Sri Lanka among highest-risk financial systems: Fitch

Dec 23, 2011 (LBO) - Rapid credit growth and rising asset prices has put Sri Lanka among the highest-risk financial systems, according to a new report by Fitch Ratings which has cut its growth forecast for emerging Asia.

The report on the Asia-Pacific sovereign credit outlook said there were growing concerns about bank credit in the region.

"While many advanced economies “de-lever”, the speed of credit growth and rising asset prices has led to Asia-Pacific harbouring four of the world’s nine highest-risk financial systems," Fitch said.

"Hong Kong and China were joined by Indonesia and Sri Lanka in the December 2011 assessment, although Vietnam dropped out as credit growth eased."

Fitch upgraded Sri Lanka’s long-term foreign-currency rating to ‘BB−’ with a stable outlook from ‘B+’/Positive in July 2011.

The move reflected the "stabilisation and recovery of the economy under the authorities’ IMF programme and efforts to consolidate the chronic budget deficit," Fitch said.

"However, foreign direct investment has been surprisingly slow to recover after the end of the country’s long civil war in 2009, and the authorities devalued the Sri Lankan rupee by three percent in November 2011.

"Structural reforms to support longer-term growth prospects combined with further fiscal consolidation efforts would increase Sri Lanka’s chances of moving further up the ratings scale."

Fitch said that strong and improving external balance sheets buffer most of emerging Asia from ongoing volatility in global investor risk appetite.

"India and Sri Lanka are the only Fitch-rated emerging Asian countries to run deficits on “basic balance” (the current account plus net foreign direct investment)," the report said.

"This structural weakness may help explain why the Indian rupee fell to a record low against the US dollar in December 2011, while Sri Lanka devalued its currency in November."

Asian economies were not immune from the financial crises in the industrialised countries.

Fitch has cut its forecast for emerging Asia’s 2012 growth to 6.8 percent for 2012, from 7.4 percent estimated in June 2011.
"This reflects both the deterioration in the outlook for the world economy and the lagged impact of policy tightening in some countries, including the region’s two giants, China and India," the report said.
"Both China and India face a combination of slowing activity and stubbornly high inflation, underlining the risks that can arise from allowing inflation to rise above desired ranges."