Private sector credit growth could stay at desired levels despite policy tightening: FCR

• Says strong private credit numbers provide assurance of economic recovery 
• Upgrades growth forecasts to 4% this year and to 4.3 in 2022

Credit to the private sector from licensed commercial banks could stay at the desired direction during 2021  and potentially transcending into 2022 despite some easing in the next couple of months as the private sector’s thirst for credit is unlikely to wane much from monetary tightening, First Capital Research (FCR) opined. 

The pace of private sector credit is an important barometer of how dynamic the country’s economy and its actors - consumers, businesses and investors are going to be. During the first seven months, such credit flows have broadly stayed steadily high despite virus-induced disruptions to the economy.

“The accelerated credit growth situation is likely to slow down over the next 2-3 months with the negative liquidity situation in the country,” wrote Dimantha Mathew, the Head of Research at FCR in their mid-year outlook report for 2021 released recently. 

“However, we believe the private sector credit growth target of 12 percent can be reached for 2021E”, he added.  
According to the data available through July 2021, licensed commercial banks had expanded their total outstanding private sector credit by Rs.76.6 billion in the month, logging a robust 14.3 percent growth in private sector credit from a year ago levels, well above Central Bank’s 12.0 percent target for the year and accelerating from 12.9 percent recorded in June 2021.

In the first seven months, such credit on a cumulative basis grew by Rs.491 billion, surpassing the total private sector credit of Rs.374.1 billion in the whole of 2020 and Rs.235.5 billion extended in 2019, reflecting key economic health gauge is well on course to either match or surpass the year end target for 2021.

FCR also expressed its confidence over its ability to repeat a similar performance even in 2022 by recording a 12 percent sustained growth, despite the multiple rounds of likely monetary policy tightening - one pinned for this year and anther two pinned for the first half of next year. 

The Central Bank on August 19 raised its key policy rates by 50 basis points followed by a 200 basis points increase in the banks’ mandatory reserve ratio to absorb part of overnight market liquidity with the hope of alleviating recent anomalies in the foreign exchange market and to pre-empt any sustained inflationary pressures. 

Besides that, FCR forecasts another possible rate hike during the remainder of 2021 and further two rate hikes during the first half in 2022 in response to, “extremely weak economic indicators”.  

“In addition, we maintain that credit growth is likely to remain around the 12 percent mark in 2022E as well with bulk of the growth likely to take place during 1H2022”, Mathew said.

FCR last week upgraded its forecast for Sri Lanka’s Gross Domestic Product to 4.0 percent in 2021 and further up to 4.3 percent levels in 2022, from its earlier forecasts of 3.2 percent and 3.8 percent respectively for the two years.