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Sri Lanka banks readying for external pressure as ‘stimulus’ trigger downgrades

ECONOMYNEXT – Sri Lanka’s banks which have borrowed abroad could face greater pressure from foreign lenders amid credit downgrades, a senior banker said as the first sovereign rating cut following a fiscal and monetary ‘stimulus’.

Rating agencies warned the country above its weakening debt repayment ability as taxes were slashed in January in a ‘fiscal stimulus’ in a growth short-cut to try and boost growth after an output shock from a currency in 2018 which came from rate cuts and liquidity injections.


After policy rates were cut in January 2020 and large volumes of money was printed in a ‘monetary stimulus’ in March hitting a dollar soft-peg a amid a Coronavirus crisis and Fitch Ratings downgraded the country’ ‘B’ speculative grade credit to ‘B-‘, or a notch above ‘CCC’.

Hatton National Bank, Sri Lanka’s second largest private bank by assets said it was ready to meet any heightened concerns from lenders on rollover of its foreign loans.

“We are actually making sure that we have enough funds to make all our repayments on the due date, just in case we are unable to negotiate anything different,” Hatton National Bank chief executive, Jonathan Alles told in an online forum organized by the Advocata institute, a Colombo based think tank.

“In this regard the rating .. matters because these are including in our loan structures.

“It has an impact on our borrowing and our ability to borrow in the future and for the borrowing cost as well.”

He said sovereign ratings and performance indicators were built into some loan covenants.

Many Sri Lanka banks have borrowed abroad, sometimes from oil rich Middle Eastern countries, which are also facing pressures due to low oil prices with state revenues also collapsing.





Difficult Questions

Foreign lenders were also questioning the lack of state support for Sri Lanka’s banks.

“We try our best to explain but, they all come from countries where there has been tremendous government support like 30 percent or 15 percent GDP is being allocated as stimulus in to the economy
to support SME s and various others” Alles said.

“When you get a UK investor or someone coming from Singapore this is a bit challenging.

“And they are also very concern about the moratoriums we are granting, there impact on profitability more importantly sustainability of the business and the industry and the ability for the banks to continue.”

Singapore, which does not print money as part of its economic strategy based on classical economics, is using foreign reserves buffer to fund a deficit in 2020, without hurting the exchange rate or monetary stability.


Sri Lanka prints more money as rating downgraded to just above CCC

Sri Lanka sovereign rating downgraded to ‘B-‘ by Fitch, outlook negative

Sri Lanka economy to contract 1.0-pct in 2020, banks to under pressure from Coronavirus: Fitch

In Sri Lanka banks have been asked to take on part of Coronavirus credit measures.

Banks were also asked to provide a credit moratorium as part of the January ‘stimulus’ that raised the original concerns among investors and rating agencies about the country and the banking system.

The central bank has relaxed some loan loss and provisions and capital rules to help bank.

“We believe the banks’ funding and liquidity profiles could come under pressure if access to foreign-currency funding becomes more challenging given the deterioration in the sovereign credit profile, or if there is a flight to quality, which could affect banks with weaker domestic franchises,” Fitch Ratings said.

Forward premiums in Sri Lanka’s forex markets are also fell as the rupee rates fell as money printing depressed short term domestic rates and hit the currency making it difficult to raised dollars driving domestic dollar interest rates up.

Some investors who bought Sri Lanka Development Bonds, had been unable to rollover their borrowings amid continued monetary instability and stimulus, leaving auctions unsubscribed, market sources said. (Colombo/ May 05/2020)

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