Moody’s assigns B1 rating to Sri Lanka’s global bond offering

Moody’s Investors Service (Moody’s) has assigned a B1 rating to the Government of Sri Lanka’s US dollar bond offering maturing in 2027. The outlook on the Government of Sri Lanka’s issuer rating is negative.

Ratings rationale

Sri Lanka’s B1 rating balances the economy’s robust growth potential and higher income levels than similarly rated sovereigns against a high government debt burden, low debt affordability, and reliance on external borrowing combined with relatively low foreign exchange reserves.

The negative outlook on the rating is underpinned by: (1) Sri Lanka’s persistently weak fiscal metrics, in an environment of subdued GDP growth, which could lead to renewed balance of payments pressure; and (2) the possibility that the effectiveness of the fiscal reforms envisaged by the government may be lower than we currently expect, which could further weaken fiscal and economic performance.

Signs that the fiscal consolidation measures are ineffective or that the authorities’ commitment towards fiscal consolidation is wavering would point to a higher debt burden for longer and put negative pressure on the rating. In particular, if such developments were accompanied by a marked fall in foreign exchange reserves and lack of market access, a downgrade of the rating would be possible.

Conversely, evidence of effective reform implementation leading to significant and lasting improvements in tax collection would be positive. Such an improvement, coupled with reforms of macroeconomic policy that lead to more stable external financing conditions, would support a return of the rating outlook to stable.