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sector role and reduction in inequality. Moodys also stresses the need for effective economic management to maintain positive outlook on countrys B1 rating. Sri Lankas shrinking labour force to affect economic growth, as total employed population drops to 7.1m in 2Q12 (7.5m in 2Q11). China continues to be Sri Lankas top lender, disbursing $443.6m of the committed $1.05bn in 2012. Government creates 18,000 jobs for unemployable graduates. IFC to create access to finance among Sri Lankas micro, small and medium entrepreneurs. Sri Lanka ranked 79th in Forbes magazines Best Countries for Business. Inflation in Nov 12 increased to 9.5% YoY (+60 bps MoM). Inflation is now at a three-month high as prices of food and non-alcoholic beverages rose 2.4%. The All Share Price Index closed at 5,351.25 down 2.9% MoM and down 11.9% year to date. In Nov. foreign investors were net buyers of Rs.1.5bn (-214% MoM) and have been net buyers of Rs.35.0bn in 2012. Treasury bill yields at a two month high as government continues to be actively engaged in the debt market. The rupee ended the month at 128.82/131.70 vs. the USD (rupee weaker ~0.2% MoM). Year to date the rupee is now weaker 14.3%, down from a high of 17.3% in Jun 12.

In Economic news:
Budget 2013 passes second reading in Parliament. The primary targets for 2013 are GDP growth of 7.5% (6.8% in 2012) and fiscal deficit to 5.8% of GDP (~6.2% in 2012). World Bank commends Sri Lankas post war economic performance but notes sustainable growth only through policy reforms, greater private

In Consumer news: In Business news:

Motor car registrations in Oct 12 declines 72% YoY to 1,076. Tourist arrivals in Oct 12 were 80,379 (+15.5% YoY). Tea production in Oct12 was up 7.2% YoY to 26.6m kg. Telecommunications sector to grow on increased subscriber spending. Apparel export earnings decline 4.3% in the first nine months of 2012. 3Q12 Industry wise earnings summary The LMD-Nielsen Business Confidence Index in Oct 12 reaches a seven month high of 135. Active credit cards in Sri Lanka increased to 928,072 (+12% YoY) to Aug 12. Demand for consumer durables remains strong despite unchanged consumer sentiment. Consumer Affairs Authority accuses Prima Group and Serendib of unauthourised wheat flour price increases. The Nielsen Consumer Confidence Index in Oct 12 remained unmoved at 59.

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Rs.bn 2011 Actual 2012 Budget 2013 Budget 812.6
12.4%

In Economic news:
Budget 2013 passes second reading in Parliament. The budget 2013 contains a mix of medium-term
fiscal consolidation and several populist proposals. The primary targets for 2013 are GDP growth of 7.5% (6.8% in 2012E) and reducing fiscal deficit to 5.8% of GDP (6.2% in 2012E). To reach GDP target, domestic and external economic conditions have to improve. This is challenging as domestically the country is affected by high interest rates, sustained inflation and its heavy dependence on imports. Externally, economic woes in the Euro zone, moderate growth in the US and slowdown in China puts pressure on Sri Lankas predominantly commoditised (limited value-added) exports. To note, in Nov 11 GDP growth for 2012 was forecasted at 8.0%, only to be re-revised to 6.8% in Oct 12.

Tax revenue
% GDP

1,000.6
13.3%

1,132.0
13.0%

Non Tax revenue Grants Total revenue and grants

% GDP

122.2 15.1 949.9

14.5%

105.5 20.0 1,126.1

15.0%

125.9 20.0 1,277.9

14.7%

Recurrent expenditure Public investment Other Total expenditure

% GDP

1,006.6 407.5 (14.0) 1,400.0

21.4%

1,107.9 497.5 (10.4) 1,594.9

21.2%

1,267.4 529.6 (11.7) 1,785.4

20.5%

Revenue deficit Budget deficit

% GDP Source: Budget Speech 2013

(71.8) (450.2)
6.9%

(1.8) (468.8)
6.2%

(9.4) (507.4)
5.8%

tax revenue has consistently fallen short of estimates, with 2012 to be no exception (tax revenue during the eight months to Aug 12 was Rs.562.6bn well short of the run rate required to achieve year-end target of Rs.1.0trn). Expenditure is expected to be Rs.1,785bn, 15.9% higher than the 2012 target with 70.9% deemed as recurring. Recurrent expenditure mainly relate to loan interest (~37% of recurrent spending), public sector salaries and wages (~29%) and state pension (~10%), limiting governments ability to curb such expenditure, thus leaving no option but to reduce capital expenditure. For 2012 the fiscal deficit target was 6.2% of GDP, however during Jan-Aug 12 the deficit reached 6.0% of GDP. Specific budget proposals are included in the business section of this bulletin. sector. As at 31 March 2012, the World Banks Sri Lanka portfolio consisted of 14 projects with a total commitment of $1.07bn.

2013 Budget

Reduction in the fiscal deficit is to be mainly from what we feel as ambitious revenue targets as opposed to controlling recurrent spending. Revenue is forecasted at Rs.1,278bn (+13.5% from 2012 target) with tax revenue expected to contribute about 88% towards this target. In the past

Happy with recent progress says World Bank MD. Ms. Sri Mulyani Indrawati, Managing Director, World Bank,

in a recent visit to Sri Lanka commended the countrys post war economic performance but stated that growth will be sustainable only through fiscal and public sector reforms, greater private sector role, and a reduction in inequality among provinces and income groups. Ms. Indrawati noted fiscal and public sector reforms would lead to lower budget deficit, lower public debt, improved efficiency and a conducive environment for the private

As a partner for future development, the World Bank is keen to play a proactive role with financing and policy advocacy, said Ms. Indrawati at the briefing.

Moodys warns that Sri Lanka needs policies to maintain positive outlook on countrys B1 rating. Moodys Investor services (Moodys) in a report titled Credit
Analysis: Sri Lanka, said effective macroeconomic management policies and improvements to the investment environment are required to sustain strong growth and ensure price stability, as the peace dividend of lower inflation and reduced government funding costs appear to be waning.

Moodys praised governments efforts to stabilise the economy and foreign reserves by raising tariffs, floating the currency and raising interest rates to. However it noted that a slowdown in exports (-5.8% YoY during 9M12) are a sign that external risks to the economy were continuing. According to Moodys Sovereign Bond Methodology, Sri Lanka scored

low for economic and government financial strengths, moderate for institutional strength, and moderate for susceptibility to risks from financial, economic, and political events.

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In Economic news:
Sri Lankas shrinking labour force to affect economic growth. According to the Department for Census
and Statistics, as at 2Q12 the total employed population in Sri Lanka excluding Northern and Eastern provinces was 7.1m, down from 7.5m in 2Q11. The drop could be attributed to an increase in those seeking foreign employment; as per latest data, in 2011 263,000 left for employment up from 247,119 in 2009.

8,000,000 7,500,000 7,000,000 6,500,000 6,000,000 5,500,000 5,000,000 4,500,000 4,000,000 3,500,000 3,000,000 Female employed ppn. Male employed popn

Male participation rate

80 70 60 50 40 30 20

Female participation rate

2003 2004 2005 2006 2007 2008 2009 2010 2011 2Q11 2Q12

Specifically in 2011, 5,346 persons migrated for employment to South Korea and this is expected to exceed 9,000 by 2012. The South Korean government is to increase the job quota granted to Sri Lanka to 40,000 as several South Korean employers have commended Sri Lankan workers efficiency and innovativeness. The labour force participation rate (excluding Northern and Eastern provinces) continued to trend lower, reaching low of 47.2 in 2Q12 from a high of 51.2 in 2006. Labourforce participation rate is the percentage of working-age persons (16-64) in an economy who are employed and are unemployed but looking for a job. Demographically male participation fell to 66.7% from high of 68.1% in 2006 and female participation fell to 29.8% from 35.7% in 2006. Industrial sector employment increased 9.1% YoY. Perhaps in a sign of things to come there was a 15.8% YoY drop in agriculture sector employment, likely due to famers moving away from paddy cultivation due to adverse weather conditions and increasing cost of production. As at 2Q12, the unemployment rate fell to 3.8% from 4.1% a year earlier,

Source: Department of Census and Statistics

2Q11, Agriculture, 34% share 2Q11, Services, 42% share 2Q12, Agriculture, 30%, -15.8% YoY 2Q12, Services, 43%, -3.8% YoY

2Q12, Industry, 27%, +9.1% YoY

Employed population

2Q11, Industry, 24 % share

Source: Department of Census and Statistics

largely due increased employment in the 20-24 age group in the industrial sector, foreign employment and through the creation of state jobs for unemployed graduates.

place improvement from 2011 was attributed to large-scale reconstruction and development projects, poverty alleviation policies and private sector investment in less developed areas (small and medium enterprises and agriculture). Forbes determines the Best Countries for Business by grading 141 nations across 11 factors (refer table). New Zealand was ranked first, up from number two last year, due to transparent and stable business climate. In Oct 12, IFC-World Banks annual Ease of Doing Business Index placed Sri Lanka at 81 up eight places from 2011.

CSE to Sri Lanka ranked SEC andimproving work together to develop capital market. In a sign of relations, Securities and Exchange Commission (SEC) and the 79th in Forbes Colombo Stock Exchange (CSE) agreed a 10 point to develop the countrys capital market. the Budget 2013 magazines Best Implementation would be carried out through 10 points are; proposed Presidential Task Force on Capital Market Development. The Countries for Business. The four 1) Expedite SEC Act amendments to be in line with
International Organisation of Securities Commission standards; 2) Encourage more listings (public and private) 3) Attract new funds (foreign and local) to broad base the market; 4) Develop infrastructure (trading, back office systems, etc.) to improve efficiency; 5) Develop the corporate debt market 6) Increase investor education and awareness 7) Develop unit trusts industry 8) Strengthen risk management systems (RMS, CCP, DVP risk-based capital/supervision, broker back office); 9) Develop new products (derivatives, ETF, commodities) 10) De-mutualise the CSE from a member-owned company to a company owned by shareholders

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In Economic news:
The All Share Price Index closed at 5,351.25 down 2.9% MoM and down 11.9% year to date. Worst performing sectors in the month were stores and
compiled according to Standard & Poors norms and as per CSE chairman Krishan Balendra there was a demand from foreign investors to start an internationally recognized index. Moreover it was noted that S&P SL20 Index can be used as a foundation for products such as exchange traded funds, in-line with the SEC/CSE capital market development plan (point number 9 in the above list). Budget 2013 Focus: Companies listing its shares on or after 1st April 2013 and offering more than 20% of its shares to the general public to receive a 50% reduction on tax payable in year of assessment in which the shares are listed and for next two years of assessment. Withholding tax on interest income from investing in bonds and debentures listed on the CSE to be exempted from 2013. Stamp duty on transfer of stocks to a margin trading account to be exempted.

supplies (-19.9% MoM), information technology (-14.1% MoM) and motors (-13.4%). Telecommunications (+2.1% MoM) and beverage, food and tobacco (+1.9% MoM) were the only sectors to record positive gains, month over month. In November, foreign investors were net buyers of Rs.1.5bn (-214% MoM) and have been net buyers of Rs.35.0bn in 2012. Milanka Price Index (MPI) comprising of 25 of the most liquid stocks will end its 13 year existence in Jan 13. The move was largely expected with the introduction of the S&P SL20 index in August 2012. The new index is

Significant stock market transactions during Nov 2012

Date
13-Nov-12 13-Nov-12 19-Nov-12

Status
Pending Pending Completed

Target Company
Browns Investment Plc ERI HNB

Buyer
ERI Taprobane Holdings Plc Asian Alliance Insurance Plc

Seller
Taprobane Holdings Plc Lionhart Investments Mr. Ashok Pathirage

No. of shares Value (Rs.) Stake involved (%)

372m 101m 0.22m Rs.2.04bn Rs.1.68bn Rs.34m 20% 28% NA

Government creates 18,000 jobs forunemployable Source: Company Filings graduates. In another bizarre action that goes against all sense of fiscal

Creation of New Posts in the State Sector Institution Ministries Departments Provincial Councils Statutory Boards Development Projects Total
*Includes 18,128 of new graduate posts Source; Department of Management Services

2009 1,769 40,095 1,641 1,027 44,532

2010 1,095 828 2,811 568 5,302

2011 Jan - Aug 12 1,498 1,140 523 534 255 3,950 21,463* 2,618 286 541 562 25,470

restraint, the government announced the creation of 21,463 new posts in ministries up to August 2013, of which 18,128 for unemployable graduates. Unemployable graduates (graduates who need additional vocational qualifications to be employed in the private sector) are educated by tax payers through state universities and once state employed receive tax payer funded salaries and lifetime pensions. They are unemployable due to substandard and/or irrelevant courses followed at universities, lack of skills and at times poor attitude. The government already employs 1.3m citizens. During JanAug 12, state salaries and pensions amounted to Rs.303bn about 54% of the total Rs.562bn tax revenue for the same period. Add loan interest payments of Rs.294bn to salaries and pensions, and the tax revenue is already short. Law makers are reluctant to contest such job handouts due to obvious political sensitivities; thus further burdening the poor, middle and upper class tax payers. Sri Lanka can ill afford to be fiscally playful as tax revenue continues to dwindle (refer tax revenue/GDP chart) and access to foreign concessionary funding is limited, as the country is now classed as a lower-middle income country as opposed to being low-income.

Source: Central Bank of Sri Lanka

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In Economic news:

SME receives budgetary support. The Small

and Medium Enterprises (SME) sector contributing about 25% towards GDP and employing about 35% of the labour force were benefitted from attractive policies in the budget2013. Main SME related budget proposals;

IFC increases focus on creating access to finance in Sri Lanka. Mr.

Adam Sack, Sri Lanka Country Manager, International Finance Corp (IFC) in an interview (15th Nov 12) said that increasing access to finance in the lagging areas in Sri Lanka, especially among micro, small and medium enterprises is an area that the IFC will concentrate on. Action to be taken by IFC; a) Creation of a secure transaction registry - creating access to credit for SMEs on movable assets b) Work with local banks and other registered financiers to promote credit, especially micro finance. c) Advice the government in structuring private public partnerships to international standards d) Introduction of mobile banking to micro, small and medium entrepreneurs (introducing a scheme already implemented in Sub Sahara Africa and East Asia). e) Invest in Sri Lankan companies, thus providing long term finance.

a) Regional Development Banks to extend credit facilities based on SME group guarantees b) SMEs with an annual turnover of less than Rs.500m to be taxed at 10% c) SMEs to be exempt from Nation Building Tax and Value Added Tax from January 2013 d) Samurdhi banking societies to increase micro finance and leasing facilities to Rs.500,000 e) Lankaputhra Development Bank to implement a credit guarantee scheme to underwrite credit risks of institutions which lend to small businesses e) Replanting subsidy increased to

Rs.350,000 from Rs.300,000 per hectare f ) Rs.2bn to develop eight fishery harbours g) Organic fertiliser at a guaranteed price of Rs.400 per 50kg bag h) Seed paddy requirement for the Maha cultivation to be provided free of charge i) Import taxes on milk powder to be maintained j) Tax on imported canned fish to be increased k) 5,000 acres of under-utilised plantation company land to be reallocated on a 30-year lease to 12,500 entrepreneurial youth

Government liable for CPCs $60m hedging loss.

Mr. Susantha Silva, Managing Director, Ceylon Petroleum Corporation (CPC) said that the recent ruling to pay $60m to Deutsche Bank on account of the badly gone wrong oil hedging deal was against the government and not the CPC. This was confirmed by a Colombo based Deutsche Bank official.

China continues to be Sri Lankas top lender. As at Aug 12,

Foreign Financing Commitments (Loans $m) Jan - Aug 12 Bilateral China Japan India Netherlands Germany Denmark Saudi Fund Other Multilateral The World Bank UN Agencies ADB IFAD Total 324.8 22.0 2,548.9 103.6 79.5 231.2 1,802.1 217.8 366.7 24.2 1,136.7 1,055.0 508.8 443.1 102.5 34.4 58.3 784.7 520.5 54.2 28.4 396.6 67.4 1.6 46.1 16.3 Jan - Sep 11 Jan - Sep 10

China committed $1.06bn in loans, disbursing

Source: Department of External Resources

Earlier it was stated that CPC had lost a $60m hedging case against Deutsche Bank, at the Washington-based International Centre for Settlement of Investment Disputes. Its against us, $443.6m towards priority road now we are considering what actions to be taken to annul projects ($179.7m), Puttalam this Sri Lankas Attorney General Palitha Fernando told coal power project ($74.5m), Reuters, after the verdict. Mattala International Airport The hedging deal was entered into in 2008 by CPC project ($35.8m), Northern roads with Deutsche Bank, Standard Chartered Bank (SCB), rehabilitation project ($33.4m) and Citi Bank, and local banks to buy crude oil at a capped for the Katunayake expressway price of $130 per barrel. Oil prices having hit $147 in project ($26.3m). Japan committed early 2008 fell to $40 in Dec 08 thus exposing CPC to $508.8m and disbursed a total of about a $500m obligation. In Jul 12, CPC lost its appeal $280.2m for the greater Colombo against a $162m plus interest hedging payment to urban transport development SCB. The government claimed that the CPC did not project phase I and II, outer circular have the capacity or technical expertise to enter into highway project southern highway such an agreement and that the bank mis-sold the and for the Upper Kotmale hydro contracts. SCB maintained that CPC had always been power project. As at Aug 12, $1.40bn aware that a fall in oil prices would have made it liable of the committed $2.51bn foreign to make payments. financing had been disbursed.

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In Economic news:

The fiscal deficit in the first eight months of year expanded to Rs.454.5bn (+30.0% YoY), 6.0% of GDP. A

-500.0 Rs.bn -450.0 -400.0 -350.0 -300.0 -250.0 -200.0 -150.0 -100.0 -50.0 Jan Feb

2012

2011

2010

2012E defict target Rs.468.8bn

Jan- Aug fiscal deficit as a % annual defcit /target

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Greater Colombo Housing Approvals In

the second quarter of 2012, 2,389 houses were approved for construction in Greater Colombo (+3.5% YoY) and 296(-13.5% YoY) other buildings were approved (+10.0% YoY). In 2Q12 the cost of all construction index reached an all-time high of 554.6 (+29.9 points QoQ). Specifically, the all housing construction index and the nonresidential building construction cost index also reached all-time highs (refer charts below). Depreciation of the rupee and imposition of import tariffs to promote locally produced construction material continue to drive costs higher. Industry experts consider that currently about 80-85% of construction material are imported.
Greater Colombo Housing Approvals
3,500 3,000 2,500 2,000 540.0 1,500 1,000 500 0 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12
Source: Central Bank of Sri Lanka

decline in Aug 12 tax revenue (-2.8%YoY) offset a significant decline in current spending (-20.4% YoY). Even though tax revenue during Jan-Aug 12 is 9.8% higher than last year, as mentioned previously this is short of the run rate required to meet the Rs.1.0bn target set for 2012. The current account deficit expanded to Rs.149bn (+29.1% YoY).

Source: Central Bank of Sri Lanka

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

Jan Aug Jan Aug Jan Aug 10 11 12 495.3 574.6 632.0 635.3 140.0 314.5 930.3 355.7 349.6 5.4% 781.0 149.0 454.5 6.0%

Jan Aug 12 of target Target '12E 57.1% 1106.1 14.7% 70.5% 1107.9 14.7% NA 1.8 0.0% 96.9% 468.9 6.2%

Number of houses approved (Greater Colombo-GC) All Housing Construction Cost Index

600.0 580.0 560.0

Treasury yields at a two month high.

Yields on treasury bills across all maturities traded higher as the government continued to be actively engaged in the debt market. Rates on 91 day treasury bills were 10.79% (+13 bps MoM), 182 day treasury bills were 12.09% (+19 bps MoM), and 364 day treasury bills were 12.85% (+37 bps). At the month end auction the government sold Rs.3.6bn in 91-day, Rs.11.5bn in 182 day bills and Rs.8.4bn in 364 day bills. Rising rates are in sync with increasing inflation, which is at a three month high.

182 days T .bill 364 days T .bill 91 days T. bill

13% 11% 9% 7%

520.0 500.0 480.0

Inflation

5% 3%

Greater Colombo other building approvals

500 450 400 350 300 250 200 150 100 50 0 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 Other building approvals Non residential building construction cost Index (1990=100)

Source: Central Bank of Sri Lanka

565 545 525 505 485 465 445 425

Source: Central Bank of Sri Lanka

Budget 2013 focus: Import tax on construction machinery to be reduced. However to promote locally produced construction material, an import tariff differential is to be maintained between finished products and raw material.

Source: Central Bank of Sri Lanka

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 02.11.12 16.11.12 23.11.12

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 10 year

Bond yields

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In Economic news:
Inflation in Nov 12 increased to 9.5% YoY (+60 bps MoM). Inflation
is now at a three-month high as prices of food and non-alcoholic beverages rose 2.4%. Food and nonalcoholic beverage segment constitute about 40% of the inflation index.
Source: Central Bank of Sri Lanka

The rupee ended the month at 128.82/131.70 vs. the USD (rupee weaker ~0.2% MoM). Year to

140 135 130 125 120 115 110 105

Mid point (rs. per US$)

Bid - Ask spread (Rs. per US$)

7.5 6.5 5.5 4.5 3.5 2.5 1.5

date the rupee is now weaker 14.3%, down from the year high 17.3% in Jun 12.SCB in a report titled Global Focus 2013 The Year Ahead, stated that as trade balance stabilises and capital inflows pick up on the back of improved investor sentiment, an appreciation pressure on the Rupee [Sri Lankan] can be expected in 2013 taking USD-LKR to 126.50 by end 2013.

Source: Central Bank of Sri Lanka

Trade deficit in Sep 12 reduces to $513.1m (-43.3%YoY), as years deficit reaches $6.80bn (-0.3% YoY). Exports were down 6.6%YoY in the month, the

seventh consecutive monthly drop, whilst imports reduced a significant 25.4% YoY. Thus governments objective of reducing growth in trade deficit is back on track having reversed in Aug 12 where the trade deficit grew a staggering 72.3% over Jul 2012. Based on CBSL s 2012 road map targets of $11.70bn for exports and $20.90bn for imports and analysing monthly trade activities in 20092011, we estimated Sep 12 exports to be $1.18bn, significantly higher than the recorded $801.5m. In Sep 12, agriculture exports (~22% of exports) increased 5.8% YoY as tea exports rebounded increasing 16.2% YoY due to increased production from favourable weather conditions and high international prices. Industrial exports (~77%) declined 11.6% YoY as textile and garments exports reduced 9.2% YoY to $303.0m. Imports were $1.76bn down 25.4% YoY. Consumer goods imports (~18% of imports) declined 32.1% YoY, as consumer goods imports excluding food and beverages dropped 37.9% YoY to $114.8m. Intermediate goods imports (~62%) declined 18.8% YoY as textile and textile articles dropped 5.0% YoY and petroleum imports dropped 3.9%. Investment goods (~20%) reduced 36.0% YoY as imports of machinery & equipment and transport equipment dropped 29.6% and 55.0%. During Jan-Sep 12, exports fell 5.8% YoY to $7.39bn and imports decreased 3.3% YoY to $14.17bn, expanding the trade deficit to $6.80bn (-0.3% YoY). Trade during the last three months of the year is about 28% of annual exports and imports. Thus we forecast full year exports to be $10.28bn (~-2.2% YoY) and imports to be $19.17bn (~-2.8% YoY). The resulting trade deficit is $9.43bn (~-3.5% YoY) is higher than the CBSL target.

2-Jan-12 12-Jan-12 22-Jan-12 1-Feb-12 11-Feb-12 21-Feb-12 2-Mar-12 12-Mar-12 22-Mar-12 1-Apr-12 11-Apr-12 21-Apr-12 1-May-12 11-May-12 21-May-12 31-May-12 10-Jun-12 20-Jun-12 30-Jun-12 10-Jul-12 20-Jul-12 30-Jul-12 9-Aug-12 19-Aug-12 29-Aug-12 8-Sep-12 18-Sep-12 28-Sep-12 8-Oct-12 18-Oct-12 28-Oct-12 7-Nov-12 17-Nov-12 27-Nov-12
7,000.0 $m 6,000.0 5,000.0 4,000.0 3,000.0 2,000.0 29.5% 1,000.0 0.0 Jan 12 Feb 12 Mar 12 Apr 12 May 12 Jun 12 Jul 12 Aug 12 Sep 12 Jan Sep Jan Sep 11 12 0.9% 25.2% 11.0% 6.6% 21.2% 9.2% 13.8% 21.8% 4.3% 19.4% 33.8% 44.3% 43.2% 67.6% 54.4% Trade deficit ($m) (LHS) YoY % MoM % 0.3% YoY 72.3% 80.0% 60.0% 40.0% 20.0% 0.0% 20.0% 40.0% 60.0%
Source: Central Bank of Sri Lanka
Total exports $m 1400

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

1200

1000

2011 2010 2009

800

600

400
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 Source: Central Bank of Sri Lanka

Jan Sep 12 CBSL target ($m) 2012E ($m) % of target Trade Exports 7,393 11,700 63.2% Imports 14,173 20,900 67.8% Trade Deficit 6,780 9,200 73.7% Source: CBSL and Gradient estimates

Gradient estimates 2012E ($m) 10,283 19,714 9,430

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In Business news:
Motor car registrations in Oct 12 declines 72% YoY to 1,076, with total registrations declining 40% YoY to
26,667 according to JB securities. Registration of Maruti/Suzuki vehicles declined to 96 units compared 1,350 units the previous year. However,
Budget 2013 Focus: Proposals to increase excise duty on vehicles is to add about Rs.200,000, Rs.400,000 and Rs.25,000 on small cars, trucks and three wheelers. The price of buses is expected to increase by Rs.1m along with a Rs.500,000 increase in 4-wheel farm tractor prices. Moreover, the revenue licensing annual fee for petrol and motor cars up to 762kg was increased to Rs.2,000. It was also proposed to increase the duties on vehicles imported under concessional schemes from 10% to 20%.

the registration of luxury vehicles such as Mercedes, Audi and BMW rose to 93 units (87 units in 2011). Registrations of motor cycles, three wheelers and buses declined to 12,513 (-38.5% YoY), 7,898 (-36.3% YoY) and 127 (-60.3% YoY) units during the month.
Through a budget proposal, the three year restriction imposed on transferring duty-free vehicle permits was lifted. 10,000 vehicle permits have been issued since 2010 with plans to increase it to an average of 5,000 permits per year. Senior public sector officials receive tax concessions of 50%for 1000 cc vehicles, 55% for 1600 cc vehicles, 60% for 2000 cc vehicles and 70% for 2600 cc vehicles.
123,000

Tourist arrivals in Oct 12 was 80,379 (+15.5% YoY), higher than our expectation of 79,600.

113,000 103,000 93,000 83,000 73,000 63,000 53,000 43,000 33,000

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 to reach target of 1m .

2012E

2011 2010

Total arrivals for the year are up 16% YoY to 774,151. India continues to be the highest contributor with 17,654. However, arrivals from the country were down 1.5% YoY. In terms of growth, South Africa and the Caribbean & Latin America recorded growths of 243.5% (426) and 124.2% (148) respectively. The World Travel Market, named Sri Lanka as a new emerging travel powerhouse along with Indonesia, Malaysia, Mexico and Argentina. Reemergence after the civil war, investing in infrastructure and the beauty of destination were identified as key highlights for the tourism industry in Sri Lanka. Mr. Manav Thadani, Chairman, Hospitality Valuation Services (HVS), South Asia, believes that Sri Lankas target of welcoming 2.5m visitors by 2016 could only be achieved by 2020. Based on tourist arrivals by market share, Mr. Thadani estimates that the country would only be able to welcome 1.93m visitors by 2016.
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

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Source: Sri Lanka Tourism Development Authority (SLTDA)

He opines that Sri Lanka would struggle to build the required additional 30,000 rooms within the next four years to welcome the set target. Moreover, he states that the sector should focus on the budget and midmarket hospitality segment to remain competitive in the region. Budget 2013 Focus: It has been proposed to offer a 25% discount on lease rentals to all local investors, to encourage more construction of hotels and resorts. Concessions on land leasing would be offered to foreign investors who form equity partnerships of at least 30% with local investors.
Tea Board forecasts 325mn kg of production for 2012. Assumed monthly progression of Tea production

Mr. Manav Thadani, Chairman, Hospitality Valuation

Tea production in Oct12 was up 7.2% YoY to 26.6m kg as weather conditions continue to improve.
However, John Keells brokers stated that the heavy rain that prevailed in the country would not lead to a sharp recovery in crops which were hampered by drought. In fact, the heavy rains itself would impede the crops.

Tea Production (mn kg)

Aug 2012E

Sep

Oct

Nov

Dec

Budget 2013 Focus: The proposal to reduce income tax to 12% for exporters of organic tea was criticised as there was only a handful of organic tea producers for export. However, the proposal to allocate 25,000 acres of unutilised land to develop small holder plantation crop to 12,500 youth from low income families was welcomed.

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

Source: Sri Lanka Tea Board

The Planters Association (PA) warned that the tea industry could become unstable in the future as rising costs continue to erode profits. According to the PA, during Jan-Sep 12, the average cost of production was Rs.400Rs.410 per kg whereas the average selling price per kg was Rs.386.

Further, proposals include increasing replanting subsidies to small tea holders toRs.350,000 from Rs.300,000 per hectare. However the PA stated that the increase would not be sufficient to meet the targeted 2% of total land requiring replanting. With effect from Nov 12, tea export Cess increased to Rs.10 from Rs.4 further contracting the producer margins.

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In Business news:
Telecommunications sector to grow on increased subscriber spending.

20,000,000 18,000,000 16,000,000 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 -

Fixed lines

Mobile phones

Internet and Email subscribers

Mobile penetration 97% 95%

98% 96% 94% 92% 90% 88% 86% 84% 82% 80% 78%

90% 87% 85% 88% 88%

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

According to a report published by Fitch ratings, average revenue per user (ARPU) in Sri Lanka is expected to increase in 2013 from strong growth in minutes of use, as mobile subscriber growth decelerates due to high penetration. The rating agency believes that tariff based competition would not emerge due to an increase in operating cost and the high level of inflation driven by high energy costs and the depreciation of the rupee. However, tariff competition is expected for data services, international roaming, and international direct dialing revenue.
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Note: (a) Internet and email subscribers include mobile broadband services (b) From 2Q12, population data from census 2012 is used Source: CBSL

Profitability is expected to come under pressure from high subscriber acquisition and retention costs as six operators compete in a saturated market. Budget 2013 Focus: It has been proposed to reduce the telecommunications levy related to internet tariffs. This is expected to have a positive impact on the sector along with a boost to the mobile broadband market which currently has a low penetration rate of around 6%.

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In Business news:
Apparel export earnings decline 4.3% in the first nine months of 2012, according to CBSL. The main reason is
Textile and garment export earnings $m (Jan-Sep 2012)
450 400 350 300 250 200 150 100 Export of apparel and clothing accessories (knitted or crocheted) to the USA

Textile and garment export earnings $m (Jan-Sep 2012)

20% 15% 10% 5% 0% -5% -10% -15% % Change

the decline in demand from the European Union (accounts for nearly 50% of Sri Lankas apparel exports). Sri Lanka Apparel Exporters Association (SLAEA) Chairman Rohan Abeyakoon expects an 8-10% YoY drop in apparel exports due to high costs, loss of the GSP+ facility and low export demand. A request was put forward by the SLAEA to form alise the 5-day working week with a 45.5 hour week and for a move away from a minimum wage arrangement. The objective is to increase productivity to compete with nations such as Bangladesh, India and Vietnam who adopt a 48 hour week, operate from a low cost base and have duty-free access to the European Union market. Sri Lanka did not feel immediately the impact of the loss of the GSP+ facility as earnings from textile and garment exports to the EU increased by 3.0% and 25.1% in 2010 and 2011. However, this reversed from Feb 12 onwards. The loss from the withdrawal of the GSP+ facility is estimated at $1bn. On a positive note, earnings from apparel exports to the United States grew by 6% YoY to $537m. The US currently accounts for 40% of Sri Lankas total apparel export market. Only four other nations along with Sri Lanka were able to increase export earnings during the period Jan- Sep 2012 among the top 15 exporters. China continues to dominate the apparel export market to the US with an annual output of $10.9bn.
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Country
0
India Export Earnings Pakistan Growth YoY % Sri Lanka Growth YoY % (EU) Bangladesh China

50

January - September ($m) 2008

Jan 367 2% 1%

2009
Apr 969 296 699 -2% 399 -4% 650

2010
May 1,050 278 780 -13% 409 -17% 733 Jun 381 15% -6%

2011
Jul 1,168 328 962 -14% 507 -17% 816

2012
Aug 359 -4% -12%

Feb Mar 1,003 341 319 774 2% -12% 500 -1% -12% 680

Sep 956 303 751 -9% 537 -16% 781

2011-2012 -20%
-18% -22% 6% -4% -1%

Growth YoY % 7,534 8,058

Growth YoY % (EU) 9,927 11,057

10,930

Source: United States International Trade Commission

Export of apparel and clothing accessories (knitted or crocheted) to the USA Country
India Pakistan Sri Lanka Bangladesh China

January - September ($m) 2008

1,003 774 500 680 7,534

% Change 2012
956 751 537 781 10,930

2009
969 699 399 650 8,058

2010
1,050 780 409 733 9,927

2011
1,168 962 507 816 11,057

2011-2012
-18% -22% 6% -4% -1%

Source: United States International Trade Commission

Budget 2013 Focus: It has been proposed to grant a two year depreciation allowance to the industry along with a reduction in port and airport Levy to 2.5% from 5.0% on daily used consumable items.

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:
3Q12 Industry wise earnings summary:
The Banking sector continued its strong momentum as the top five players recorded YoY growth in interest income driven. Net interest margins (NIM) remained steady at around 4% as high deposit pricing continue to eat into high loan rates. CBSL expects NIMs to decline to 3.3% by 2016 due to competition. The gross NPL decreased by 20 bps to 2.9% compared to 3.1% in 3Q11.
Net Interest Income Net Interest Margin Net Profits Gross NPL Return On Assets Return On Equity NetGroup 3Q12 Interest Income Net Interest Margin Gross NPL Net Profits Return On Assets Return On Equity Bank level Bank Group Loans to deposit Bank level Bank level Group 3Q12 Bank level Group Net Bank Interest Income NetLoans to depositMarginBank level ProfitsBank level Interest Net Rs. Bn YoY% 3Q12 3Q11 Rs. Bn YoY% 3Q12 3Q11 3Q12 3Q11 3Q12 3Q11 3Q12 3Q11 Rs. Bn YoY% 3Q12 3Q11 Rs. Bn 3Q12 3Q11 3Q11 Group 3Q12 3Q11 Loans to deposit 3Q12 3Q11 Group 3Q12 YoY% Bank 3Q12
Commercial Bank of Ceylon Commercial Bank of Ceylon 5.6 5.6 21.1% 21.1%
63.0% 63.0% HNB 7.2 HNB 7.2 Commercial Bank of Ceylon 3.0 Sampath Bank Sampath Bank 3.0 HNB NDB 1.5 NDB 1.5 BOC 8.0 Sampath Bank Average 5.04 BOC 8.0 NDB Source: Company Data Average 5.04 BOC

Budget 2013 Focus: To allow licensed commercial banks (LCB) to provide venture capital finance for up to Rs.10m per business. Enable LCBs to borrow up to $50m annually, for three years without approval from the Exchange Control Department. DFCC Bank and NDB Bank permitted to raise $250meach overseas through 10 year tenures, with the government underwriting the exchange risk on the borrowings and providing other related benefits. Proposal to increase duty on vehicles imported on concessional schemes (from 10% to 20%), would affect finance and leasing companies as over 75% of new leases are disbursed to finance imported motor vehicles.
Revenue Profit Before Tax Profit Before Tax Margin Revenue Profit Before Tax Profit Hotel profits of Hotel Segment financing Before Only 3Q12 1% on the annual Segment Only 3Q12 banks, Only 3Q12 Hotel SegmentTax Margin Hotel Segment Only 3Q12 Hotel Segment Only 3Q12 Gross NPL Hotel Segment Only 3Q12 Return On Assets Return On Equity and insurance companies is toBn be paid to the Rs. Bn YoY% Rs. Bn YoY% 2Q13 1Q13 Rs. Bn YoY% Rs. YoY% 2Q13 1Q13 Bank level Bank level Bank level

4.5% 4.5% Rs. Bn 4.9% 4.9% 4.1%

4.1% 3.6%

21.1%

21.1%

17.2%

17.2% 36.1%
31.7% 36.1%

3.6% 3.4%
4.1% 3.4%

31.7%

4.1%

4.5% 2.3 11.5% 88.5% 88.6% 3.1% 3.0% 21.4% 21.3% 3.7% 3.9% 4.5% 2.3 11.5% 88.5% 88.6% 3.1% 3.0% 21.4% 21.3% 3.7% 3.9% YoY% 3Q12 3Q11 Rs. Bn YoY% 3Q12 3Q11 3Q12 4.7% 1.7 21.0% 92.9% 95.2% 2.2% 2.1% 15.9% 16.3% 4.1% 4.4% 4.7% 1.7 21.0% 92.9% 95.2% 2.2% 2.1% 15.9% 16.3% 4.1% 4.4% 5.64.2% 21.1% 4.5% 90.4% 4.5%2.7% 2.3 11.5% 88.5% 2.3% 88.6% 1.0 -9.1% 95.2% 2.8% 24.5% 24.9% 2.8% 4.2% 1.0 -9.1% 95.2% 90.4% 2.7% 2.8% 24.5% 24.9% 2.3% 2.8% 7.23.7% 63.0% 4.9% 129.9% 4.7%1.9% 1.7 21.0% 92.9% 1.4% 95.2% 0.7 -3.7% 118.4% 1.7% 20.8% 16.6% 1.4% 3.7% 0.7 -3.7% 118.4% 129.9% 1.9% 1.7% 20.8% 16.6% 1.4% 1.4% 3.9 36.0% 103.9% 1.8% 35.5% 30.3% 2.8% 3.03.1% 21.1% 4.1% 82.0% 4.2%2.3% 1.0 -9.1% 95.2% 3.2% 90.4% 4.0% 1.9 99.8% 97.2% 2.4% 2.3% 23.6% 21.9% 2.9% 3.1% 3.1% 3.9 11.1% 103.9% 36.0% 82.0% 2.3% 1.8% 35.5% 30.3% 3.2% 2.8% 1.5 17.2% 3.6% 3.7% 0.7 -3.7% 118.4% 129.9% 4.0% 1.9 11.1% 99.8% 97.2% 2.4% 2.3% 23.6% 21.9% 2.9% 3.1% 8.0 36.1% 3.4% 3.1% 3.9 36.0% 103.9% 82.0% 5.04 31.7%
EBITDA Group 3Q12
YoY%

National Insurance Trust Fund. These proceeds 36.8% Asian Hotels &&Properties 2.0 28% 0.72 66.8% Asian Hotels Properties 2.0 28% 0.72 66.8% 36.8% 3Q12 are3Q11 finance a Crop 3Q11 38% 3Q120.05 to Insurance Scheme, 3Q11 up 9.1% set Aitken Spence Hotel Holdings 0.6 38% 0.05 57.3% 9.1% Aitken Spence Hotel Holdings 0.6 57.3% 3.1% Johnfarmers using fertiliser subsidies NAfrom 2013. 3.9% 21.4% NA 21.3% 3.7% for Keells Hotels3.0% NA NA John Keells Hotels NA NA NA NA 2.2% Trans Asia interest on drought affected loans is to be 4.4% 15.9% 0.8 16.3% 34% 0.25 4.1% 101.7% 33.3% Further 2.1% Trans Asia 34% 0.25 33.3% 0.34 2.3% 101.7% waived off and banks 0.8 advised to delay75.3% 2.8% are 33.3% such 26.4% 2.7% Average 2.8% 24.5% 1.1 24.9% Source: AverageCompany Data 1.1 33.3% 26.4% loan installment collections until the0.34 1.4%harvest. 1.4% next 75.3% 1.9% 1.7% 20.8% 16.6%
2.3%
Source: Company Data
Sri Lanka Sector

29.6% 29.6%
1.9% 1.9% 27.7%

NA

NA

27.7% 19.7% 19.7%

1.8%

35.5%

30.3%
Sri Lanka Sector

3.2%

2.8%

Source: Company Data

Average

Source: Company Data

Sri lanka Telecom Dialog Axiata Average

Sri lanka Telecom

Source: Company Data

User2Q12 Rs. 2Q12 3Q12 3Q12 Minutes of Use 2Q12 (losses) (0.5) Net Profit 70.0% EBITDA 8.0% Net Profit 5.0% (Mobile - Post & Pre NA (Mobile - Post & Pre NA 1.8 4.7 0.4 12.4% FOREX gains / Paid) Rs. Bn (0.9) Group 3Q12 Paid) Margin 4.7 373.8% Group 3Q12 4.9 13.6% 0.4 32.7% 6.2% 358.0 350.0 2.1 2.1 (losses) Revenue Net Profit EBITDA 221.9% Rs. Bn 4.8 YoY% 10.8% 3Q12 0.4 2Q12 -0.7 3Q12 22.5% 2Q12 5.6% 3Q12 358.0 2Q12 350.0 3Q12 2.1 2.1 Rs. Bn 14.5 YoY% 20.1% Rs. Bn 3.3 YoY% Rs. Bn2Q12 Group 3Q12 Group 3Q12 Group 3Q12
Rs. Bn

Revenue Group 3Q12

YoY%

Net Profit Group 3Q12

YoY%

Revenue 15.0% 14.6 Group 3Q1225.1% 14.5

14.6 15.0%

Rs. Bn

Rs. Bn

FOREX gains / 3Q12 2Q12

FOREX gains / (losses) Rs. Bn

4.1%

4.0%
Net Profit Margin

1.9

Average Revenue Per 11.1% 99.8% 97.2% User Rs. Minutes of Use (Mobile - Post & Pre (Mobile - Post & Pre Average Paid) Per Revenue Paid)

3Q12

Dialog Axiata Sri lanka Telecom Average Dialog Axiata

Source: Company Data

1.8 70.0% 4.7 8.0% Rs. Bn YoY% Rs. Bn 4.7 373.8% 4.9 13.6% Government 14.6 15.0% Revenue 3Q12 14.5 20.1% Levies/ Finance Profit After Tax 3.3 221.9% 4.8 10.8% 14.5 25.1% Cost 3Q12 Group 3Q12 Group 14.5 25.1%
Rs. Bn 21.6 13.8 YoY% 10.9% 15.5% Rs. Bn 16.6 YoY% 14.5 9.6% Rs. Bn YoY% 20.1% 2.3 0.1 15.8% -62.4% 3Q12

(0.5) 12.4% 5.0% NA YoY% Rs. Bn YoY% 3Q12 2Q12 0.4 (0.9) 32.7% 6.2% 358.0 350.0 2.1 1.8 70.0% 4.7 8.0% 0.4 Net Profit -0.7 0.4 22.5% 5.6% 358.0 350.0 2.1 4.7 373.8% 4.9 13.6% 0.4 Margin
2Q12 3.3

0.4

NA 2.1 (0.5) 2.1 (0.9) -0.7

3Q12

Average

221.9%
11.6% 1.8%

4.8

10.8%

0.4

Ceylon Tobacco Nestle Lanka Average

*YE 31st March

*Cargills Ceylon

Source: Company Data

10.6% 0.6%

23.6% 21.9% 2.9% In the 2.3% Telecommunications sector, Dialog 3.1% Axiata generated a revenue growth of 25.1% YoY in 3Q12 driven by mobile voice revenue (+14.5% Average Revenue Per YoY) due to growthUser Rs. in usage and expansion Use Minutes of of its mobile subscriber base (7.6m as of 3Q12Post & Pre (Mobile - Post & Pre (Mobile - (+8% Net Profit Paid) Paid) Margin YoY). Sri Lanka Telecoms revenue grew 14.6% 3Q12 2Q12 YoY.2Q12 Dialog and Sri Lanka Telecom3Q12 recorded each 2Q12 12.4% 5.0% NA foreign exchange gains of Rs.400m due to the NA 32.7% 6.2% 358.0 350.0 2.1 appreciation of the rupee in 3Q12, compared to 2.1 22.5% 5.6% 358.0 350.0 2.1 losses of Rs.900m and Rs.500m in 2Q12. 2.1 2.4%

0.3 157.9% Government

Source: Company Data

7.1 0.03 421.1% 11.3% After 3.9% Net Profit 11.0% Revenue 3Q124.1% Levies/ Finance Profit0.8 Tax Government 14.2 5.7 196.2% Group 3Q12 1.1 -14.2% 7.5% Margin 8.1% Group 10.2% Cost 3Q12 Levies/ Finance Revenue 3Q12 Rs. Bn YoY% Rs. Bn YoY% Rs. Bn YoY% 3Q12 2Q12 Cost 3Q12 Group

Profit After Tax Group 3Q12

Net Profit Margin

Ceylon Tobacco *Cargills Ceylon Ceylon Tobacco Nestle Lanka *Cargills Ceylon Average Nestle Lanka
*YE 31st March

21.6 13.8 7.1 14.2

10.9% 15.5% 4.1% 10.2%

16.6 Rs. Bn 0.3

9.6% 2.3 15.8% 10.6% 11.6% YoY% Rs. Bn YoY% Rs. Bn YoY% 3Q12 2Q12 157.9% 0.1 -62.4% 0.6% 1.8% 21.6 10.9% 16.6 9.6% 2.3 15.8% 10.6% 11.6% 0.03 421.1% 0.8 3.9% 11.3% 11.0% 13.8 15.5% 0.3 157.9% 0.1 -62.4% 0.6% 1.8% 5.7 196.2% 1.1 -14.2% 7.5% 8.1% 7.1 4.1% 0.03 421.1% 0.8 3.9% 11.3% 11.0% 14.2 10.2% 5.7 196.2% 1.1 -14.2% 7.5% 8.1%

Average

Source: Company Data *YE 31st March Source: Company Data

The top three companies in the Food, Beverage and Tobacco sector posted an average revenue growth of about 10%. Profitability at Nestle Lanka and Cargills Ceylon continue to be affected by high finance costs and high fuel & energy costs. Ceylon Tobacco Company contributed Rs.47.8bn (+9% YoY) to government coffers during the first nine months of 2012 despite a 2.6% drop in cigarette volumes.

Budget 2013 Focus: Proposal to introduce national building tax and value added tax to those supermarkets and large scale trading operations with quarterly revenue of over Rs.500m. This is expected to generate Rs.5.3bn in revenue for the government in 2013. To overcome this impact on their margins, supermarket operators are likely to sell at the maximum retail price (MRP) and seek greater margins from suppliers.

Selling at MRP may affect price sensitive consumers who could return to small boutiques and shops for their groceries. Cargills Ceylon stated that they would be taking stock of future investment and expansion plans. The supermarket industry has called for an urgent meeting with the finance ministry to discuss the new taxes imposed. Excise duty on cigarettes was increased pre-budget.

n Equity evel
3Q12 21.3% 16.3% 24.9% 16.6% 30.3% 21.9%

Q11

Bank level The Hotel and Travel sector continues to grow as tourist arrivals to the country grows.
3Q11 3.7% 3.9% 4.1% 4.4% 2.3% 2.8% 1.4% 3.2% 1.4% 2.8% 2.9% 3.1%

Gross NPL

Revenue Hotel Segment Only 3Q12

Rs. Bn Asian Hotels & Properties Aitken Spence Hotel Holdings John Keells Hotels Trans Asia Average
Source: Company Data Sri Lanka Sector

Profit Before Tax Hotel Segment Only 3Q12

Rs. Bn YoY% 0.72 0.05 NA 0.25 0.34 66.8% 57.3% NA 101.7% 75.3%

Profit Before Tax Margin Hotel Segment Only 3Q12

2Q13 36.8% 9.1% 33.3% 26.4% 1Q13 29.6% 1.9% NA 27.7% 19.7%

YoY% 2.0 0.6 NA 0.8 1.1 28% 38% NA 34% 33.3%

venue Per Rs. ost & Pre d)

NA 350.0 350.0

Minutes of Use (Mobile - Post & Pre Paid)

3Q12 2.1 2.1 2Q12 NA 2.1 2.1

Q12

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In Business news:
The LMD-Nielsen Business Confidence Index in Oct 12 reaches a seven-month high to 135;
up 13 points MoM, but down 18 points YoY. Nielson Sri Lankas Director Mr. Shaheen Cader said that Improved business performance in the last three months contributed significantly to the rise in the index. In the latest survey, 35% of the respondents believed that the economy will improve over the next 12 months, similar to that of in Sep 12. More importantly, those who believed the economy to get worse decreased to 23% from 33% in Sep 12.

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

In Consumer news:
Active credit cards in Sri Lanka increased to 928,072 (+12% YoY) to Aug 12. The total outstanding
balance as of Aug 12 was Rs.48bn (+38% YoY) compared to Rs.37.6bn in Dec 11. What is important to note is that within a short period of one month, the total outstanding balance increased by Rs.7.5bn. Nations Trust Bank, the franchise holder for American Express recorded a 38% growth in credit cards income in 3Q12 along with a 23% and 24% growth in credit card spend and receivables. The bank states that growth was due to the macro environment being conducive for consumer confidence, propelling increases in consumer spends and the appetite for credit in the emerging segments.

50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 10.0% 10 0%

20.0% Source: Central Bank of Sri Lanka Source: Central Bank of Sri Lanka

Demand for consumer durables remains strong despite unchanged consumer sentiment. In 3Q12 Singer Sri Lanka reported group revenues

players. Performance is remarkable given the devaluation of the rupee, high interest rates and high electricity costs. Despite the rise in revenue, profit before tax (PBT) for all consumer segments declined significantly with consumer electronics (-70% YoY) and communication (-70% YoY) taking the biggest hit. PBT margins too were adverse compared to the previous year.
Revenue Rs.2,175m, +21% YoY

of Rs.18.7bn (+21% YoY) with retail operations generating revenues of Rs.17.5bn (+19% YoY). Unit sales were higher across most consumer items apart from televisions, audios and computers. Refrigerators (+17%YoY), sewing machines 2,500 (+9%), fans (+40%), microwaves 2,000 (+171%), air conditioners (+33%), 4% kitchen appliances (+41%), irons 1,500 3% (+82%) and rice cookers (+54%).
1,000 Revenue Rs.640m, +16%
YoY

The company also recorded growth from new product categories such as cameras, mobile phones, water purifiers, sprayers, induction cookers, gas cylinders, air coolers and blu-ray

500 -

Revenue Rs.1,363m, +2% YoY

Sewing-Related Products

Consumer Electronics

White Goods

Source: Company Data

Feb 11 Feb 11 Mar 11 Mar 11 Apr 11 Apr 11 May 11 May 11 Jun 11 Jun 11 Jul 11 Jul 11 Aug 11 Aug 11 Sep 11 Sep 11 Oct 11 Oct 11 Nov 11 Nov 11 Dec 11 Dec 11 Jan 12 Jan 12 Feb 12 Feb 12 Mar 12 Mar 12 Apr 12 Apr 12 May 12 May 12 Jun 12 Jun 12 Jul 12 Jul 12 Aug 12 Aug 12 Sep 12 Sep 12 Oct 12 Oct 12

185 185 175 175 165 165 155 155 145 145 135 135 125 125 115 115 105 105 95 95 85 85 Source: www.lmd.lk

Annual Growth No. of credit cards and outstanding balance

Outstanding Balance

No. of active credit cards

5% 4%

3%

Revenue Rs.421m, +18% 1% Revenue Rs.320m, YoY Revenue Rs.338m, +35% YoY -2% YoY

5% 5% 4% 4% 3% 3% 2% 2% 1% 1% 0%

Kitchen-Related Products

Communications

Furniture

PBT Margin 2012

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The Consumer Affairs Authority (CAA) files a case against Prima Group and Serendib Company. The two companies have been accused of
increasing the prices of wheat flour without prior approval of the CAA, thus violating the Consumer Protection Act. In Oct 12, Prima and Serendib increase the prices of wheat flour by Rs.6 and Rs.4 citing loss on imports due to depreciating rupee and high cost of transportation. As a result bakery owners increased the price of a 450g loaf of bread by Rs.2.

The Nielsen Consumer Confidence Index in Oct 12 remained unmoved at 59 from September. 41% of

the respondents (up from 29% in September 12) stated that conditions will be bad for people to buy things they need over the next 12 months as consumers remained concerned over employment prospect and the state of personal finances. Consumers who consider job prospects to be bad over the next 12 months were up to 30% compared to 21% in September 12.

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

Nielsen Consumer Index

In Consumer news:

Oct Sep Aug Jul Jun May Apr

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

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

In other business news

Mihin Lanka has suffered an Rs.1.9bn loss for the financial year 2010/2011 with accumulated losses amounting to Rs.8.5bn since its inception in 2007, according to the Auditor General. The Bank of Ceylons Rs.6bn debenture issue was fully subscribed with the issue closing 13 days ahead of schedule. The initial issue of Rs.3bn was oversubscribed on the same day of issue and was kept open for another Rs.3bn. Mercator Lines Ltd. of Singapore sought an interim injunction against Ceylon Shipping Corporation Ltd. and Lanka Coal Company (Pvt) Ltd. for the alleged wrongful termination of a contract. Seylan Bank is to raise Rs.1bn via 10m unsecured, subordinated, redeemable five year debentures with a par value of Rs.100 each with an option to issue a further 10mdebentures in the event of oversubscription. MAS Holdings is to invest $70m in the construction of an automated knitting plant at Thulhiriya.

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