LNP – Moody’s upgrades Sri Lanka’s rating to Caa1; outlook stable

• Assigns definitive Caa1 ratings to new USD-denominated issuances

Global rating agency, Moody’s yesterday upgraded the Government of Sri Lanka’s Long-Term Foreign Currency Issuer Rating to Caa1 from Ca. The outlook is stable.Â

Previously, the rating was on review for upgrade.

It said the decision to upgrade the issuer rating to Caa1 is driven by the conclusion of the restructuring of Sri Lanka’s international bonds held by private sector creditors, which reduces the default risk on new and future issuances.Â

At Caa1, Moody’s noted that Sri Lanka’s credit profile reflects the reduction in external vulnerability and Government liquidity risk and prospects for fiscal and debt sustainability from a weak starting point, which are underpinned by ongoing reforms under the Government’s programs with development partners including the International Monetary Fund (IMF). Willingness and capacity to implement reforms speak to Sri Lanka’s governance and also underpin the rating action.Â

However, these credit supports are balanced against still weak debt affordability and a high debt burden compared to peers, which limit the Government’s fiscal flexibility and capacity to address underlying social challenges.

Moody’s said the stable outlook reflects balanced risks to the ratings. On the upside, it noted the Government’s commitment to and continued implementation of reforms may strengthen its credit profile beyond current assumptions, to a level consistent with a higher rating. On the downside, the rating agency opined the still narrow Government revenue base and limited fiscal space, combined with the reliance on external financing, pose asymmetric risks to the credit profile should the global macroeconomic environment become less supportive for a sustained economic recovery and further reform implementation.

“This rating action concludes the review that we initiated on 28 November 2024. Concurrently, we have assigned definitive Caa1 foreign currency senior unsecured ratings to Sri Lanka’s new USD-denominated issuances, specifically Macro-Linked Bonds (MLBs), the Governance-Linked Bond (GLB), as well as the step-up and Past-Due Interest (PDI) Bonds, from provisional (P)Caa1 ratings. We have also withdrawn the Ca foreign currency senior unsecured rating on Sri Lanka’s July 2022 Bond, of which $ 268 million remains outstanding after the settlement of Bonds in the Government’s exchange offer, for business reasons,” it added.

Moody’s…

Sri Lanka’s local and foreign currency country ceilings have been raised to B1 from Caa1 and B3 from Ca, respectively. The three-notch gap between the local currency ceiling and the sovereign rating balances a contained Government footprint, against still relatively limited but increasing foreign exchange buffers that confer macroeconomic risks, as well as a challenging domestic political and policymaking environment due to underlying social pressures. The two-notch gap between the foreign currency ceiling and local currency ceiling takes into consideration the high level of external indebtedness, although the rebuilding of foreign exchange buffers is reducing the risk of transfer and convertibility restrictions.