ICRA Lanka expects strong private credit growth in March

• But cautions on  external sector vulnerabilities, rising inflation 

ICRA Lanka Limited yesterday said private sector credit is likely to have expanded at similar pace or faster in March, after a spurt in private credit in February, which defied its earlier expectations. 

Releasing its latest regular publication on the economy, the rating agency turned upbeat about the prospects of the economy as seen from the recent high-frequency data, showing continued expansion in domestic economic activity. 

However, it cautioned of the signs of rising inflation and the external position of the 
country as potential caveats. ICRA Lanka often takes a view on the private sector credit, interest rates, inflation and the general trajectory of the economy in its Monthly Economic Update. 

“Credit growth in February exceeded our expectations,” the rating agency said, making reference to its earlier forecast made on the likely pace of credit, ahead of February, which turned out to be a stellar month. 

However, it yesterday forecasted March to have delivered a “relatively stronger” credit expansion, due to businesses’ want of additional liquidity to ratchet up production as well as to stockpile the produce ahead of what turned out to be a red-hot New Year season this year. 

“… manufacturing, plantations and trading businesses operate above average capacity during March, which may increase their working capital intensity, leading to a temporary spike in borrowings,” ICRA Lanka said explaining its reasons for the upbeat projection for credit.According to preliminary data, Sri Lanka has had one of the most vibrant consumer spending spells ahead and during the traditional Sinhala and Tamil New Year, where people engaged in what is referred to as ‘revenge spending’, after more than a year of being told to hunker down.

Meanwhile, the reserve money also increased in March, recording the strongest year-on-year expansion since April last year, propelled by the growth in currency in circulation and the deposits held by commercial banks with the Central Bank. 

“Generally, currency in circulation expands ahead of festive seasons,” ICRA Lanka observed. 

However, the rating agency raised concerns in the areas of the country’s external sector, which has come under pressure since of late and the inflation, which spiked in March, which are reflected in the recent increases in the treasuries’ yields.  The rupee/dollar exchange rate touched a new record low last Thursday, before regaining on Friday, after the country took receipts of the US $ 500 million loan from China Development Bank. The rupee gained drastically against the dollar yesterday, with the dollar selling rate recorded at Rs.191.97.

The inflation hit 4.1 percent in March, rising from 3.3 percent in February, predominantly driven by food prices, which rose by nearly 10 percent from a year ago. 

“… banks and investors will keep a close tab about the external position of the country. Markets seemed to be alarmed about likelihood of rising inflation and may keep factoring it in treasury yields,” ICRA Lanka concluded.