SL’s economy likely to grow by just 2 % in 2022, Fitch says

Sri Lanka's economic performance is expected to weaken in 2022, forecasting growth to slow to 2 per cent although downside risks to forecasts remain, Fitch Ratings said in a report on Thursday.

It said that Sri Lankan banks are likely to face continued asset- quality pressure in 2022 as rising macroeconomic stresses stemming from the sovereign credit profile pose a threat to borrowers' repayment capacity, alongside the conclusion of most relief measures in 2021.

Fitch- rated banks' stage 3 ( impaired) loans ratio has remained broadly unchanged since 2019 ( 9M21: 9.4 per cent, 2019: 9.5 per cent), as relief measures prevented deterioration in lending quality. However, asset- quality pressure was evident in elevated loan impairment charges and a rising share of stage 2 loans in gross loans. The share of loans under moratorium at Fitch- rated banks declined, estimated at 10 per cent of gross loans at end-September 2021 (end-1H20: 26 per cent).

Fitch said stage 3 loans are likely to increase in 2022 but a sharp rise in the ratio may not be apparent due to robust loan growth. Credit costs are likely to remain high, although below 2021.

“We believe Sri Lankan banks face added asset-quality pressure from their government securities holdings, particularly those denominated in foreign currency which accounted for around 6.5 per cent of Fitch- rated banks' total assets at end-9M21,” the statement said.