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In Economic news:

The Asian Development Bank reduced Sri Lankas 2012 GDP growth forecast to 6.5% from 7.0% and cut its 2013 forecast to 7.0% from 8.0% as part of its overall downgrade of the South Asian region. Sri Lankan Cabinet approves the budget for 2013. Of the government spending of Rs.2.52trn (+13.5 YoY), defence and urban development will receive Rs.289.5bn (+25.9% YoY). Sri Lanka improves its Ease of doing business ranking to 81. The current account deficit during Jan-Jul 12 expanded to Rs.139.3bn (+57.6% YoY). The seven month budget deficit is Rs.425.7bn (+50.0%), 5.7% of GDP (4.4% in Jan-Jul 11). The All Share Price Index closed at 5,513.64 down 7.7% MoM, year to date losses are at 9.2%. Inflation in Oct 12 eased to 8.9% YoY (-20 bps MoM) a five month low. The trade deficit in August 12 was $921.1m (+4.3% YoY), expanding the years deficit to $6.27bn (+6.3% YoY). Exports were down 13.1% YoY in the month, sixth consecutive monthly drop.

In Business news:
Motor car registrations in Sep12 declines 75% YoY to 1,072 with total registrations declining 45% YoY to 24,478. Tea production in Sep12 was up 11.9% YoY to 26.8m kg driven by improved weather conditions.

In Consumer news:
Sri Lanka hikes prices on diesel, tobacco, alcohol and chicken. Sri Lanka was ranked 63 in the Global Food Security Index Sep 12 (Rank 62 in Jun 12). The price of a 450g loaf of bread was increased by Rs.2. The Nielsen Consumer Confidence Index in Sept 12 recovered marginally to 59.

Tourist arrivals in Sep12 were 71,111 (+18% YoY). India continued to be the highest contributor with 13,888 (19.5%) arrivals with the largest growth from the African region (+216.4% YoY). Lonely planet, named Sri Lanka as the number one destination in the world to visit in 2013. The loss of Sri Lankas GSP+ facility to be about $1bn to Sri Lankas garment industry. Net Interest Margins (NIM) of the banking industry to decline to 3.3% in 2016. Dish TV India to invest Rs.700m in Dish TV Lanka. The LMD-Nielsen Business Confidence Index in September continued its mild recovery to 122.

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In Economic news:
The Asian Development Bank (ADB) reduced Sri Lankas 2012 GDP growth forecast to 6.5% from 7.0% and cut its 2013 forecast to 7.0% from 8.0%. The revisions were part
of ADBs overall downgrade of the South Asian region where it is now expected to grow by 5.5% (vs. 6.6%) in 2012 and to 6.4% (vs. 7.1%) in 2013, almost entirely from weakness in India. ADB noted that

2012E Original
ADB CBSL SCB IMF RAM 8.0% 8.0% 7.1% 7.5% NA

2013E Latest
6.5% 6.8% 6.8% 6.7% 6.5%

Revisions
7.0% 7.2% 6.8% NA

Original
8.0% 8.0% 7.5% 8.0% NA

Revisions
7.0% NA

Latest
7.0% 7.0% 7.5% 6.7% 7.0%

Source: ADB, IMF, CBSL, Standard Chartered Bank, RAM Ratings

Economic growth in South Asia is under pressure from the continued weakening of the global economic environment and tight monetary policies adopted to rein in domestic inflation. ADBs forecasts South Asias inflation to average 8.6% in 2012 and 7.4% in 2013.

received for government spending of Rs.2.52trn (+13.5 YoY) of which defence and urban development will receive Rs.289.5bn (+25.9% YoY). Education is to receive Rs.37.9bn (+9.9% YoY) and higher education has been allocated Rs.27.9bn (+17.2% YoY). The total maximum borrowing for 2013 has been increased to Rs.1.3trn (+12.6% YoY).The first reading of the appropriation Bill was on the 8th of October and the budget proposal (second reading) will be presented on the 8th of Nov12.

Sri Lankan Cabinet approves budget 2013. Approval was

Allocation (Rs. Bn) Ministry

Defence and Urban Development Local Gov. and Provincial Councils Finance and Planning Ports and Highways Public Adm. And Home Affairs Economic Development Health Transport Agrarian Services and Wildlife Irrigation and Water Resource Man. Power and Energy Education Water Supply and Drainage Higher Education
Source: Appropriation Bill

2012
229.9 129.8 124.2 123.0 113.6 104.6 74.0 53.5 39.0 35.8 33.6 33.3 33.2 24.5

2013
289.5 132.7 94.8 131.6 127.8 88.9 93.5 44.7 43.2 40.5 28.5 37.9 34.7 27.9

YoY Growth %
25.9% 2.3% -23.7% 7.0% 12.5% -15.0% 26.4% -16.5% 10.8% 13.0% -15.1% 13.9% 4.7% 14.0%

% of 2013 government spending Rs.2.52trn

11.5% 5.3% 3.8% 5.2% 5.1% 3.5% 3.7% 1.8% 1.7% 1.6% 1.1% 1.5% 1.4% 1.1%

% of GDP 2012
3.1% 1.7% 1.7% 1.6% 1.5% 1.4% 1.0% 0.7% 0.5% 0.5% 0.4% 0.4% 0.4% 0.3%

2013
3.4% 1.5% 1.1% 1.5% 1.5% 1.0% 1.1% 0.5% 0.5% 0.5% 0.3% 0.4% 0.4% 0.3%

Source: Appropriation Bill

jump from 2011 in the IFC and World Bank compiled report was attributed to implementing the most regulatory reforms in South Asia and thus having created a better environment for local entrepreneurs. Three significant actions that were considered to have improved Sri Lankas position were; a) Computerising the registration for the Employees Provident Fund and Employees Trust Fund

Sri Lanka improves its Ease of doing business ranking to 81. The eight place

b) Establishing an electronic system for registering land in Colombo c) Credit Information Bureau establishing a searchable collateral registry Sri Lanka was the highest ranked South Asian country ahead of Maldives (95), Pakistan (107), Nepal (108), Bangladesh (129), India (132), Bhutan (138) and Afghanistan (168). Singapore topped the rankings yet again followed by Hong Kong, New Zealand and the United States. However on a negative note, Sri Lanka was ranked 112th in dealing with construction permits (Maldives -19, Pakistan -105) as the country had 17 procedures to content with (Maldives - 8, Pakistan - 11) thus increasing average processing time to 216 days.

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In Economic news:
Sri Lanka to get $500m loan from the IMF? It is
unclear if Sri Lanka is seeking a loan from IMFs Extended Fund to pay off the maturing $500m sovereign bond. An official at the Finance Ministry stated that an IMF team was in the country in early October to discuss a new loan facility. However the CBSL governor refuted this claiming that the IMF team was here on a routine visit and that the government is not engaged in any discussions with the IMF for an additional loan facility.

Government debt continues to rise. Government

debt as at Jul 12 was Rs.6.16trn a staggering 23.8% increase from a year earlier. Year to date, debt is up almost Rs.1.02trn (+20%) still within the governments budget imposed borrowing limit of Rs.1.16trn for 2012. Foreign debt rose 34.0% YoY to Rs.2.97trn and now accounts for 48.3% of total debt; highest in recent years. In 2012 $415m was received as part of the final disbursement under International Monetary Fund (IMF)s stand-by arrangement and a $1bn sovereign bond was issued. Whilst a rise in foreign debt puts pressure on the rupee at the time of repayment; governments desire to borrow overseas frees up liquidity for the private sector. Based on CBSL forecasts for GDP growth and inflation, we estimate GDP at current prices to be Rs.7.52trn and Rs.8.62trn in 2012 and 2013. Hence we analyse debt as % of GDP at 81.9% in Jul12 rising to 84% at the end of the year and to be just over 88% in 2013. 2013 increase in debt is based on Rs.1.3trn additional borrowing approved in the budget 2013. Levels above 90% are widely considered to be unsustainable levels for an economy leading to currency devaluation, higher inflation and periods of higher interest rates.

8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0

2006 2007 85.0% 90.6%

Debt (Rs.bn.)

Debt/GDP
88.1%

92% 90% 88% 86%

83.6%

86.4% 85.2% 81.9% 81.9% 78.5%

84% 82% 80% 78% 76% 74% 72%

81.4%

2008

2009

2010

2011

2Q12

31-Jul-12

2012E

2013E

Source: CBSL and Gradient estimates

New World Securities Limited, a trading member of the Colombo Stock Exchange with about 80% Japanese ownership increased its investment in Sri Lankas treasury bonds to Rs.6.5bn, having attracted Rs.2.0bn in late Jun 12. New World Securities Director and CEO Viraj Malawana said that they were looking at a further Rs.10-15bn over the next six months and that the 12.5% cap placed by the government on foreign investments in domestic debt is not favourable. as at 1Q12 the Cost of all construction index was at an all-time high of 524.7 (+23.6 points QoQ). Cost of cement continued to rise in the local market with the second rise in cement prices in six months occurring in mid-October. Demand for cement in Jul 12 was 413,000 MT (+21.5% YoY) of which about 47% was locally produced.

Construction industry affected by high costs.

In the second quarter of 2012, 2,389 houses were approved for construction in Greater Colombo (+3.5% YoY) and in 4Q11, 375 other buildings were approved (+10.0% YoY). The rising cost of construction post the rupee devaluation is seen as a major deterrent to construction;

Greater Colombo Housing Approvals (Number and Index)

3,500 3,000 2,500 2,000 1,500 1,000 500 0 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 Number of houses approved (Greater Colombo-GC) All Housing Construction Cost Index 570 560 550 540 530 520 510 500 490 480

Great Colombo other building approvals (Number and Index)

500 450 400 350 300 250 200 150 100 50 0 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 Other building approvals Non Residential Building Construction Cost Index (1990=100) 510 500 490 480 470 460 450

Source: Central Bank of Sri Lanka Note: Cost index for 2Q12 is not available

Source: Central Bank of Sri Lanka Note: Latest available data

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In Economic news:
Hydro power plants avoided a near catastrophic scenario as the delayed monsoon rains finally arrived. Water inflows to the

are offered subsidies thus aggravating the pressure on the ordinary citizens who are already paying one of the highest tariffs in Asia. In a bizarre move that is likely to keep electricity tariffs high for the foreseeable future, the Public Utilities Commission (PUC) increased the purchases tariffs on renewable energy fuels by over 20%. This rate is fixed for 20 years for mini-hydro plants built in 2013. The tariffs apply to plants of 10 MW.
Flat Tariffs for 2013 Flat Tariffs for 2013 Type
Mini-hydro Mini-hydro (Local) Wind Wind (local) Biomass (dendro) Biomass (agro & Ind. waste) Municipal Waste Waste heat recovery Undeclared fuels
Source: PUCSL

power plants up to Sep 12 were the lowest in 20-years, at one point generating only 12.8% of the countrys energy requirement. According to Power Ministry, in the first nine months of 2012 hydro reservoirs had received inflows enough to produce 1,228m units (GigaWatt hours) of electricity, lower than in 1991. Power cuts were imposed for the first time in 10 years, after the Chinese built coal plant failed and along with weak rainfall. Years of under investment hasled to chronic shortage of energy generation thus stifling economic development. Whilst hydro and coal power plants are to be constructed, apart from second phase of the Chinese built coal plant coming to the grid in 2013 the other plants are years away from construction. Further the government has warped policies where places of worship and several industries

Earlier Rate Rs/kW

13.04 13.32 19.43 19.97 20.70 14.53 22.02 6.64 20.70

CEB Proposal Rs/kW

13.63 13.95 17.40 17.86 23.56 16.21 7.77 -

2013 Rate Rs/kW

16.70 17.15 20.62 21.22 25.09 17.71 26.10 9.19 25.09

Incre. %
28.07% 28.75% 6.12% 6.26% 21.21% 21.89% 18.53% 38.40% 21.21%

EPF controversy rumbles on.

Several employee trade unions sought action from the countrys Supreme Court over controversial share investments by the state managers of the Employees Provident Fund (EPF). The investments which resulted in large losses are claimed to have been made in second tier firms and banks in contravention of the publicly declared investment policy.

Moreover share purchases in several banks have led to allegations of insider dealing as the CBSL being the regulator of the banks was deemed to have been privy to non-public information. Further it was revealed that the investment policy had been changed without consulting unions.

and due to the need to make changes to the refinery to accommodate other varieties of crude oil. Non-availability was claimed to be the result of delays in calling for tenders thus leading to delays in receiving new supplies. The COC Managing Director stated that despite the closure there were ample stocks of ready-to-use fuel. New supplies is to arrive at the Colombo Port in MidNovember. Changes are been done to the refinery as it is currently able to only process Iranian crude oil. US sanctions on Iran have necessitated Sri Lanka to look at other sources to obtain its oil. A Dubai based supplier is to provide crude

The Ceylon Petroleum Corporation closes the Sapugaskanda refinery for two weeks due to the non-availability of crude oil

stock oil on Nov. 8 or 9 and a Saudi supplier is to deliver supplies on Colombo on Nov. 13 or 14. Due to the change in Supplier it was noted that the country would have to incur an additional Rs.2bn increasing the total fuel bill to Rs.5bn. The Sapugaskanda refinery processes about 70% of the national petrol and diesel requirements, 75% of aviation fuel, 45% of furnace oil and kerosene. It was reported that the loss due to the closure would be about a staggering Rs.600,000 a day. Separately Sri Lankas Petroleum Resources Development Secretariat (PRDS) called for expressions of interest from geophysical prospecting firms to re-process seismic data received from off the coast of Mannar.

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In Economic news:
The current account deficit during the first seven months of the year expanded to Rs.139.3bn (+57.6% YoY). The

The IRD is to introduce a scheme for tax payers to calculate taxable income and tax payable by themselves. Also noted that if any citizen willingly comes forward and pay taxes their past records will not scrutinised. Further to raise tax awareness IRD is organising a National tax week from Nov 1-7, 2012. In 2011, 756,757 individuals and 32,747 private, foreign and local companies were taxable, and 1,736 tax defaulters had been charged.
-500.0 -450.0 -400.0 -350.0 -300.0 -250.0 -200.0 -150.0 -100.0 -50.0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2012 2011 2010 2012E defict target Rs.468.8bn

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

poor performance was largely due to a decline in tax revenue in Jul 12 (-0.3%) and a significant spike in current spending, Rs.135.7m (+28.7% YoY). Current spending mostly consists of expenditure on wages and salaries and consumables.

91% - 2012 61% - 2011 61% - 2010

The seven month budget deficit is Rs.425.7bn (+50.0%), 5.7% of GDP, a 127bp increase from a year earlier (4.4%); as current spending and capital & lending minus repayments rose 41.7% and 19.4%, offsetting a 12.6% rise in state revenue. The budget deficit of 5.7% of GDP is shy of the 2012 target of 6.2%. Inland Revenue Department (IRD) Commissioner General Ms. Mallika Samarasekera stated that tax revenue as a percentage of GDP had dropped to 7.0% in 2011 from 8.3% in 2009. According to recently published Central Bank data, tax revenue declined to 6.53% of GDP for the first seven months of 2012 from 6.69% in 2011. The benchmark tax to GDP ratio for a lower income country is considered to be about 18% and 25% for a middle income country.

Source: CBSL

Summary

Rs. bn
Tax Revenue as % of GDP Current Spending as % of GDP Current A/C Deficit as % of GDP Budget Deficit as % of GDP
Source: CBSL

Jan-Jul 10 Jan-Jul 11 Jan-Jul 12

425.0 550.4 125.4 272.6 493.887 7.6% 784.5 8.9% 290.6 1.4% 283.7 4.4% 556 7.4% 695.3 9.3% 139.3 1.9% 425.7 5.7%

Jan- Jul of annual target Target '12E

50% 63% NA 91% 1106.1 14.7% 1107.9 14.7% 1.8 0.0% 468.9 6.2%

Source: CBSL

364 days T .bill 182 days T .bill

13% 11% 9% 7%

treasury bills across all maturities continued to drop through-out the month. Rates on 91 day treasury bill dropped to 10.66% (-62bps MoM), 182 day treasury bills dropped to 11.97% (-60 bps MoM), and 364 day treasury bills reduced to 12.56% (-46 bps). Stable and upward trending markets attract investors to equities from bill and bonds, whilst volatile markets have the opposite effect. Central bank kept repo and reverse repo rates unchanged for the sixth consecutive month.

Treasury yields drop on increased liquidity. Yields on

91 days T. bill

Inflation 5% 3%

15.00% 14.80% 14.60% 14.40% 14.20% 14.00% 13.80% 13.60% 13.40% 2 year 3 year 4 year 5 year 6 year 8 year

12.08.11 26.08.11 09.09.11 23.09.11 07.10.11 21.10.11 11.11.11 02.12.11 30.12.11 13.01.12 27.01.12 09.02.12 24.02.12 09.03.12 30.03.12 11.04.12 27.04.12 11.05.12 25.05.12 08.06.12 22.06.12 06.07.12 20.07.12 03.08.12 17.08.12 31.08.12 21.09.12 05.10.12 19.10.12 31.10.12
Source: CBSL

Bond

10 year

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In Economic news:
The All Share Price Index closed at 5,513.64 down 7.7% MoM, year to date losses are at 9.2%.
The only sector to record a positive gain in the month was Stores (+1.4% MoM) whilst worst performing sectors were Services (-13.9% MoM), Information (-13.1%), Investment (-12.3%) and Trading (-12.0%). In October, foreign investors were net buyers of Rs.2.3bn and have been net buyers of Rs.33.8bn in 2012. The Securities and Exchange Commission (SEC) relaxed almost all regulations brought in earlier in the year by the previous Chairmen. a) Brokers can now extend credit to clients up to three times the net capital (after deducting 50%of the value of fixed assets) without deducting debtors from net capital. b) Ban on executive directors, employees and spouses and their nominees of broking firms from selling shares within six months of their purchase lifted. c) The 20% upper limit on off-market transactions lifted. A longstanding minority shareholder activist Mr. K.C. Vignarajah in a letter to SEC stated that genuine investors and independent minority shareholders were rudely surprised and shocked by these changes and noted that it would be detrimental to attaining investor confidence. Separately Mr. Namal Kamalgoda was appointed to the post of SECs Director Surveillance.Previously he was Director Corporate Affairs.

Key stock market transactions during Oct 12

Date
23-Oct-12 19-Oct-12 19-Oct-12 16-Oct-12 5-Oct-12 3-Oct-12

Status
Completed Completed Pending Completed Completed Completed

Target Company
ERI Hunas Falls Hotels Plc Softlogic Capital Plc ERI E-Channelling PLC Asiri Hospitals Holdings PLC

Buyer
Caledonian Securities Amaya Leisure Plc LAUGFS Holdings Ltd Caledonian Securities Cocoshell Private Limited Actis Investment Holdings

Seller
Lionhart Investments Mercantile Investments and Finance Plc Softlogic Capital Plc Lionhart Investments E-Channelling PLC Asiri Hospitals Holdings PLC

No. of shares
24.0m 0.9m 5.1m 20.0m 3.4m 209.0m

Value (Rs.)
Rs.361.6m Rs.58.4m Rs.103.6m Rs.305.0m NA Rs.2.3bn

Stake involved (%)

7% 16% 67% 6% NA 10%

Source: Company Filings

Lionhart Investments ltd continued to reduce its stake in Environmental Resources Incorporated (ERI) as it sold around 20m of ERI shares (6%) for Rs.305m, reducing its stake to 60% from 85%.

Inflation in Oct 12 eased to 8.9% YoY (-20 bps MoM) as food and non-alcoholic beverages fell 1.3% MoM. Inflation is now at a five month low as interest

rates remain high thus impacting consumer spending and borrowing. Key policy rates were left unchanged for the sixth consecutive month. The Governor of CBSL in an interview with Bloomberg (Oct 25) said that interest rates were kept unchanged as they are pretty pleased with the current economy and behavior of inflation, and that a growth platform for 2013 has been set. He further went on to state that controlling inflation was a priority and an opportunity to loosen interest rates may arise in Dec 12. He also said that annual change in inflation in January and February 2013 would be higher due to the lower base, but would moderate from March.

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In Economic news:
Overall house prices in Sri Lankan dropped 0.7% during the 3 months to Sep 12. As per

4Q11 Sri Lanka Overall House Sale prices Sri Lanka Overall Land prices Colombo House Sale prices Colombo Apartment Sale prices Colombo Houses Rental prices Colombo Apartments Rental prices Colombo Commercial Rental prices Rs.m per perch Rs.m Rs.m per month Rs. per month Rs. per month Rs. 17.9 630,000 46.8 23.7 170,000 220,000 820,000

1Q12 17.1 670,000 50.2 27.7 190,000 210,000 830,000

2Q12 17.6 710,000 42.5 27.5 210,000 220,000 690,000

3Q12 17.5 720,000 39.1 28.4 220,000 280,000 780,000

Source: LankaPropertyWeb.com

LankaPropertyWeb.com overall house prices decreased to Rs.17.5m from Rs.17.6m in Jun 12. Colombo house rental and apartment rental prices reportedly increased to Rs.220,000 per month (Rs.210,000 in Jun 12) and Rs.280,000 per month (Rs.220,000 in Jun 12). Above prices cannot be independently verified and is based on average property prices on advertisements published on LankaPropertyWeb.com.

Provincial land prices per perch (Rs.)

700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 WP (exclu. Col.) SP CP NWP SabP NCP UvaP EP NP 4Q11 1Q12 2Q12 3Q12

Source: LankaPropertyWeb.com

continued to be a major concern, down 13.1% YoY in the month, the sixth consecutive monthly drop, whilst imports dropped a modest 4.7%, the lowest drop in four months. This caused a reversal in the previously decelerating monthly trade deficit growth, as the August trade deficit was a staggering 72.3% higher than Jul 12; the largest monthly growth since December 10. Based on CBSLs 2012 roadmap targets of $11.70bn for exports and $20.90bn for imports and analysing monthly trade activities in 2009-2011, we estimated Aug 12 exports to be $1,256.0m, significantly higher than the recorded $828.9m. Thus it is unlikely that exports targets would be met. In August, agriculture exports (~22% of exports) decreased a significant 28.5% YoY as tea exports dropped a 32.7% due to lower international prices. Industrial exports (~77% of exports) declined 7.6% YoY as textile and garments exports reduced 3.9% YoY to $358.8m due to lower demand in the EU area, lower cotton prices and what we feel as the industry loosing price competitiveness due to the withdrawal of GSP+ facility. Imports at $1.75bn also came in below our forecast of $1.83bn. Consumer goods imports (~18% imports) declined 22.9% YoY, as imports excluding food and beverages dropped 26.8%

The trade deficit in August 12 was $921.1m (+4.3% YoY), expanding the years deficit to $6.27bn (+6.3% YoY). Exports

6,000.0 5,000.0 4,000.0 54.4%

+6.3% YoY 67.6% Trade deficit ($m) (LHS) YoY % MoM % 25.2% 72.3%

80.0% 60.0% 40.0% 20.0%

Total exports $m 1400 1300 1200 1100 2012E

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

3,000.0 2,000.0 1,000.0 -29.5% 0.0 -0.9%

11.0% -6.6% -21.2% -9.2%

1000 900 800 700 600 500 400

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

4.3% -13.8% -21.8% -19.4% -33.8% Jul-12 Aug-12 Jan - Aug Jan - Aug 11 12

0.0% -20.0% -40.0%

2011 2010 2009

Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12

Source: CBSL
130 120 110 100 90 80 70 60 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 -32.7% -11.6% 0.0% -5.0% -12.6% -10.0% -15.0% -20.0% -25.0% -30.0% -35.0%

Source: CBSL

Tea Export Earnings ($m) -6.3% -9.2% -7.2%

YoY Growth %

-13.6%

-19.1%

Trade Exports Imports Trade Deficit

Jan - Aug 12 ($m) 6,588 12,746 6,157

CBSL target 2012E ($m) 11,700 20,900 9,200

% of target 56.3% 61.0% 66.9%

Gradient estimates 2012E ($m) 10,348 20,020 9,671

Source: CBSL

Source: CBSL and Gradient estimates

YoY to $127.3m (vehicle importswere down 54% YoY).Intermediate goods imports (~62% of imports) declined 5.2% YoYas textile and textile articles dropped 15.1% YoY due to lower cotton prices. Moreover, fertiliser imports increased 72% YoYto about $77m. Investment goods (~20% of imports) increased by 9.9% YoY as imports of machinery & equipment increased 25.3% YoY.

During Jan-Aug 12, exports fell 5.7% YoY to $6.52bn, however imports decreased only 0.2% YoY to $12.86bn, thus further expanding the trade deficit to $6.27bn (+6.3% YoY). Trade during the last four months of the year accounts for about 36% of annual exports and imports. Thus we forecast full year exports to be $10.35bn (~-1.5%YoY) and imports to be $20.02bn (~-1.3% YoY). The resulting trade deficit is $9.67bn (~-1.1% YoY), higher than the CBSL target.

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In Business news:
Motor car registrations in Sep12 declines 75% YoY to 1,072 with total registrations

brands (Mercedes, BMW and Audi) were up by 7% YoY to 88 due to the issuance of vehicle permits to state workers along with an increase in value of permits by $5,000 to $30,000. Motor cycle registrations declined to 11,922 (-51% YoY). According to Customs sources, revenue losses from vehicle permits amounts to Rs.8.5m on a Montero Sport, Rs.6m on a KIA SUV, Rs.13m on a BMW X1/X3 and Rs.20m on a BMW 520D. Geely Automobile Limited, ranked 475 in Fortune Global 500, is to enter the Sri Lankan market through a joint venture with Micro Cars Ltd. A manufacturing plant is to be established in Hambantota at a shared investment of $20m with Micro Cars.
36.0 34.0 32.0 30.0 28.0 26.0 24.0 22.0 20.0 Jan Feb Mar Apr May 2010 Jun 2011 Jul Aug 2012E Sep Oct Nov Dec

declining 45% YoY to 24,478 according to JB securities. Hence several car importers are seeking permission to re-export vehicles. The registration of Maruti Alto declined to 45 units (-94% YoY). However, registration of luxury

Lankan tea to remain strong during 4Q12 due to high demand driven by a shortfall in black tea production globally.

Tea production in Sep12 was up 11.9% YoY to 26.8m kg driven by improved weather conditions. Moreover, John Keells Ltd expects prices of Sri

Tea Production (mn kg)

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

Sri Lankan tea prices averaged Rs.419.8 in Sep12 (+21.39% YoY). However, Sri Lanka continues to lose global export market share to Kenya (Sri Lanka 19% vs. Kenya 25% in 2011) as Kenya has made inroads into traditional Sri Lankan tea markets such as Iran, Russia and the UAE. It was initially thought that the lower price of Kenyan tea was the reason for Sri Lankas loss of market share. However, this appears not to be case as currently Kenyan tea prices average $4.20 per kg compared to Sri Lankas $3.20 per kg. During Jan-Aug 12 tea export earnings were $840m, down 14.5% from a year earlier.

Note: Oct Dec 2012 monthly progression based on average monthly contribution to annual Note: Oct - -Dec2012 monthly progression estimates isestimates is based on average monthly production during 2010 and 2011 contribution to annual production during 2010 and 2011

Source: Sri Lanka Tea Board

Separately the Tea Trade Association of Cochin, India is to set up a tea trade centre, whereas Sri Lanka is still grappling with the decision of converting the country into a tea hub.
123,000 113,000 103,000 93,000 83,000

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 .

2012E

2011 2010

70,500. Total arrivals for the year are up 16% YoY to 693,772. India continued to be the highest contributor with 13,888 arrivals whereas the African region (+216.4% YoY) and New Zealand (+159.8% YoY) registered the highest growth during the month. UKs Post Office Travel Moneys 2012 Long Haul Holiday Report named Sri Lanka as the best value destination for the third consecutive year. The Best Value analysis is based on the cost of basic tourist items such as a cup of coffee, beer/lager, CocaCola/Pepsi, a bottle of water etc. According to the report, Sri Lankas ranking was benefitted from a strong sterling pound against the rupee offsetting a 21% YoY growth in items costs compared to Vietnam and Bali (2nd and 3rd on the Long Haul Holiday Report) whose costs had reduced 14% and 26%.

Tourist arrivals in Sep12 was 71,111 (+18% YoY), marginally higher than our estimate of

73,000 63,000 53,000 43,000 33,000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

Dec

Source: Sri Lanka Tourism Development Authority (SLTDA) , Capital Alliance (CAL), Business Monitor International (BMI)
POST OFFICE LONG HAUL HOLIDAY COSTS BAROMETER 2012
S. Korea - Seoul Australia - Darwin New Zealand - Auckland China - Beijing Canada - Calgary Dubai - Jumeirah Mauritius - Grand Baie Egypt - Sharm el Sheikh Thailand - Phuket Gambia - Kololi Mexico - Cancun Indonesia - Bali Vietnam - Hoi An Sri Lanka - south west Source: Post Office 166.92 157.79 144.32 131.00 123.68 123.49 118.88 71.05 70.69 61.14 60.48 53.48 52.37 43.85 50.00 100.00 150.00

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In Business news:
Lonely planet, named Sri Lanka as the number one destination in the world to visit in 2013. The

Arugam Bay), value for money and easy reach due to cheap fares from regional hub Bangkok. In a surprising move the President of Sri Lanka ordered the removal of private campsites inside national parks on the belief that most campsites are owned by foreigners resulting in currency outflows. Mobile tented safari operators have claimed that most are locally owned and that the move is detrimental to the industry with bookings in 2013 having to be cancelled. Several tour operators noted that few clients had already cancelled their trips to Sri Lanka entirely as a result. Separately, Mr. Bhashwara Senanka Gunarathna, who was a member of the board of Sri Lanka Tourism Development Authority since 2010 was appointed as the chairman of the Sri Lanka Tourism Development Authority (SLTDA) and the Sri Lanka Tourism Promotion Bureau (SLTPB). according to a recent report published by Emerging Textiles, prices of Chinese imports are below average for most product categories. To add to the woes, Sri Lanka could face increased competition from India as it eyes a Free Trade Agreement (FTA) with the European Union. If the FTA is to be successful, Indian apparels would gain preferential access to the EU markets under the GSP facility. Negotiations are at the final stage and are expected to conclude by the end of the year of early 2013.

main reasons highlighted were the emergence of new popular places to visit (Kalpitiya, Puttalam lagoons and

The loss of Sri Lankas GSP+ facility to be about $1bn to Sri Lankas garment industry,

according to former Secretary General of the Joint Apparel Association Forum, Rohan Masakorala. As a result, key exporters such as Brandix and MAS Holdings have moved production facilities to Bangladesh, who continue to receive duty free advantages. It was noted that the effects from losing the facility were not initially felt due to issues that were affecting other competitors such as China and Bangladesh. However,
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In Business news:
Sri Lanka Insurance Corporation (SLIC) in an Rs.208m re-insurance agreement with a fake company. According to the Auditor Generals report, SLIC had

entered into a re-insurance agreement with a fake company named Trans Asia Management Advisors FZC with regard to Sri Lanka Petroleum Corporation. According to the report premiums of Rs.92m and Rs.116m had been paid to Trans Asia Management Advisors FZC in 2009/2010

and 2010/2011. RAM ratings reaffirmed SLICs AAA/P1 rating stating that the company had a strong capital and was favourable to most peers in terms of key ratios of the industry.

Net Interest Margins (NIM) of the banking industry to decline to 3.3% in 2016 due to the high level of competition,

from the current level of 4.2% according to the Central Bank of Sri Lanka (CBSL). In order to counter declining NIMs, CBSL states that banks would need to introduce flexible and novel banking solutions particularly leasing and venture capital, fee-based banking, merchant and investment banking. A reports published by Fitch Rating expects banks in Sri Lanka to increase lending to Small and Medium Enterprises (SMEs) in order to counter the effects of competition together with an increased focus on retail lending. However, forecasts by the CBSL for the financial sector remain positive as a growth of 8.2% is expected for 2012 with assets and lending of the banking sector expected to double from its current levels to Rs.8trn and Rs.5trn by 2016.

Bank
Commercial Bank of Ceylon HNB Sampath Bank NDB BOC

Net Interest Margin 2Q12

4.5% 4.9% 4.1% 3.6% 3.4%

1Q12
4.4% 4.7% 3.9% 3.6% 3.3%

Source: Company data

joint venture company between Dish TV and Satnet Private Limited. The main driver for the investment is the high Average Revenue Per User (ARPU) of $9 in Sri Lanka compared to $3-$4 in India despite the Direct-To-Home (DTH) market being smaller than India. Dialog TV currently leads the DTH market in Sri Lanka with a subscriber base of 239,000. Dish
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Dish TV India to invest Rs.700m in Dish TV Lanka, a 70:30

TV India currently has only a 0.2% market share in Sri Lankas DTH market (APAC Pay-TV & Broadband Markets 2012). For the quarter ended 30th Sep 12, Dish TV India generated revenues of Indian Rs.5,336m (+10.1% YoY) and added 477,000 new subscribers during the quarter resulting in a gross subscriber base of 13.9m. However, forecasts by the CBSL for the financial sector remain positive as a growth of 8.2% is expected for 2012 with assets and lending of the banking sector expected to double from its current levels to Rs.8trn and Rs.5trn by 2016.

For your fresh fruit requirements: Mangoes (Karuthakolumban), Cashew Nuts, Pineapples free delivery within city limits

Coconuts free weekly delivery to restaurants/caterers/hotels +94777508323 fruitmarketlk@gmail.com www.facebook.com/fruitmarketlk

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In Business news:
The LMD-Nielsen Business Confidence Index in September continued its mild recovery to 122; up only by 1 point MoM. Furthermore, the index remains below

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the average for the last 12 months (129) and a significant 40 points less than a year ago. The main reason for the slowness as highlighted by Nielson Sri Lankas Director Shaheen Cader is that many respondents are still pessimistic about economic growth and report that financial results for the year are worse than for last year.

Source: lmd.lk

Source: www.lmd.lk

In the latest survey, 35% of the respondents believed that the economy will improve over the next 12 months, up from 32% in August 12. Moreover, those who believed the economy to get worse increased to 33% from 22% in August 12. an equal amount at Rs.100 should the initial offer be oversubscribed. Previously in 2011 BOC issued Rs.4bn in debentures. Prima settles custom law violation charge with Rs.115m payment. Sri Lanka Customs had previously imposed an Rs.1.2bn penalty on Prima Groups Ceylon Grain Elevators Plc in Jul 98. Singer Sri Lanka raised Rs.644m through a private placement in order to convert out of some of its short-term funding obligations and strengthen its balance sheet.

Other business news

Sri Lankas Renuka Agri Foods Plc, injected Rs.250m into Rich Life Dairies Ltd, a firm which sells branded milk by purchasing cumulative convertible and redeemable debentures in Rich Life. Fitch Ratings withdraws LOLC groups ratings whilst confirming the negative outlook as LOLC group of companies chose to stop participating in the rating process. Bank of Ceylon to raise Rs.6bn via 30m unsecured, subordinated, redeemable five-year debentures at Rs. 100 each; with an option to issue
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Mar 12

Aug 12

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Sep 12

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Jun 12

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Jan 12

Source: www.lmd.lk http://lmd.lk/2012/05/01/business sentiment 9/

Jul 11

185 175 165 155 145 135 125 115 105 95 85

Jul 12

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In Consumer news:
Sri Lanka hikes prices on diesel, tobacco, alcohol and chicken. Lanka Indian Oil Corporation (LIOC)
increased the prices of a liter of diesel by Rs.4 to Rs.121 per litre. LIOC said the hike was necessary as it was losing Rs.13 per litre which had amounted to a total loss of Rs.350m. It was only in Feb12 that the Ceylon Petroleum Corporation (CPC) increased diesel prices by Rs.31 to Rs.115 per litre.Taxes on tobacco products were increased with the view of stemming the looming budget deficit. During 1H12, Ceylon Tobacco Company contributed Rs.31.2bn (+8% YoY) to government revenue. Excise duty rates on wine, arrack, foreign liquor and malt liquor

Excise Duty per 1,000 Cigars Description

*Cigars Cigarettes below 60mm Cigarettes between 60 and 67mm Cigarettes between between 67 and 72mm Cigarettes between between 72 and 84mm Cigarettes between over 84mm
Source: Sri Lanka Customs * per kg

New
Rs.7,000 Rs.4,612 Rs.9,258 Rs.12,100 Rs.14,963 Rs.18,500

Previous Change %
Rs.5,500 Rs.4,037 Rs.8,112 Rs.10,953 Rs.13,815 Rs.17,100 27.27% 14.24% 14.13% 10.47% 8.31% 8.19%

(beer) were increased during the month as well. Further, the Ministry of Cooperatives and Internal Trade stated that the price of kg of chicken would be increased by Rs.30.

and considers the core issues of food affordability, availability, quality and safety across a set of 105 countries.

Sri Lanka was ranked 63rd in the Global Food Security Index September 2012 (Rank 62 in Jun 12). The index is prepared by the Economist Intelligence Unit

Global Food Security Index 2012 Country Sri Lanka India Pakistan Nepal Bangladesh Overall Ranking Overall Score 63 66 76 79 81 46.3 44.2 37.6 34.5 33.9 Affordability 61 71 80 94 79 Category Rank Availability Quality and safety 58 70 52 73 82 56 71 74 81 92

The Nielsen Consumer Confidence Index in Sep12 recovered marginally to 59, up 2 The price of a 450g loaf of bread was increased by Rs.2

as Prima and Serendib increased the prices of wheat flour by Rs.6 and Rs.4 per kg. Both companies requested price hikes due to losses incurred on imports driven by a depreciating rupee and high cost of transportation. Prima and Serendib increased prices of wheat flour by Rs.8.50 in April as well. In Feb 12, bread prices were upped by Rs.5 following fuel and electricity price hikes.

points from the all-time low of 57 recorded in August 12. 29% of the respondents (down from 48% in August 12) stated that conditions will be bad for people to buy things they need over the next 12 months, noting that consumers continue to be plagued by concerns about borrowings to finance purchases such as durables and vehicles, particularly in the light of the prevailing high interest rates. Consumers who consider job prospects to be bad over the next 12 months were down 21% compared to 24% in August 12.

Mar 12 Feb 12 Jan 12 Dec 11 Nov 11 Oct 11 Sep 11 Aug 11 Jul 11 Jun 11 May 11 Apr 11 Source: lmd.lk

Nielsen Consumer Index

Overall, Sri Lanka is ranked ahead of India (66) and Pakistan (76). However, India is ranked ahead in terms of availability (52 vs. 58 for SL) and Pakistan is ahead in terms of quality and safety (56 vs. 70 for SL). Higher Nutritional standards, less volatility of agriculture production and food safety were highlighted as strengths for Sri Lanka in terms of scores while public expenditure on agricultural R&D, GDP per capita and protein quality were identified as weaknesses.

Source: Economist Intelligence Unit

Sep Aug Jul Jun May Apr

12 12 12 12 12 12

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

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