Thursday Mar 19, 2026
Thursday Mar 19, 2026
Thursday, 19 March 2026 05:25 - - {{hitsCtrl.values.hits}}
Senior Director – APAC Sovereign Ratings Jeremy Zook
Fitch Ratings yesterday said it does not expect Sri Lanka’s sovereign rating to face severe downside pressure from the ongoing global energy shock linked to the escalating Middle East conflict, although it could blunt recent improvements in credit metrics.
“Sri Lanka is quite vulnerable to energy price shocks. However, we think of it perhaps more as blunting some positive improvements in credit metrics that we’ve seen over the past few years, rather than necessarily leading to severe downside pressures on the rating,” said Fitch Senior Director – APAC Sovereign Ratings Jeremy Zook.
“Of course, this all depends on how long the energy price shock persists,” he said speaking at the Fitch Ratings APAC Sovereign Update 2026 virtual forum yesterday.
In April 2022, Fitch Ratings downgraded Sri Lanka to ‘Restricted Default.’ In December 2024, Fitch Ratings upgraded Sri Lanka’s sovereign credit rating from ‘Restricted Default’ to ‘CCC+,’ which it affirmed in October 2025.
Zook pointed to the 2022 crisis as a reference point, noting that the previous surge in energy prices had significant repercussions domestically and in terms of external finances for Sri Lanka, adding that such risks remain in a severe downside scenario.
“But what I want to mention now is, I think reflecting on those hard-fought gains, reflecting that focus that the Government has implemented on macro adjustment and facilitating greater macro stability, which is really what we see now, Sri Lanka is in a stronger position at the moment than it was in 2022 to manage this potential energy shock,” Zook said.
He noted that Sri Lanka recorded a current account surplus last year compared to a wide deficit in 2022, though higher oil prices are expected to exert pressure on that balance.
The impact is expected to transmit through trade, remittances, and tourism. Higher oil prices would weigh on the trade balance, while remittance inflows could be affected by economic disruptions in Gulf States. Tourism flows may also face headwinds.
“But, you know, that stronger current account position to start limits some of the downside pressures there,” Zook said.
On the fiscal side, he said policy flexibility remains constrained under the International Monetary Fund (IMF)-supported program, limiting the Government’s response.
“We’ll have to see how negotiations with the IMF proceed. If this energy shock is prolonged, perhaps there would be greater flexibility there,” Zook noted.
He added that while a significant fiscal deterioration is not expected, the shock could dampen near-term gains.
“But on the fiscal picture, we wouldn’t anticipate too much of a deterioration. But again, this kind of maybe limits some of the upside in the near term. Sri Lanka, of course, is also dealing with the fallout of some pretty significant flooding in November of last year that has added, again, to fiscal and external costs,” Zook said.
“And this energy price shock does come at a bit of an unfortunate time. But those buffers there in terms of rating and even foreign exchange reserves are improving over the past couple of years, and even so far in 2026. So, all of that gives a bit more buffer for Sri Lanka’s rating,” he added.
Fitch Ratings’ last country-specific report was issued on 11 November 2025 after the 2026 Budget, where it noted the Government’s latest Budget indicates that the authorities remain committed to reducing Government debt/GDP over the medium term after beating their targets in the 2025 Budget.
It noted that the outperformance in 2025 was partly driven by underspending, with the public investment/GDP ratio significantly below target–at 3.2% against the original goal of 4%. “Shortfalls in implementing planned investment spending could weaken the economy’s growth potential, making longer-term fiscal consolidation more challenging. That said, the latest Budget highlights several measures that have the potential to lift investment and benefit growth. These include the resumption of an expansion of Colombo’s international airport, a Rs. 342 billion (1% of 2026 Fitch-estimated GDP) allocation towards road development, tax incentives for the construction of digital infrastructure, and planned legislation to increase the use of public-private partnerships in infrastructure projects,” it said.
“Sri Lanka’s high Government debt remains a key weakness for the sovereign credit profile. In our October assessment, we projected that gross general Government debt/GDP would fall to about 96% in 2027, from 100.5% in 2024, remaining well above the median of 74% for sovereigns in the ‘CCC’ rating category. The scheduled end of the IMF program in 2027 and our expectation that debt repayment obligations will step up from 2028 add to the risks facing the debt outlook over the medium term,” the ratings agency said in November 2025, before Cyclone Ditwah.
