Debt moratorium for SMEs unlikely to support SL’s economic recovery :Moody’s
View(s):The Government’s debt moratorium is credit negative for Sri Lankan banks and the ‘sovereign (status)’ because it risks increasing SMEs’ risk appetite and relaxing their attitude toward debt repayments, rating agency Moody’s said this week.
This in turn will undermine banks’ asset quality and constrain the sovereign’s credit profile, it said in a statement, referring to the January 13 announcement by the Central Bank in issuing guidelines on the debt moratorium for small and medium enterprises (SMEs).
The scope of this debt moratorium is much wider than last year’s moratorium for the tourism sector given that SME loans constitute a significant part of the banking system’s gross loans, it said.
“Among the banks we rate, we expect the moratorium will most affect Hatton National Bank Ltd and Sampath Bank PLC given that SME banking is one of their core businesses. Meanwhile, Bank of Ceylon will be least affected because its loan book is largely exposed to state-owned entities and large domestic corporates, the statement said.
The asset quality of Sri Lankan banks has deteriorated in recent years, a result of a weak domestic economy and excessive loan growth prior to 2017. The debt moratorium will help slow the banks’ non-performing loan formation this year, but Moody’s anticipate an increase in bad debts when the grace period ends, especially if the domestic economic conditions remain weak.
These latest SME relief measures are the second major set of economic stimulus measures announced by the current administration since it took office at the end of last year. “However, similar to our expectation on any macroeconomic benefits from the tax cuts announced for businesses and households, they are similarly unlikely to lead to significant and sustained acceleration in economic activity, despite SME activity across various sectors comprising around half of Sri Lanka’s gross domestic product and employment. Any short-term boost to economic activity will depend jointly on SMEs uptake for working capital support and banks’ additional lending because of the aggregate measures.
“We expect a strengthening tourism sector to drive continuing and gradual economic recovery in 2020, with real GDP growth picking up to 3.4 per cent from the 2.6 per cent we expect for 2019. We do not expect the SME debt relief package or the broad-based tax cuts to significantly boost demand.”
According to the Central Bank’s guidance, the moratorium will not apply to import credit facilities, with the exception of those for machinery and equipment. As such, Moody’s do not expect that the most export-oriented SMEs will receive a significant benefit from this relief package because of the weak external environment.
The SME debt relief package will also include a joint credit guarantee scheme formed by the government and the Central Bank, which will provide guarantees up to 75 per cent of the gross loan amount for those SMEs with nonperforming loans. “Because banks will be charged a 1 per cent per annum guarantee fee, we do not expect this guarantee programme to result in any fiscal cost for the government,” Moody’s said.