deficits and fund bailouts of fellow nations crippled by the fiscal crisis.

The debt of the 17 euro nations climbed to 87.2 % of GDP in 2011 from 85.3 % the previous year. This is the highest since the euro was introduced in 1999. Greece topped the list with debt at 165.3 % of GDP, while Estonia had the least at 6 % of GDP.

Euro-Region Debt Rises to Highest in Currency's History

Source: The Associated Press

Source: Bloomberg

Source: The Economist


S&P Downgrades Spain Standard & Poor's cut its credit rating on Spain by two notches, citing expectations

the government finances will deteriorate even more than previously thought as a result of a contracting economy and an ailing banking sector.

The ratings agency, which downgraded Spain to BBB + from A, also put a negative outlook on the credit and said Spain's situation could deteriorate further unless ambitious measures were taken at European level.

S&P Cuts India Outlook

Standard & Poor's cut India's credit rating outlook to negative from stable, reflecting the toll that hefty fiscal and current account deficits and political paralysis are exacting on Asia's third-largest economy.

The negative outlook will also jeopardises India's long-term rating of BBB-, the lowest investment grade rating.

A

BBB+

Stable

Negative

Stable

Negative

Source: Reuters

Source: Reuters

ANALYSIS & FORECAST


Indicator Unit 2010 (b) 2011 (c)Projections

2012 2013 2014 2015

Real Sector

GDP @ Market Price Rs.bn 5,604 6,543 7,504 8,631 9,909 11,290

Real GDP Growth % 8.0 8.3 7.2 8.0 8.3 8.5

Per Capita GDP USD 2,400 2,836 2,939 3,435 3,969 4,574

Total Investment % of GDP 27.6 29.9 30.5 31.6 32.0 32.3

Domestic Savings % of GDP 19.3 15.4 18.3 21.9 23.8 25.0

National Savings % of GDP 25.4 22.1 26.7 30.2 31.6 32.5

External Sector

Trade Gap USD mn -4,825 -9,710 -9,183 -9,110 -9,433 -9,994

Exports USD mn 8,626 10,559 11,703 13,030 14,557 16,302

Imports USD mn 13,451 20,269 20,885 22,139 23,990 26,296

Workers' Remittances USD mn 4,116 5,145 6,481 7,341 8,079 8,876

Current Account Balance % of GDP -2.2 -7.8 -3.8 -1.4 -0.4 0.2

Overall Balance USD mn 921 -1,061 1,250 1,700 2,400 2,500

External Official Reserves (d) (e) USD mn 6,610 5,958 7,945 9,157 10,776 12,823

Debt Service Ratio (f ) % 15.9 12.6 16.1 15.7 16.8 16.6

Fiscal Sector

Total Revenue and Grants % of GDP 14.9 14.5 15.0 15.1 15.6 15.7

Expenditure and Net Lending % of GDP 22.9 21.4 21.2 20.9 20.8 20.7

Current Account Balance % of GDP -2.1 -1.1 0.0 0.5 1.0 1.0

Overall Budget Deficit % of GDP -8.0 -6.9 -6.2 -5.8 -5.2 -5.0

Government Debt % of GDP 81.9 78.5 77.7 73.2 69.0 65.4

Financial Sector (g)

Reserve Money Growth % 18.8 21.9 15.0 15.0 15.0 14.0

Broad Money Growth (M2b) % 15.8 19.1 15.0 15.0 15.0 14.0

Growth in Credit to Private Sector % 24.9 34.5 19.0 14.0 15.9 14.5

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• Based on the information available by mid March 2012

• Revised

• Provisional

• Excluding receipts of Asian Clearing Union,

• External official reserves include the proceeds from the IMF Stand-by Arrangement facility-2009.

• Total debt service payments as a percentage of earnings from exports of goods and services

• Year-on-year growth in end year values

Source: CBSL Annual Report 2011

Sri Lanka: Medium Term Macroeconomic Framework (a)

Growth

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Growth is expected to moderate to around 7–7.5 % in 2012, as activity slows in response to the tightening of monetary and fiscal policy.

Nevertheless, growth is expected to remain reasonably healthy, supported by the continued expansion of agriculture in the northern and eastern provinces, a boost to construction from major infrastructure projects, and the continued expansion of tourism. The depreciation of the rupee should also, over time, help boost exports.

The rupee depreciation and the sizeable increases in petroleum and electricity prices will lead to an increase in consumer prices.

The annual average inflation rate should still remain in single digits and food price inflation is expected to remain benign.

Limited public sector wage increases so far should also help. Nevertheless, the Central Bank will need to stand ready to respond to rising inflation risks especially if higher international oil prices persist.

Inflation

Sri Lanka Outlook and Risks - IMF

Cont…

Balance of Payments

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The recent steps taken by the authorities will reduce the external current account deficit to a more sustainable level.

A continued pick up in long term capital flows, including foreign direct investment, and a turnaround in short-term capital flows should help bring the balance of payments for the year into broad balance.

However, this outlook is subject to a number of risks. Higher oil prices and any weakening of external demand for Sri Lanka’s exports would put pressures on the balance of payments, as would any slippages in the authorities’ efforts to rein in credit growth and maintain two-way flexibility of the exchange rate.

Recent developments suggest that the pace of intervention, and associated loss of reserves, has moderated significantly, and that the authorities are on track to stabilize net international reserves by the end of the second quarter.

The authorities will need to continue to manage the exchange rate flexibly and maintain a tight monetary stance over the coming months to achieve the IMF’s external reserve objectives.

Even then, Sri Lanka’s reserve buffers will remain relatively low at around 2.7 months of imports and 75 % of short term debt in 2012.

Reserves

Sri Lanka Outlook and Risks – IMF (Cont…)

Cont…

Iran Embargo

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It is possible that the embargo may disrupt Sri Lanka’s ability to continue to import oil from Iran (which currently covers over 90 % of crude oil imports of Sri Lanka).

Furthermore, Sri Lanka has received “positive responses” from Saudi Arabian Oil Co. and Oman Oil Co. for supplies as the country seeks to reduce its dependence on Iranian crude.

Sri Lanka, which imports 13 of its 14 annual crude cargoes from Iran, plans to cut shipments from Iran to 10 cargoes a year to comply with U.S. sanctions. It would like to double purchases from Saudi Arabia to 2 lots, and obtain 2 consignments from Oman.

Public debt is projected to fall to around 65 % of GDP by 2015 and external debt to just over 40 % of GDP.

Debt Sustainability

Source: IMF Sri Lanka Country Report - April 2012

Sri Lanka Outlook and Risks – IMF (Cont…)


World GDP Forecasts

The world economy will grow by 3.5% in 2012, as predicted by the International Monetary Fund (IMF) in April 2012.

The IMF expects most of the world’s growth to come from emerging markets, with China alone accounting for more than a third.

China’s growth rate will slow somewhat in 2012, but not alarmingly: its economy will expand by 8% or so, faster than all but a dozen countries.

Rich countries will do better than previously expected, thanks to a brisk recovery in America and exceptional funding measures by the European Central Bank.

But the euro area will suffer a mild recession in 2012, as austerity bites, according to the IMF.

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Asia Faces Stronger Growth: IMF A

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Growth in Asia is expected to pick up this year, after slowing in the last quarter of 2011, but Asian leaders now face the difficult task of adjusting policies to support stable, non-inflationary growth, say IMF economists.

Threats to growth

Despite brighter prospects for the region, IMF warns that financial turmoil in Europe could yet escalate and spread to Asia.

In particular, a sharp fall in exports to advanced economies and a reversal of foreign capital flows would severely impact activity in the region.

IMF also cites higher energy prices as a risk to activity, and a source of difficult trade-offs between inflationary pressures and budgetary risks from energy and food subsidies.

So far, stronger economic and policy fundamentals have helped buffer Asian economies against adverse financial market spillovers from the euro crisis, but the IMF believes that the best way for Asia to protect itself against external shocks is by strengthening domestic sources of growth.

Source: IMF


The not-for-profit sector

Between 2007 and the end of last year shareholders in banks globally have lost almost 10% of their investment each year, according to the Boston Consulting Group (see chart 1).

Behind this international average lie some truly horrible losses. Investors who stuck it out in Dutch banks saw the value of their holdings fall by almost 28% a year. Holders of French, German and Swiss banks suffered average annual losses of close to 20%. Those in American and British banks lost 14% and 16% a year respectively.

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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

“Several of the countries where I have worked have been in conflict, or have recently emerged from conflict of one kind or another. These are often determining moments in the life of a nation – good times for a change of direction and a change of

heart, and good times also for the world to be prepared to change its mind about that country.”

Simon Anholt*

•Simon Anholt is one of the world’s most sought after independent policy advisors, who has worked with over 50 heads of state, heads of government and administrations of nations.

economic capsule april 2012

Economy & Finance