Reducing Sovereign Stresses Will Support Sri Lankan Banks' Credit Profiles: Fitch Ratings

COLOMBO (News 1st); Fitch Ratings has stated that the easing of sovereign stresses in Sri Lanka will help improve the credit profiles of the country’s banks.

Fitch said, ''Sri Lankan banks' operating environment (OE) assessment and overall credit profiles will be supported by any improvement in the sovereign's credit profile (Long-Term Foreign-Currency IDR: RD, Long-Term Local-Currency IDR: CCC-) following a completed debt restructuring.''

The ratings agency noted that improving macroeconomic conditions and fiscal reforms are expected to stabilize the banking sector in the near future.

According to Fitch, the Sri Lankan banking sector has faced significant pressures due to the country's economic challenges in recent years. However, with the reduction of sovereign risks, including lower external debt pressures, the outlook for the banks has begun to stabilize.

Fitch also highlighted that the improvements in fiscal policy, coupled with a more stable currency and inflationary pressures under control, will provide a favorable environment for the banks to strengthen their credit profiles.

While acknowledging the progress, Fitch emphasized that ongoing structural reforms and continued fiscal discipline will be key to sustaining the positive momentum in the country’s banking sector.

Fitch said, ''Sri Lanka is close to completing its foreign-currency debt restructuring. A successful outcome, in line with the proposed framework for local bondholders, would be likely to significantly reduce the challenges faced by banks, improving their financial profiles. Pressures on foreign- and local-currency funding and liquidity have eased considerably due to better external sector flows and the banks' efforts to preserve liquidity. We expect banks to regain access to foreign-currency wholesale funding, following the restoration of the sovereign’s creditworthiness.''