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“ . . . weakening asset quality is keeping credit costs high, in turn pressuring profitability,” said the report.
Moody’s expects the government’s capacity to support banks will be limited given its large amounts of external debt and contingent liabilities.
Fundamental risks to Sri Lanka’s economy remain significant, given its twin trade and budget deficits and the government’s high reliance on external debt, Moody’s Investors Service said in the new report.
It projects Sri Lanka’s economic growth will slow to 2.6 percent in 2019 from 3.2 percent in 2018 on declining tourist arrivals,
“Asset quality will weaken amid sluggish economic conditions,” Moody’s said.
The slow recovery in the tourism and related sectors after April’s suicide bombings is resulting in subdued economic growth.
“Tourist arrivals declined sharply following the Easter Sunday attacks in Sri Lanka, but have started recovering and should support an improvement in GDP growth in 2020,” said Tengfu Li, a Moody’s analyst.
Political risks could also resurface, with presidential and parliamentary elections scheduled for late 2019 and 2020, the report noted.
Previous bouts of political instability having triggered significant capital outflows and currency depreciation.
“Weak economic growth will in turn result in deteriorating asset quality, also on the back of excessive credit growth in recent years,” said Li.
However, bank loan growth has moderated, which should help keep capitalization stable and also ease funding pressure.
(COLOMBO, 30 August 2019)