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    Sri Lanka Foreign Currency Ratings Raised To ‘CCC+/C’ From ‘SD’; Outlook Stable

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    Sri Lanka Foreign Currency Ratings Raised To ‘CCC+/C’ From ‘SD’; Outlook Stable

    Sri Lanka Foreign Currency Ratings Raised To ‘CCC+/C’ From ‘SD’; Outlook Stable

    S&P Global Ratings announced today (September 19) that it has raised Sri Lanka’s long- and short-term foreign currency sovereign credit ratings to ‘CCC+/C’ from ‘SD/SD’.

    The agency also affirmed the country’s long- and short-term local currency ratings at ‘CCC+/C’. The outlook on both foreign and local currency ratings has been set at stable, while the transfer and convertibility assessment remains at ‘CCC+’.

    The stable outlook reflects expectations of Sri Lanka’s ongoing economic recovery, supported by fiscal reforms and external improvements. However, S&P Global warned that the country still faces challenges from high debt levels and a heavy interest burden over the next one to two years.

    Possible Risks

    According to the agency, ratings could be lowered if renewed funding or liquidity pressures emerge. Triggers for such a downgrade could include a sharp rise in inflation, a higher government interest burden, or weaker fiscal performance leading to funding stress.

    On the other hand, ratings could be upgraded if Sri Lanka shows stronger economic growth and deeper progress in fiscal and external improvements, which would strengthen its ability to manage its large debt stock.

    Rationale for Upgrade

    S&P Global said the upgrade reflects Sri Lanka’s progress in restructuring its remaining commercial debt, including government-guaranteed SriLankan Airlines bonds. This follows the country’s exchange of most Eurobonds in December 2024. Negotiations on SriLankan Airlines debt began earlier this year, with the government offering terms comparable to other external creditors.

    While there is a possibility of holdout creditors, the agency noted that this is unlikely to derail the broader debt restructuring process, as the restructured bonds include clauses ensuring comparability of treatment and protection for most-favored creditors.

    Supporting Factors and Challenges

    The upgrade is underpinned by Sri Lanka’s strong economic recovery, rapid fiscal consolidation and reforms under the IMF program, growth in foreign exchange reserves, improvements in the external position, and progress in reducing risks from state-owned enterprises.

    However, these positives are offset by the very high debt burden, as domestic commercial debt was largely excluded from the restructuring, and the heavy interest bill, which consumes nearly 50 percent of government revenue. S&P Global noted that these vulnerabilities will take time to ease, especially since external debt servicing is set to rise again from 2029.

    Overall Assessment

    The ‘CCC+’ rating reflects S&P Global’s view that Sri Lanka’s creditworthiness remains vulnerable and heavily dependent on favorable financial and economic conditions. However, the country is not currently facing a near-term payment crisis.

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