Sri Lanka is among the highest-risk financial systems in Asia’s emerging markets, said a report by a credit ratings agency, citing the rapid growth in credit.
"Hong Kong and China were joined by Indonesia and Sri Lanka in the December 2011 assessment [of high-risk financial systems], although Vietnam dropped out as credit growth eased," said a report by Fitch Ratings.
The higher credit leveraging by banks and growing asset prices were cited as reasons for the revised risk warning.
Though Fitch upgraded Sri Lanka’s credit rating in July 2011, the agency ended the year warning that “foreign direct investment has been surprisingly slow to recover after the end of the country’s long civil war in 2009.”
Fitch also expressed concern about the devaluation of the Sri Lankan rupee in November 2011.
"India and Sri Lanka are the only Fitch-rated emerging Asian countries to run deficits on “basic balance” (the current account plus net foreign direct investment)," the report said.
"This structural weakness may help explain why the Indian rupee fell to a record low against the US dollar in December 2011, while Sri Lanka devalued its currency in November."
Fitch Ratings also cut its growth forecast for emerging Asia, citing the impact on the region of the global financial crisis.
The growth forecast for 2012 is now 6.8%, down from 7.4% estimated in June 2011.
The region includes China, India, Indonesia, Korea, Malaysia, Mongolia, Philippines, Sri Lanka, Taiwan, Thailand and Vietnam.
"This reflects both the deterioration in the outlook for the world economy and the lagged impact of policy tightening in some countries, including the region’s two giants, China and India," the report said.
"Both China and India face a combination of slowing activity and stubbornly high inflation, underlining the risks that can arise from allowing inflation to rise above desired ranges."