Debt moratorium for SMEs' to affect Sri Lanka: Moody's

Colombo (News 1st): Moody’s Investor Services has warned that the debt moratorium for small and medium enterprises will negatively pressure Sri Lankan banks’ asset quality and is unlikely to help the current economic recovery. In a report, Moody's said “The debt moratorium is credit negative for Sri Lankan banks and the sovereign because it risks increasing SMEs’ risk appetite and relaxing their attitude toward debt repayments. This, in turn, will undermine banks’ asset quality and constrain the sovereign’s credit profile,”. Moody’s, which maintains a B2/stable rating on Sri Lanka, believes that the moratorium could increase SMEs’ risk appetite and relax their attitude towards debt repayments. The rating agency also said the debt relief is unlikely to lead to a sustained acceleration in economic activity similar to the sweeping tax cuts announced by the new government in November, last year. Moody’s noted that the scope of this debt moratorium is much wider than last year’s moratorium for the tourism sector, given that the SME loans constitute a significant part of the banking system’s gross loans. We expect a strengthening tourism sector to drive continuous and gradual economic recovery in 2020, with real GDP growth picking up to 3.4% from the 2.6% we expect for 2019. We do not expect the SME debt relief package or the broad-based tax cuts to significantly boost demand.