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Bank also revised its 2012 forecast to 6.8% from 7.1% but expected growth to pick up in 2013 to 7.5% driven by domestic growth offsetting sluggish exports. The current account deficit in the first half of 2012 grew to Rs.75.3bn (+37.9% YoY). The six month budget deficit is Rs.311.1bn (+40.2%), 4.1% of GDP, a 70bp increase from a year earlier (3.4%) Inflation in Sep 12 eased to 9.1% YoY (-40 bps MoM) a four month low as food and non-alcoholic beverages fell 0.3% MoM. The All Share Price Index closed at 5,971.99 up 15.3% MoM, completely erasing year to date loses and is now 4.9% up due to renewed local retailer interest and sustained foreign investor involvement. Treasury yields dropped as inflation slowed and liquidity increased. 91 day treasury bill rates dropped to 11.44% (-11 bps MoM), 182 day treasury bill rates dropped to 12.57% (-50 bps MoM), and 364 day treasury bills reduced to 13.02% (-29 bps). The Sri Lankan economy grew 6.4% YoY in 2Q12, slowing from 7.9% in 1Q12. The agriculture sector grew 9.1% YoY, industry sector grew 9.5% and services sector grew 4.5%. Sectors share of GDP remained constant at 12%, 29% and 59%. The Central Bank of Sri Lanka revised Sri Lankas 2012 GDP growth to 6.8% from 7.2%, citing severe drought conditions significantly impacting agriculture production and hydro power generation.Standard Chartered The rupee ended the month at 127.89/131.17 vs. the USD (rupee stronger ~2% MoM). The currency strengthened as banks sold dollars on increased equity market inflows and exporters cashing in their export invoices. The trade deficit in July 12 narrowed to a 17 month low of $534.7m (-19.4% YoY), reducing the first seven months deficit to $5.35bn (+6.7% YoY). Imports in July dropped a staggering 24.9% YoY also a 17 month low, but more worryingly exports were only $794.4m (-17.4% YoY).

In Economic news:

In Business news:
Tourist arrivals in Aug 12 was 79,456 (+9.7% YoY), however lower than our estimate of 83,000. Vehicle registrations in Aug 12 fell 39.5% YoY to 27,185. AIA buys 92.3% of Aviva NDB Insurance for $109m. Tea production in Aug 12 was up by a marginal 20,000kg YoY to 25.8m kg. Use of Arabian light crude oil result in losses. India will increase its garment import quota from Sri Lanka to 8 million pieces from 5 million pieces. Wireless fixed access users in Sri Lanka declined to 2.46m (-6.6% YoY) as of June 2012. The LMD-Nielsen Business Confidence Index in August continued its mild recovery to 121.

In Consumer news:
Import duties on potatoes and canned fish were increased by Rs.20 and Rs.25 per kg. The number of active credit cards in Sri Lanka increased by 55,864 from Dec 11 to July 12 to 918,216. The fake lubricant market in Sri Lanka is increasing. HSBC Sri Lanka is offering its workers a Voluntary Separation Scheme (VSS). The Nielsen Consumer Confidence Index in August 2012 dropped to an all-time low of 57,

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In Economic news:
Sri Lankas second quarter GDP growth slows to 6.4% YoY versus 7.9% in 1Q12. Sectors,
agriculture grew 9.1% YoY, industry grew 9.5% and services grew 4.5%. Sectors share of GDP was constant at 12%, 29% and 59%. Paddy was the main driver of agricultural growth (+36.4% YoY) due to a slight improvement in weather conditions (which turned adverse later in the year) and increased fertilser subsidies yielding higher crops. Tea continued to be a drag on the economy as its value addition reduced 3.5% in the quarter. The largest industrial segments, manufacturing and construction grew 6.2% and 18.3% YoY. Growth in construction indicates to a certain extent that the industry has countered the negative impact of the rupee

115.0 113.0 111.0 109.0 107.0 105.0 103.0 101.0 99.0 97.0 95.0
1.6% 2.1% 4.3% 4.2% 6.1% 6 1% 7.0% 6.4% 6.2% 6 2% 7.6% 7.0% 6.3% 6.1% 6 1% 7.1% 8.5% GDP growth % (RHS) 8.0%

8.6%

8.0% 8.1%

8.3%

8.5%
7.9%

7.5% 6.5% 5.5%

Industrial
6.4% 6 4%

Services Agriculture
GDP 2012E CBSL 6.8% IMF 6.75% ADB 7.00%

4.5% 3.5% 2.5% 1.5%

1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12

Source: CBSL

devaluation. Construction industry experts had expected currency devaluation to add about 20% to total costs. Despite this, increased demand appears to be sustaining and in fact growing the industry. The largest service segments, wholesale & retail and transport & communication grew 3.5% and 6.6%. The hotels and restaurants segment grew 23.2% YoY, but only accounts for 0.5% of countrys GDP.

drought conditions significantly impacted agriculture production and hydro power generation. The government allocated about Rs.3.5bn to compensate farmers for their crops damaged by the drought (approx. 36,000 hectares of cultivated lands have been damaged). The International Monetary Fund (IMF) has always maintained GDP growth for 2012 at 6.75% and ADB in April 12 stated that growth should be 7.0%. In Sep 12, Standard Chartered Bank (SCB) revised its forecast to 6.8% from 7.1% but expected growth to pick up in 2013 to 7.5% driven by domestic growth offsetting sluggish exports.

was later revised in May to 7.2%. The latest revision came as severe

The Central Bank of Sri Lanka (CBSL) revises Sri Lankas 2012 GDP growth forecast to 6.8%. At the beginning of the year it had forecasted 8.0% which

On a positive note the IMF said that Sri Lankas 2012 growth will be better than emerging and developing economies average of 5.6%. IMF forecasts Indias growth at 6.1%, Pakistan at 2.6% and Bangladesh at 5.9% in 2012. Further, the average growth of 5.4% forecasted for Vietnam, Philippines, Indonesia and Thailand is below Sri Lanka.

Sri Lanka slips 16 places in the latest World Economic Forums 2012-13 Global Competitiveness Rankings.
The drop is in marked contrast to the 10 place jump in 2011-12. Sri Lanka lost its ranking in seven of the 12 categories. On macro-economic environment Sri Lankas rank was 127, down from 116 last year and was placed 129 on labour market efficiency versus 117 in the previous year. Switzerland and Singapore maintained their one and two ranking. WEF assess 144 countries based on institutions, infrastructure, macroeconomic environment, health and primary education, higher education and training, goods market efficiency, labour market

Note: Afghanistan, Bhutan and the Maldives were not included the index Source: World Economic Forum - Global Competitive Index 2012-2013

efficiency, financial market development, technological readiness, market size, business sophistication and innovation.

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In Economic news:
-500.0 -450.0 -400.0 -350.0 -300.0 -250.0 -200.0 -150.0 -100.0 -50.0 Jan
Source: CBSL

largely due to a steady increase in tax revenue in 2Q12 (+17.6% YoY) and moderate current spending (9.1% YoY in 2Q12). However current spending in 1H12 rose to Rs.563.bn (+17.3% YoY).
2012E defict target Rs. bn (468.8)

2012

2011

2010

Jan- Jun budget deficit as a % annual defcit /target

The six month budget deficit was Rs.311.1bn (+40.2% YoY), 4.1% of GDP, a 70bp increase from a year earlier (3.4%); as capital and lending minus repayments rose Rs.235.8bn. The budget deficit is now almost two thirds of the 6.2% 2012 target. The government forecasts total revenue of Rs.1,106.1bn in 2012 (+18.3% YoY) and expenditure of Rs.1,107.9bn (+10.3% YoY). Come end of the year the government may well report numbers that are somewhat inline with its targets. This is made possible as a large number of expenses are termed supplementary and excluded from the budget. These expenses include fertilizer and food subsidies, additional maintenance costs of state institutions, state salary increments etc. In June 12 alone, the Treasury allocated more than Rs.6bn in supplementary funds to various state enterprises. The main beneficiaries were Sri Lanka Army (Rs.2.4bn), Ministry of Resettlement (Rs.1.9bn) and Ministry of Defence and Urban Development (Rs.500m).

66% - 2012 47% - 2011 48% - 2010

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

The current account deficit in the first half of the year (1H12) was Rs.75.3bn (+37.9% YoY).
This deficit (revenue less current spending) is a significant improvement from the Jan-Apr 12 level of Rs.139.8bn. The improvement was

CBSLsfourthSriLankaDevelopmentBonds(SLDBs)oversubscribed.

The issue aimed at raising $60m was oversubscribed by over two times, thus CBSL accepting $121.05m. The three year tenured bond was offered at US Dollar six month LIBOR plus a 400bps. The 400 bps margin was lower than the previous margin on the three year tenured SLDBs of 410bps. Foreign and local commercial banks had subscribed bids at the auction. With the latest issue Sri Lanka has raised $313m via SLDBs. According to the CBSL data as of June 2012, the countrys foreign debt was Rs.2.79trn and domestic debt was Rs.3.15trn.
364 days T .bill 182 days T .bill

15% 13% 11% 9% 7% 5% 3%

The excess liquidity in the market was evident at a midSeptember auction where bids totaling Rs.27.09bn were received and CBSL only accepting Rs.7.60bn thus helping to reduce rates. Further as we mentioned previously, as concerns over inflation abate and equity markets pick up, interest rates should reduce.CBSL kept repo and reverse repo rates unchanged for the fifth consecutive month.

Source: CBSL 2 year Source: CBSL

05.08.2011 19.08.2011 02.09.2011 16.09.2011 30.09.2011 14.10.2011 28.10.2011 25.11.2011 09.12.2011 06.01.2012 20.01.2012 03.02.2012 17.02.2012 02.03.2012 16.03.2012 05.04.2012 20.04.2012 04.05.2012 18.05.2012 01.06.2012 15.06.2012 29.06.2012 13.07.2012 27.07.2012 10.08.2012 24.08.2012 05.09.2012 28.09.2012
15.00% 14.80% 14.60% 14.40% 14.20% 14.00% 13.80% 13.60% 13.40% 3 year 4 year 5 year 6 year 8 year 10 year

on treasury bills across all maturities continued to drop. Rates on 91 day treasury bills dropped to 11.44% (-11 bps MoM), 182 day treasury bills dropped to 12.57% (-50 bps MoM), and 364 day treasury bills reduced to 13.02% (-29 bps).

Treasury yields dropped as inflation slowed and liquidity increased. Yields

91 days T. bill

Inflation

Bond

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In Economic news:

The Best performing sectors in the month were construction (+26.4% MoM), plantations (+25.3%) and information (+24.9%) while worst performers were trading and oil palms, growing 4.6% YoY. In September, foreign investors were net buyers of Rs.3.1bn and have been net buyers of Rs.31.5bn in 2012. The current run on the market appear to be retail driven, most wanting to reverse previous losses. Mr. Deshan Pushparajah, Head of Capital Markets at Capital Alliance told the Business Times that the market was undervalued for a while and it required a catalyst, with foreign buyers coming in, it got activated. Putting end to speculation on investigations into companies allegedly involved in pump and dump transactions, the Securities and Exchange Commission (SEC) in a statement said that The SEC wishes to categorically mention that there are no ongoing or pending investigations at present in respect of any of the companies disclosed....Previously several media sources had listed 17 companies including finance companies, hotels and property companies alleging that the SEC had commenced a probe. In August, Mr. Tilak Karunaratne resigned as Chairman of SEC stating that he was forced to resign as he was probing malpractices at several companies.

The All Share Price Index closed at 5,971.99 up 15.3% MoM, completely erasing year to date loses and is now up 4.9%.
1,050 1,000 950 900 Net Credit to Government (Rs. bn) Growth YoY% 55.0% 50.0% 50 0% 45.0% 40.0% 35.0%

Inflation in Sep 12 eased to 9.1% YoY (-40 bps MoM). Inflation is now at a fourmonth low due
850 800

At an economic forum organised by Bloomberg newswires, CBSL 750 30.0% to food and non-alcoholic beverages falling 0.3%MoM. The drop in Governor, Mr. Ajith Cabraal said that if the Sri Lankan economy is to inflation was almost in-line with a Reuters poll conducted among 11 grow to $100bn by 2016, as targeted by authorities, inflation has to be analysts who expected inflation to reach 9.2%.55.0% analysts noted food kept in mid-single digits. He went on to further state that significance The 1,050 1,050 55.0% Net Credit to Government (Rs. bn) Growth YoY% Net Credit to Growth YoY% prices to rise at a reduced pace despite an extended drought. Food Government (Rs. bn)the current 43 month single digit inflation is not realised by many and of 290 115.0% 1,000 1,000 Credit Growth YoY% 50.0% 50 0% 50.0% non-alcoholic to State Corporations (Rs. bn) beverage segment constitute about 40% of the inflation people, stating that 50 0% Lanka has traditionally been a country with high Sri 105.0% 270 950 index. 950 inflation and we had almost begun to feel comfortable with 10, 12, 15, 95.0% 45.0% 250 45.0% 85.0% 20% inflation. 900 900 230 SCB revised its average inflation forecast for 75.0% to 7.7% from 7.2%, 2012 40.0% 40.0% 65.0% 210 850 850 stating that its earlier forecast did not reflect the spike in June inflation In July 2012, growth of credit to government dipped to 36.6% YoY, whilst 55.0% 190 35.0% to 9.3% (from 7.0% in May) resulting from drought-related supply-side growth of credit to35.0% corporations and private sector accelerated thus 800 45.0% 800 170 constraints. SCB said However, we think a rate cut is likely in Q1-2013 fuelling fear of inflation. Credit to private sector was up 31.7% YoY to 35.0% 750 30.0% 750 30.0% 150 25.0% as inflation moderates. We expect a cumulative 50bps of rate cuts next Rs.2.27bn, an all-time high. year, taking the repo rate to 7.25% by end-2013.
290 2,300
2,250 270 2,200 250 2,150 2,100 2,050 2,000 1,950

Credit toto the Private Sector(Rs. bn) Credit State Corporations (Rs. bn)

Growth YoY% Growth YoY%

115.0% 290 35.5% 105.0% 35.0% 270 95.0% 34.5% 85.0% 250
34.0% 34 0%

Credit to State Corporations (Rs. bn)

Growth YoY%

115.0% 1,050 105.0% 95.0% 85.0% 75.0% 65.0% 55.0% 45.0% 35.0% 25.0% 1,000 950 900 850 800 750

Net Credit to Government (Rs. bn)

Growth YoY%

55.0% 50.0% 50 0% 45.0% 40.0% 35.0% 30.0%

230 210 190 170

75.0% 33.5% 65.0% 33.0% 55.0% 32.5% 45.0% 32.0% 35.0% 31.5% 25.0% 31.0%

230 210 190 170 150

150 1,900

Source: CBSL

2,300 2,250 2,200 2,150

Credit to the Private Sector (Rs. bn)

Growth YoY%

35.5% 2,300 35.0% 2,250 34.5% 2,200 34.0% 34 0% 2,150

Credit to the Private Sector (Rs. bn)

Growth YoY%

35.5% 290 35.0% 270 34.5% 250 34.0% 34 0% 230

Credit to State Corporations (Rs. bn)

Growth YoY%

115.0% 105.0% 95.0% 85.0% 75.0%

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In Economic news:
The trade deficit in July 12 narrowed to a 17 month low of $534.7m (-19.4% YoY), reducing
the first seven months deficit to $5.35bn (+6.7% YoY). Imports in July dropped a staggering 24.9% YoY also a 17 month low, but more worryingly exports were only $794.4m (-17.4% YoY). Exports are at a two month high. The monthly growth of the trade deficit is decelerating, and the July deceleration is slowest since the deficit contracted 35.0% YoY in Feb 11. This is evidence of restrictive monetary and fiscal policies introduced in early 2012 impacting trade.

Total exports ($m)

1300 1200 1100 1000 900 800 700 600 500 400

Estimated monthly export progression to meet CBSL 2012 exports target of $11.7bn

1,152

2012E

794.4

2011 2010 2009

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

*Note: July- Dec 2012 monthly estimates is based on average monthly contribution to annual exports from 2009-2011
6,000.0 67.6% 5,000.0 4,000.0 3,000.0 2,000.0 -6.6% 1,000.0 0.0 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 -9.2% -21.8% -33.8% Jul-12 Jan - Jul 11 Jan - Jul 12 -20.0% -40.0% 54.4% Trade deficit ($m) (LHS) YoY % 60.0% 40.0% 20.0% 0.0% +6.7% YoY 80.0%

Source: CBSL

Imports at $1.75bn also came in below our forecast of $1.33bn. Intermediate goods imports (~62% of imports) declined 27.4% YoY as petroleum imports dropped a significant 53.0% YoY. Consumer goods imports declined 20.9% YoY, as imports excluding food and beverages dropped 31.4% YoY to $125.8m. Investment goods (~20% of imports) decreased by 20.6% YoY as imports of machinery & equipment and transport equipment dropped 22.2% and 29.6% YoY. During Jan- Jul 12, exports fell 4.6% YoY to $5.77bn and imports increased 0.6% YoY to $11.1bn, expanding the trade deficit to $5.35bn (+6.7% YoY). On average the last five months of the year account for about 45% of annual exports and imports. Thus we forecast full year exports to be $10.47bn (~-0.4YoY) and imports to be $20.21bn (~-0.4% YoY). The resulting trade deficit is $9.73bn (~-0.4% YoY), higher than CBSL target of $9.20bn. Moreover,152 foreign direct investment (FDI) projects have so far been signed this year and the government is looking for more investments from Fortune 500 companies. Whilst confidence was expressed at reaching 2012 FDI target of $2bn, during 1H12 only $452m had materialised.

Based on CBSL s 2012 roadmap targets of $11.70bn for exports and $20.90bn for imports and analysing monthly trade activities in 20092011, we estimated July 12 exports to be $1,152.0m, significantly higher than the recorded $794.4m. In July, industrial exports (~77% of exports) declined 19.3% YoY as textile and garments exports reduced 14.4% YoY to $328.2m due to continuing sequence of events that we have repeatedly highlighted, namely, lower demand in the EU area, lower cotton prices and what we feel as the industry loosing price competitiveness due to withdrawal of GSP+. Agriculture exports (22% of exports) decreased 11.8% YoY as tea exports dropped 12.6% due to lower international prices.

Source: CBSL

Gradient Cumulative Cumulative CBSL target estimates trade in Jan Jul trade, full year Jan Jul 12 (m) 2012E (m) % of target 2012E (m) 2009 11 (m) 2009 11 (m) Trade Exports 5,759 11,700 49.2% 10,471 14,301 25,969 Imports 11,113 20,900 53.2% 20,205 24,018 44,282 Trade Deficit 5,354 9,200 58.2% 9,734 9,717 18,312 Source: CBSL and Gradient estimates
Source: CBSL and Gradient estimates

% of cumulative balances 55% 54% 53%

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In Business news:
123,000 113,000 103,000 93,000 83,000 73,000 63,000 53,000 43,000 33,000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Tourist Arrivals

Tourism Development Authority forecasts 1m tourist arrivals in 2012. World Travel and Tourism Council estimate is 964,000. Assumed monthly progression of tourist arrivals .
2011 2010

Tourist arrivals in Aug 12 was 79,456 (+9.7% YoY), however lower than our estimate of 83,000.
2012E

Total arrivals for the year are up 15.8% YoY to 622,661. Despite increasing number of arrivals, occupancy rates have been declining since April 12 (June 12 - 47.4% vs. 57.3% in 2011). Tourists appear to be choosing cheaper accommodation not falling under the Tourist Boards purview. Sri Lanka is to sign a MoU with Maldives to market the two countries as one tourist destination. Separately,Mr. Nalaka Godahewa resigned as Chairman of the Sri Lanka Tourism Development Authority (SLTDA), a month after being appointed as SEC Chairman. He was appointed as SLTDA Chairman in May 2010.

Source: Sri Lanka Tourism Development Authority (SLTDA) , Capital Alliance (CAL), Business Monitor International (BMI)

Vehicle registrations in Aug12 fell 39.5% YoY to 27,185

according to JB Stockbrokers. However, the registration of certain luxury brands increased due to vehicle permits given to state workers. According to Sri Lanka Customs in September, 525 vehicles were unloaded at the Hambantota port, of which 312 were super luxury vehicles imported on duty free concession permits. BMW vehicle registrations increased to 47 in August 2012 from 25 in July 12. Moreover, Mercedes, BMW and Audi units only declined 11% YoY to 65 units in August 12 compared to smaller models such as Maruti/Suzuki which fell 90% YoY to 126 units. The Vehicle Importers Association of Sri Lanka has requested the government to extend the age limit of used vehicle imports from two to three and a half years. This would result in cheaper vehicles and curb the outflow of foreign exchange. Separately, the Association garnered support to open an automobile sales centre in Myanmar. Myanmar with its tax concessions for the vehicle industry is seen as an attractive location to conduct business. Hero MotorCorp Ltd partnered with Abans Group to launch its twowheelers in Sri Lanka. Further, Mahindra Group intends to increase its market share in Sri Lanka by entering the two-wheel segment. Sri Lanka is the largest market outside India for Mahindras light vehicle sales. Motor cycle registrations in August 12 declined 38.6% YoY to 7,718.

AIA buys 92.3% of Aviva NDB Insurance for $109m. Aviva PLC agreed to sell its stake in Aviva NDB Holdings

Lanka (Private) Ltd. to American International Assurance (AIA). Aviva PLC is on a strategic drive to sell underperforming businesses globally to raise funds to protect against its exposure to the Euro zone. AIA Group agreed

to acquire a 92.3% stake in Aviva NDB Insurance for $109m. Aviva NDB generated gross written premiums of $81m in 2011, with life insurance premiums accounting for about $60.75m of that amount (Reuters). Hong Kong based AIA operates in 15 Asian markets and generated revenues of $12.3bn in FY 2011 and net profits of $1.6bn.

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In Business news:
Tea production in Aug12 was up by a marginal 20,000kg YoY to 25.8m kg

36.0 34.0 32.0 30.0 28.0 26.0 24.0 22.0 20.0 Jan

Tea Production (mn kg)

Tea Board forecasts 325mn kg of production for 2012. Assumed monthly progression of Tea production

following six months of consecutive decline due to an improvement in weather conditions. The tea industry in Sri Lanka is at a stage of uncertainty as its share of world trade declined to 21.6% in 2011 compared to 40% in 1970. Cost of production (COP) per kg has risen from Rs.121.97 in 2001/02 to Rs.355.02 in 2011, mainly due to wage hikes, and is amongst the highest in the world. Tea production in Sri Lanka is expected to grow at an annual rate of 1% up to 2021. Tea exports for 1H12 increased to 156m kg (6.4% YoY) with Iran, Iraq and Libya recording growths of 39.13%, 31.76% and 270.83%. A plan to make Sri Lanka into a tea hub has run into problems with tea manufacturers warning that re-blending Sri Lankan tea with cheap imports could

Feb

Mar

Apr

May 2010

Jun 2011

Jul

Aug 2012E

Sep

Oct

Nov

Dec

Note: July - Dec 2012 monthly progression estimates is based on average monthly contribution to annual production during 2010 and 2011

Source: Sri Lanka Tea Board

dilute the value of the Pure Ceylon Tea brand. Similarly, India too has expressed its concerns with regards to re-exporting lower quality tea from India under the brand of Indian origin tea.

Use of Arabian light crude oil result in losses.

Following trade sanctions imposed on Iran, Sri Lanka was compelled to substitute Iranian light with Arabian light crude. This has resulted in a 10% decline in yield leading to a reduction in the output of petrol and kerosene. Moreover, laws are being drafted to regulate the pricing and quality of petroleum products through the Public Utilities Commission (PUC) from 2013. PUC already oversees the power sector. Meanwhile, from October Lanka IOC will increase the price of petrol by Rs.10 and diesel by Rs.15 per litre. The company noted that diesel price increases were necessary to offset the loss incurred on petrol. Further it has requested the government to introduce a long-term formula for fuel prices which will provide for adjustment of duties and levies and revision in prices from time to time based on the international prices, with proviso to insulate consumers wherever required.

India will increase its garment import quota from Sri Lanka to 8 million pieces from 5 million pieces.

Previously only 5 million pieces were granted zero duty provided that they were manufactured using Indian made fabric. In 2011, Sri Lanka exported $50m of garments, woven fabrics and other textiles to India. India also plans to establish a textile manufacturing park named IndiaSri Lanka Concept Integrated Textile Cluster which will be setup on a 500 acre zone with $350m initial investment. The objective is to revive the textile industry in Sri Lanka and add around $225m of new textile exports from Sri Lanka along with a generation of around 25,000 new employment opportunities.

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In Business news:
Wireless fixed access users in Sri Lanka declined to 2.46m (-6.6% YoY) as of June 2012.
According to CBSL most of the users declined using the service in 2Q12 and the number stood at 180,796. On the other hand, mobile and internet/ email subscribers had risen to 19.2m (+6% YoY) and 1.14m (+77 YoY). Given the high level of penetration in the mobile sector, growth is being driven by the use of multiple networks by users.

Telecom Users Wireline Wireless Total Fixed

2Q2011 918,221 2,635,177 3,553,398

1Q2012 958,038 2,658,373 3,616,411 18,866,134 1,086,000

2Q2012 969,636 2,460,876 3,430,512 19,272,324 1,145,587

YoY 5.6% 6.6% 3.5% 6.0% 77.3%

Mobile 18,176,030 Internet/e mail 645,965 Source: Central Bank of Sri Lanka
Source: CBSL

According to the Telecommunication Regulatory Commission (TRC), the industry has suffered Rs.8bn in foreign exchange losses to date. The main driver has been the devaluation of the rupee and TRC expects the impact to lessen in the next two quarters with the rupee stabilizing. During 1H12, Sri Lanka Telecom and Dialog Axiata reported foreign exchange losses of Rs.1.9bn and Rs.3bn.
185 175 165 155 145 135 125 115 105 95 85
Aug-11 Dec-11 Oct-11 Nov-11 May-11 May-12 Mar-11 Mar-12 Aug-12 Apr-11 Feb-11 Sep-11 Feb-12 Apr-12 Jan-11 Jun-11 Jan-12 Jun-12 Jul-11 Jul-12

The LMD-Nielsen Business Confidence Index in August continued its mild recovery to 121;

up 13 points MoM, driven by increased confidence in economic recovery and expected improvement in corporate revenues. Despite the mild recover, the Nielson Sri Lankas Director Shaheen Cader pointed out that the index is well short of the 150 to 160 mark seen during early 2012. It is also still well below the average (133) for the last 12 months. In the latest survey, 33% of the respondents believed that the economy will improve over the next 12 months, up from 21% in July 12. More importantly those who believed the economy to get worse reduced to 22% from 42% in July 12.
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Source: www.lmd.lk

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In Consumer news:
Import duties on potatoes and canned fish were increased by Rs.20 and Rs.25 per kg. This action taken by the Ministry

on chilli, cowpea, green gram, peanut, sugar, kurakkan in order to certify a higher price for the production of local farmers. The Sri Lankan Water Board is to increase tariffs by 20% due to the rise in production costs. Tariffs were last adjusted in 2009. Despite higher revenue (+41.2 YoY to Rs.11.1bn), losses continued to increase due to high cost of purification and water leakages. Sale of kerosene in the first six months to June 12 declined to 74,000 MT (-11.9% YoY) after price hikes in February 12.

of Trade was deemed as necessary to protect local farmers. It was only last month that the President directed Lanka Sathosa to sell canned fish at reduced prices to provide relief to consumers. Further in August import duties on potatoes were increased by Rs.20. The Finance Ministry now states that in light of the harvesting season, higher taxes will be imposed

The number of active credit cards in Sri Lanka increased by 55,864 from Dec 11 to July 12 to 918,216. The total outstanding balance as

25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 5.0% 10.0%

Annual Growth No. of credit cards and outstanding balance

Outstanding Balance No. of active credit cards

of July 12 was Rs.40.5bn compared to Rs.37.6bn in Dec 11(+7.7%). This growth is despite the CBSL permitting banks to increase interest rates on credit cards to 28%.Rapid lifestyle changes and the rise in cost of living have been the main reasons for the growth. Analysts predict that the number of credit cards in circulation would rise to 1m by 1Q13.

15.0% Source: Central Bank of Sri Lanka

Source: CBSL

The fake lubricant market in Sri Lanka is increasing This includes the sale of unlicensed lubricants,

market leader, has declined to 56.9% in 2011 compared to 64.8% in 2010. The chairman of Distilleries Corporation of Sri Lanka Plc (DCSL) too noted an increase in the supply of illegal alcohol due to heavy taxes imposed on the industry. DCSL alleged that artificial toddy and spirits are imported in pretense of making paint and baby cologne.

adulterated and counterfeited brands and recycling used oil. Mr. Kishu Gomes, Country Chairman for Chevron Lubricants stated that while there only 13 licensed distributors, 17 operators were importing producing or selling lubricants. The market share of Chevron Ceylon Limited, the

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M ont hly Bullet in: S ep temb e r 2 0 1 2

Nielsen Consumer Index

In Consumer news:
is going through a global programme that is aimed at improving efficiency, increasing their revenue capability and ensuring long-term sustainable growth and that HSBC Sri Lanka, as a part of the group will also be implementing this global programme. HSBC Sri Lanka has a workforce of around 1,700 and it is believed that the bank is looking to reduce around 20% of its staff through the scheme. Recent reports state that HSBC plans to cut 30,000 jobs worldwide by 2013.

HSBC Sri Lanka is offering its workers a Voluntary Separation Scheme (VSS). HSBC Sri Lanka spokesperson stated that the whole of the HSBC group

Aug Jul Jun May Apr

12 12 12 12 12 12 12 12 11 11 11 11 11 11 11 11 11

57 59 58 60 65 72 77 85 87 85 75 69 77 77 69 65 62

The Nielsen Consumer Confidence Index in August 2012 dropped to an all-time low of 57,

down 2 points from 59 recorded in July 12. 48% of the respondents (down from 54% in June 12) stated that conditions will be bad for people to buy things they need over the next 12 months, asconsumers are increasingly concerned about the state of their personal finances and debt repayments. Consumers who consider job prospects to be bad over the next 12 months was 24%, same as in July 12, but was still lower than the April 12 high of 31%.

Mar Feb Jan Dec Nov Oct Sep Aug Jul Jun May Apr Source: lmd.lk

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