Moody’s raises Sri Lanka’s rating

• This follows successful restructuring of international bonds
• earlier, Fitch Ratings upgraded Sri Lanka’s IDR to ‘CCC+’ from ‘RD’

Christmas gifts are continuing to come Sri Lanka’s way, with Moody’s Ratings (Moody’s) upgrading the island nation’s long-term foreign currency issuer rating to Caa1 from Ca. The outlook is stable. Previously, the rating was on review for upgrade.
On Friday, Fitch Ratings upgraded Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘CCC+’, from ‘RD’ (Restricted Default). Moody’s in its rating commentary 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. 
“At Caa1, 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 programmes with development partners including the International Monetary Fund (IMF),” it said. 

It added that the willingness and capacity to implement reforms speak to Sri Lanka’s governance and also underpin the rating action.
However, Moody’s pointed out that 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.
“The stable outlook reflects balanced risks to the ratings. On the upside, the government’s commitment to and continued implementation of reforms may strengthen its credit profile beyond our current assumptions, to a level consistent with a higher rating,” it said.
Moody’s pointed out that on the downside, 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 was initiated on November 28, 2024.
Concurrently, Moody’s assigned definitive Caa1 foreign currency senior unsecured ratings to Sri Lanka’s new USD-denominated issuances, specifically the 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.
It said it has also withdrawn the Ca foreign currency senior unsecured rating on Sn Lanka’s July 2022 bond, of which US$ 268 million remains outstanding after the settlement of bonds in the government’s exchange offer, for business reasons.
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. 
(Mirror Business)