Fitch Ratings has raised Sri Lanka’s long-term foreign currency issuer default rating (IDR) to ‘CCC+’ from ‘RD’ (restricted default), reflecting a significant improvement in the country’s economic outlook and its ability to manage debt obligations.
The upgrade follows Sri Lanka’s completion of its international sovereign bond restructuring, a critical step in addressing the country’s debt crisis. This move has alleviated concerns about further defaults on local currency debt and demonstrates progress in the country’s recovery efforts. Although Fitch does not typically issue outlooks for sovereigns with ratings of ‘CCC+’ or below, the new rating signals an improvement in the overall perception of Sri Lanka’s economic stability.
Sri Lanka has made strides in optimizing its domestic debt, completing the local currency portion of its Domestic Debt Optimization (DDO) in September 2023. This included exchanging treasury bills and temporary advances from the Central Bank of Sri Lanka for new treasury bonds and bills. The restructuring has not only reduced immediate debt risks but also enhanced fiscal sustainability, which was a key factor in Fitch’s decision to upgrade the rating.
The improved rating indicates that international markets are gaining confidence in Sri Lanka’s ability to implement reforms and stabilize its economy. This follows a period of economic turmoil marked by high inflation, dwindling foreign reserves, and significant debt repayments. The country’s measures to enhance macroeconomic indicators, including fiscal consolidation and monetary policy adjustments, have also contributed to this positive reassessment.
Sri Lanka’s journey out of financial crisis has been closely monitored by global agencies, and this upgrade represents a critical milestone in its efforts to regain financial stability and credibility. However, challenges remain, as the nation must continue to implement structural reforms to secure long-term economic growth and maintain the confidence of investors.
This development is likely to encourage more favorable terms in future borrowings and provide a boost to the government’s efforts to rebuild the economy. While the path ahead remains complex, the latest upgrade signals a step in the right direction for Sri Lanka’s recovery.
