BI-

Gradient Alliance

Bi-Monthly Bulletin, February & March 2012

In Economic news:

The Central Bank downgraded its economic growth forecast for

2012 to 7.2% from its previous estimate of 8.0%, citing slower credit growth, higher energy expenditure and lower imports through reduced economic activity. These measures were geared towards reducing the $10bn trade deficit. Further measures included an increase in import taxes on vehicles. The Sri Lankan rupee continued to slide as the Central Bank stopped defending the currency and state banks curtailed its dollar sales. S&P citing falling foreign reserves and fiscal problems lowered its outlook on Sri Lanka's 'B+' long-term foreign currency sovereign credit rating to stable from positive. Inflation rose to 5.5% in the 12 months to March 2012 up from 2.7% in February, with non-food items rising 4.0%, housing gas and fuels rising 4.3% and transport rising 9.6%.

In Business news:

The

tea

industry was impacted by union unrest and turmoil in Iran, Libya, Iraq and Syria. Overall tea exports declined by 7% in the month of February compared to the previous year. The CPC raised fuel prices causing a rise in bus fares, an introduction of a fuel surcharge on electricity tariffs and price increases on durable and non-durable goods. Further, the Association of Container Transporters was discussing a 26% rise in their charges to transport goods. During the two months of February and March 2012 the Colombo All share Index lost 4.8%.

In Consumer news:

Total vehicle population rose 13.3% YoY to approximately 4.5

million vehicles in 2011 as import restrictions were relaxed during the year; new vehicle registrations rose staggering 46.5% to 526,421. The Nielsen Consumer Confidence Index dropped to 77 in February 2012 from 85 in January 2012. The index revealed that job prospects and personal finances were significantly stated as "not so good" for the next 12 months.

Economic News
The Central Bank (CB) downgraded its economic growth forecast for 2012 to 7.2% from its previous estimate of 8.0%, citing slower credit growth, higher energy expenditure and lower imports through reduced economic activity. The CB asked commercial banks to limit credit growth to 18% in 2012 from over 34% in 2011. Higher credit growth had contributed to a record trade deficit of $10 billion. To this effect CB raised repo and reverse repo rates by 50bps.

Gradient Alliance Bi-Monthly Bulletin, February & March 2012

Source: Central bank of Sri Lanka

However in recently released CB data, state borrowings from banks rose to a historic high (Rs.73.7 million) in January 2012, offsetting credit to private business which fell to Rs.44.6 billion in January 2012 against Rs.60.2 billion in December 2011. CB data also showed that total credit to the government from the banking system increased 53.3% to Rs.926.8 billion by end January 2012 from Rs.833.6 billion in December 2011. Standard & Poor's Ratings Services lowered its outlook on Sri Lanka's 'B+' long-term foreign currency sovereign credit rating to stable from positive, citing falling foreign reserves and fiscal problems. S&P said the stable outlook reflects strong growth prospects but that high debt levels and budget deficits are concerns. Sri Lanka's B+ foreign currency rating was confirmed. Moreover, S&P also downgraded Sri Lanka's long-term local currency rating to 'B+' from 'BB-', whilst affirming the 'B' short-term local currency rating. Inflation rose to 5.5% in the 12 months to March 2012 up from 2.7% in February, with nonfood items rising 4.0%, housing gas and fuels rising 4.3% and transport rising 9.6%. Moreover, a revision to LP gas prices is being discussed, as Laugfs and Litro having made a request to the Consumer Affairs Authority to increase the price of a 12.3kg gas cylinder by Rs.209 and Rs.175 respectively. Previously, a request by the leading milk importers to increase the price of milk powder by Rs.35 was rejected by the Authority. The rupee declined to 128-130 against the dollar compared to 110 levels of the previous year (a drop of 14%) as the government relaxed its hold on the exchange rates, in order to reduce imports. However this impact is to be limited as petroleum accounts for 23% of total imports (as of 2011) and its demand is seen as inelastic. The price of crude oil continued to steadily rise due to the unrest in Syria and Iran (Brent crude oil prices have risen 13.1% year to date), further impacting the countrys trade deficit.

Bi-Monthly Bulletin, February & March 2012

Business News

Gradient Alliance

Bi-Monthly Bulletin February & March 2012

The tea industry was impacted by union unrest and turmoil in Iran, Libya, Iraq and Syria (accounting for about 55% of the total tea exported). Tensions in Iran caused restrictions being placed on tea exporters access to export revenues. Iran has delayed payments for past exports as the country struggles to deal with US sanctions and a lack of access to foreign currency. Sri Lanka annually exports between 25-30 million kg of tea to Iran (about 10-12% of total exports). Overall tea exports declined by 7% in the month of February compared to the previous year. At the same time, we witnessed a marginal decline of 1% in the average price per kg, which stood at Rs.502.7 in February.

In February the Ceylon Petroleum Corporation (CPC) raised fuel prices as high world crude oil prices and an IMF loan disbursement condition of reducing state subsidies left the government with little choice. CPCs forecasted expenses of Rs.179 billion and forecasted revenue of Rs.146 billion, resulting in a loss of Rs.23 billion for 2012. However increasing world oil prices will push forecasted costs to Rs.218 billion; thus CPC hoping to recover a portion of the loss through YoY the fuel price hike. Rs. Feb-11 Feb-12
Change Kerosene Oil Petrol Diesel Gas Avg. Lt Lt Lt 51 115 75.5 1,604 106 149 115 2,046 107.8% 29.6% 52.3% 27.6%

The ripple (selected):

effect

was

as

follows

a) Bus fares were revised, with minimum fare increasing to Rs.9 from Rs.7.

b) Ceylon Electricity Board (CEB), generating approximately 85% of the countrys electricity need by thermal power introduced a fuel surcharge on electricity tariffs. It is estimated that more than 78% of electricity consumers would have to pay an additional 40% following the price revisions. c) Construction industry expects construction costs to increase about 16-18% as most construction material is imported.

Bi-Monthly Bulletin, February & March 2012

Business News
During the two months of February and March 2012 the Colombo Stock market lost 4.8%. Inconsistent fiscal policies and monetary policies were keeping local investors away. However foreign buying had increased. The worst performing sectors in the two months were IT (-25.9%), footwear and textile (23.0%) and Motors (-21.9%).

Gradient Alliance

Bi-Monthly Bulletin February & March 2012

The LMD - Nielsen Business Confidence Index rose three points to 154. The index was measured at the beginning of February thus not reflecting fuel price hikes and the S&P ratings downgrade that occurred during the month.

Bi-Monthly Bulletin, February & March 2012

Consumer News
Total vehicle population rose 13.3% YoY to 4.5 million vehicles in 2011. 2011 was a record year as the number of new registrations increased to 526,421, a growth of 46.5% compared to 2010. In a bid to control dollar outflows the Finance Ministry increased automobile taxes in March 2012; 1. 2. 3. 4. 5. 6. 7. 8. 9. Previous (%) Cars P 120-189 Cars - D 180-191 Vans - P 103-172 Vans - D 112-291 3heelers - P 51 3 Wheelers - D 61 3 Wheelers Elec. 27 D/cab trucks 93-110 Motor cycles 61 Revised (%) 189-275 250-350 125-200 125-350 100 100 50 150 100

Gradient Alliance

Bi-Monthly Bulletin February & March 2012

Depreciating currency is likely to further curtail demand for vehicles. Prior to March tax increases, industry experts had expected vehicle sales to grow only 8-10% in 2012. Further, the increase of lease and hire purchase rates would also add to the woes of the industry. The Nielsen Consumer Confidence Index dropped to 77 in February 2012 from 85 in January 2012. The index revealed that for the next 12 months job prospects and personal finances were stated as "not so good" (Job prospects: Jan -33, Feb 56, Personal finance: Jan 57, Feb 71). Mobile penetration rates reaches 90% in December 2011. According to Telecommunications Regulatory Commission, as of December 2011, there were 18,319,447 mobile subscribers in Sri Lanka, a growth of 6.1% compared to the previous year, which is however low compared to the growth that occurred in 2010 (21.0%). High level of penetration is from a reduction in handset rates and tariffs as industry players attempt to gain market share. Internet subscriber continued to increase as improved awareness and price of connectivity continued to come down. According to latest figures, as at June 2011 the internet and email subscriber penetration was 1.5% at 323,000 subscribers. Mobile internet and email subscribers were over 485,000, a significant growth of 431% compared to its introduction in 2009.

Bi-Monthly Bulletin, February & March 2012

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Bi-Monthly Bulletin, February & March 2012