Sri Lanka: Private Credit Growth Key To Banking Sector Recovery- BMI

Sri Lanka: Private Credit Growth Key To Banking Sector Recovery

Asia / Wed 06 Nov, 2024 BMI

Key View

Interest rate cuts by the Central Bank of Sri Lanka have reduced the margin boosts that commercial bank enjoyed over the last two years, and we expect  monetary policy easing to continue.  

The good news is that the economy is gradually improving, which should support credit growth and in turn banking sector profitability.

While challenges remain, the banking sector’s impairment coverage ratio and liquidity measures remain sound for now.  

Further monetary policy easing will pose a headwind to commercial banks in Sri Lanka. 

Disinflation remains well underway with the inflation rate falling to as low as -0.8% y-o-y in 

October, significantly below the target rate of 5%. In response to that, the Central Bank of 

Sri Lanka has started cutting interest rates, and we expect more cuts ahead to bring the policy

rate down to 6.0% by end-2025 from its peak of 15.5% in 2023. This will reduce the boost to 

banks’ net interest margins that they enjoyed over the last two years (see chart below).

NIM Boosts Is Diminishing Sri Lanka - Deposit/Lending Rate & 

Net Interest Margin, %

Source: Haver, BMI

The good news is that the economy is gradually improving, which should support credit growth 

and in turn banking sector profitability. GDP will rebound from a 2.3% contraction in 2023 and 

expand by 4.5% in 2024 and 4.7% in 2025 on our forecasts. We expect credit demand to come

from the private sector. Indeed, household debt has returned to growth after contracting for 

much of 2023, while the decline in corporate debt has gradually eased (see chart below). 

Amid the ongoing fiscal consolidation, these two sectors have the potential to replace the fiscal

stimulus that drove credit growth in the past year. 

NIM Boosts Is Diminishing Sri Lanka - Deposit/Lending 

Rate & Net Interest Margin, %

Source: Haver, BMI

One major hurdle to credit growth is the condition of bank balance sheets. The economic 

downturn over the last few years has led to higher credit costs and concerns over bank 

capitalisation. This may hinder the recovery in credit growth.  Moreover, state banks with 

high public sector debt exposure may come under pressure from Sri Lanka’s debt restructuring

 with key creditors, including China. In particular, reduced interest rates from such restructuring

 would affect their revenue streams. While we currently consider the upcoming September 

presidential elections tail risk, it could cause slower economic growth and delay economic 

reforms and debt restructuring under the IMF’s guidance. Such a situation will have a negative 

knock-on impact on the banking sector.

Capital Adequacy Dipped, And Elevated NPL Risks Banks' Future Capital

 Adequacy Sri Lanka - Capital Adequacy Ratio (LHC) & NPL Net Of Provision

 To Capital (RHC), %

Source: Haver, BMI

 

Another potential headwind is the recent dip in the banking sector capital adequacy ratio, even

 though it has remained well above the regulatory threshold (see LHS above). Elevated non-

performing loan (NPL) ratios, which indicate that a significant portion of loans are not 

generating income, pose additional concerns about banks’ capital adequacy. Indeed, the ratio 

of NPLs (net of provisions) to capital in Sri Lanka has risen and remains significantly higher 

compared to its neighbouring country, India (see RHS above). This points to further potential 

stress on the banking sector's capital base, as banks may have to set aside more provisions 

to cover potential loan losses.

Overall Financial Soundness Is Improving Sri Lanka - Total 

Impairment  Coverage Ratio & Liquid Assets To Short-Term

Liabilities

Source: Central Bank of Sri Lanka, BMI

For now, the banking sector’s impairment coverage ratio and liquidity measures remain 

sound (see chart above). The strengthening of the Sri Lankan rupee also reduces the burden 

of foreign currency-denominated liabilities, which account for around 20% of total liabilities. 

These factors will help to mitigate the challenges facing the banking sector. 

This commentary is published by BMI, a Fitch Solutions company, and is not a

comment on Fitch Ratings Credit Ratings. Any comments or data included in 

the report are solely derived from BMI and independent sources. Fitch Ratings 

analysts do not share data or information with BMI.⍐ 

Copyright © 2023 Fitch Solutions Group Limited. All rights reserved. 30 North Colonnade, London E14 5GN, UK.

Asia 

Sri Lanka

புதிதாக ஐந்து முதலீட்டு வலயங்கள்!

 

அத தெரண December 5, 2024

நாட்டில் ஏற்பட்டுள்ள அரசியல் ஸ்திரத்தன்மையுடன் முதலீடு செய்வதற்கு உகந்த சூழல் உருவாகியுள்ளது என ஜனாதிபதி அநுர குமார திசாநாயக்க தெரிவித்தார்.

புதிய முதலீட்டு வாய்ப்புகளை வழங்குகையில் அரசியல் பக்கச்சார்பு அடிப்படையில் சந்தர்ப்பம் வழங்குதல் போன்ற எந்தவொரு அரசியல் அழுத்தங்களும் இனிமேல் இடம்பெறாது. 

நாட்டுக்கு உகந்த தூய்மையான முதலீடுகளை நாட்டுக்குள் கொண்டு வருவதற்கான முழுச் சுதந்திரத்தை இலங்கை முதலீட்டுச் சபைக்கு வழங்குவதாகவும் ஜனாதிபதி தெரிவித்தார்.

இலங்கைய முதலீட்டுச் சபையின் உயர்மட்ட அதிகாரிகளுடன் இன்று (05) ஜனாதிபதி அலுவலகத்தில் நடைபெற்ற கலந்துரையாடலின் போதே ஜனாதிபதி இதனைத் தெரிவித்தார்.

அரசியல் ஸ்திரத்தன்மையை போலவே நாட்டுக்குள் நிதி ஸ்திரத்தன்மையையும் உறுதிப்படுத்திக்கொள்ள வேண்டுமென சுட்டிக்காட்டிய ஜனாதிபதி அநுரகுமார திசாநாயக்க, அது தொடர்பிலான பாரிய பொறுப்பு முதலீட்டுச் சபைக்கு உள்ளது என்றும் சுட்டிக்காட்டினார்.

முதலீட்டுச் சபைக்கிருக்கும் பொறுப்பை சரியாக நிறைவேற்ற அர்ப்பணிக்க வேண்டும் என்றும், நாட்டுக்கு உகந்த முதலீடுகளை கொண்டு வருவதற்கு முதலீட்டுச் சபைக்கு முழுமையான சுதந்திரம் வழங்கப்படும் என்றும் ஜனாதிபதி இதன்போது உறுதியளித்தார்.

முதலீட்டுச் சபையின் செயற்திறனை அதிகரிப்பதற்கான நிதி ஒதுக்கீட்டை எதிர்வரும் வரவு செலவுத் திட்டத்தில் பெற்றுக்கொடுப்பதற்கும், புதிதாக ஐந்து முதலீட்டு வலயங்களை அடுத்த வருடத்தில் ஆரம்பிப்பது குறித்தும் கவனம் செலுத்தியிருப்பதாகவும் ஜனாதிபதி தெரிவித்தார்.

ஜனாதிபதியின் செயலாளர் கலாநிதி நந்திக சனத் குமாநாயக்க, இலங்கை முதலீட்டுச் சபையின் தலைவர் அர்ஜூன ஹேரத், பணிப்பாளர் நாயகம் ரேணுக வீரகோன் உள்ளிட்ட அதிகாரிகள் இதன்போது கலந்துகொண்டனர்.

List of MPs who obtained liquor permits to be presented to Parliament today: Nalinda Jayatissa

 

By Ajith Siriwardana and Yohan Perera Daily Mirror 4 December 2024

Parliament, December 4 (Daily Mirror) - Claiming that investigations into MPs who had obtained liquor licenses had begun, Chief Government Whip Nalinda Jayatissa said today the list of MPs who obtained liquor permits will be presented to Parliament this afternoon.

He told this in Parliament while responding to a question raised by MP Shanakiyan Rasamanickam.

MP Rasamanickam questioned why the government is not releasing the list of MPs who obtained liquor permits.

"People must know who are the MPs who have obtained bar permits. Why is this information not being released, the MP questioned.

Chief Government Whip Nalinda Jayatissa said the list will be presented in Parliament this evening and that investigations have already begun.

German governing coalition collapses, adding upheaval in uncertain moment

German governing coalition collapses, adding upheaval in uncertain moment

Chancellor Olaf Scholz fired his finance minister and announced a confidence vote that is widely expected to fail and pave the way to early elections in the spring 

German Chancellor Olaf Scholz, left, fired Finance Minister Christian Lindner on Wednesday. (Christof Stache/AFP/Getty Images)

The Washington Post November 6, 2024 By Kate Brady

BERLIN — Germany’s governing coalition collapsed Wednesday, as Chancellor Olaf Scholz fired his finance minister and announced a confidence vote that is widely expected to fail and to pave the way to early elections in the spring.

The news from Europe’s largest economy added a huge jolt of uncertainty on a day when much of the world’s attention was focused on the outcome of the U.S. election.

“I would have liked to have spared you this difficult decision,” Scholz said at the chancellery Wednesday night. “Especially in times like these, when uncertainty is growing.”

Federal elections have been held early on only three occasions in Germany’s postwar history. And this rare event is coming as Europe prepares for a second presidency of Donald Trump, who has threatened tariffs that could severely wound the export-dependent German economy and who has raised doubts about continued U.S. support for Ukraine and European security.

Scholz’s center-left government was the first to be formed after the retirement of Chancellor Angela Merkel, who anchored European politics for 16 years. Scholz’s “traffic light” coalition — named after the colors of his Social Democrats (SPD), the Greens and the neoliberal Free Democrats (FDP) — has been in power since 2021.

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Scholz’s Social Democrats will continue as a minority government with the Greens, which will require finding parliamentary majorities on a case-by-case to pass any bills. Scholz said that parliamentary action on all but the most urgent bills would be postponed.

But it was precarious from the start. After a short-lived honeymoon on sparse common ground, ideological divisions emerged. The parties have been engaged in months of infighting — while the German economy stagnated, the coalition parties sank in public opinion polls, and the far-right Alternative for Germany (AfD) party drew historic gains in state elections.

It was a budget fight that ultimately brought everything down.

To fill big gaps in next year’s budget, Scholz’s SPD and the Greens have favored state- and debt-financed policies. The FDP, though, is an ardent proponent of the “debt brake.” Enshrined in the constitution, designed to force balanced budgets, the debt brake can be suspended only in exceptional circumstances — most recently in response to the coronavirus pandemic and Russia’s 2022 invasion of Ukraine.

Scholz said Wednesday that FDP leader and Finance Minister Christian Lindner had been dismissed after rejecting economic proposals.

“The finance minister shows no willingness to implement the offer for the good of our country. I do not want to subject our country to such behavior any more,” Scholz said, visibly irritated.

“There is no basis of trust for further cooperation,” he continued. “Serious government work is not possible like this.”

Scholz alleged that “Lindner only cares about the survival of his own party.”

Speaking soon after, Lindner shifted blame to the chancellor.

“Olaf Scholz has played down the economic concerns of the citizens,” he said. “His counterproposals are dull, unambitious and do nothing to combat the weak growth.”

Lindner said he could not agree to Scholz’s demand to suspend the debt brake and had proposed fresh elections, which Scholz “brusquely rejected.”

Scholz said publicly Wednesday that he would submit to a vote of confidence in Germany’s lower house of parliament on Jan 15.

“Members of the Bundestag can then decide whether to clear the way for early elections,” he said.

But with his personal approval ratings at rock bottom, Scholz’s chances of gaining sufficient parliamentary support for continued leadership are slim.

If the confidence vote fails, Scholz would then be in position to formally ask President Frank-Walter Steinmeier to dissolve the Bundestag within 21 days, after which elections must be held within 60 days.

Elections in March or early April would be half a year earlier than planned.

The German government now enters a period of near paralysis. Scholz’s Social Democrats will continue as a minority government with the Greens, which will require finding parliamentary majorities on a case-by-case to pass any bills. Scholz said that parliamentary action on all but the most urgent bills would be postponed.

Ahead of the breakup, Economy Minister Robert Habeck of the Greens said it would be the worst time to let the coalition collapse, in view of the U.S. election and the war in Ukraine.

But patience among voters has also worn thin. A poll last week by Infratest dimap on behalf of German broadcaster ARD found that 54 percent of people surveyed would like to see early elections. The same survey also found that 85 percent of respondents were “little” or “not at all satisfied” with the government.

In national polls, Scholz’s Social Democrats are in third place around 15 percent, behind the conservative Christian Democratic Union (CDU) and far-right AfD, with the Greens in fourth position around 11 percent. If elections were held today, Lindner’s FDP might not even make it over the 5 percent threshold required to hold seats in parliament.⍐

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By Kate Brady

Kate Brady is a researcher and reporter based in The Washington Post's Berlin bureau. She has been at The Post since early 2023 and has been reporting from Germany for the best part of a decade