Sri Lanka growth to slow down from estimated 3.5 % in 2020: Fitch
View(s):Fitch Ratings has revised Sri Lanka’s banking sector outlook for 2020 to negative as the coronavirus pandemic poses increased risks to the anticipated expansion in the economy and credit demand, which will adversely affect the performance of the banks.
Operating conditions are more challenging, affecting asset quality and profitability recovery. This will add to rating pressure as the rating ‘Outlook’ for the Sri Lankan banking sector is already ‘Negative’ following the revision in Sri Lanka’s sovereign rating in December 2019, the rating agency said this week in a media release.
Fitch expects to perform a complete review of all ratings assigned to Sri Lankan banks in the near term, which will include an assessment of the likely impact.
“We believe the pandemic could cause considerable disruptions to key economic sectors such as services, which accounted for 59 per cent of nine-month real GDP at end-September 2019, through its impact on sub-sectors such as trade, transportation, tourism and manufacturing (16 per cent of real GDP), and hamper our previously anticipated pickup in economic activity. We now expect Sri Lanka’s GDP growth to slow significantly from our original estimate of 3.5 per cent for 2020, after provisional growth of 2.8 per cent in 2019,” it said.
Fitch believes demand for credit will remain muted in 2020 due to the weaker economic growth outlook despite the multiple policy rate cuts by the central bank – 50bp in late January 2020 and another 25bp in March 2020 – along with a 1 per cent reduction in statutory reserve requirements (SRR).
It said that any prolonged impact of the virus will intensify the asset quality pressure the banks are already facing, with the sector regulatory non-performing loan (NPL) ratio rising to 4.7 per cent by end-2019 from 3.4 per cent in 2018 even as the regulator and the government continued to announce policies to stimulate the economy.
The banking regulator, following an order from the Sri Lankan president, directed banks to implement a debt moratorium on capital plus interest for six months for businesses in several sectors affected by the coronavirus. “This may soften the impact in the near term, but we now expect the sector NPL ratio to rise in 2020,” it said.
The series of expansionary monetary policy measures adopted by the regulator since April 2019 will lead to margin pressure through lower interest rates and subdued credit demand. Fitch believes that this, together with high levels of provisioning and credit losses, will negate the benefits to banks’ profitability from lower taxes announced last year.