Sri Lanka’s Stable Outlook Shines as S&P Upgrades Rating to CCC+

S&P Global Ratings has upgraded Sri Lanka’s sovereign foreign currency ratings to ‘CCC+/C’ from the previous ‘Selective Default (SD)’ rating, while maintaining a stable outlook. This move reflects positive developments in Sri Lanka’s ongoing debt restructuring efforts and improved credit profile, signaling gradual progress toward macroeconomic stabilization.

Background on Rating Revision
Sri Lanka had been grappling with a severe debt crisis since 2022, resulting in multiple defaults on foreign currency sovereign bonds. The selective default rating reflected the challenges of the country’s financial distress and limited ability to meet external obligations on time.

However, S&P’s recent upgrade to ‘CCC+/C’ is driven largely by Sri Lanka’s successful restructuring of the majority of its $12.55 billion international sovereign bonds (ISBs) into new notes with extended maturities and enhanced terms.

Key Factors Behind the Upgrade
S&P cites several factors in support of the upgrade:

Effective restructuring of commercial bonds, including governance-linked, step-up U.S. dollar bonds, and past-due interest bonds

Continued cooperation and plan adherence with the International Monetary Fund (IMF) and creditors

Strengthened fiscal discipline and reform commitment aimed at restoring debt sustainability

Gradual improvements in foreign exchange reserves and balance of payments conditions

Despite these positive signals, S&P notes remaining challenges including the restructuring of a $175 million government-guaranteed bond issued by SriLankan Airlines and ongoing fiscal pressures.

Stable Outlook Despite Risks
The stable outlook reflects S&P's view that improvements to Sri Lanka’s debt profile balance against risks from potential inflation spikes, fiscal slippages, and the country’s external vulnerabilities over the near term.

S&P has refrained from assigning an outlook to the ‘SD’ rating on Sri Lanka’s foreign currency debt, as it signifies a default event rather than a forward-looking credit opinion.

Implications for Sri Lanka
The upgrade can bolster investor confidence, potentially lowering borrowing costs and expanding access to international capital markets over time. Improved ratings also facilitate increased investor participation in Sri Lanka’s post-restructuring bonds.

These developments align with government efforts to restore macroeconomic stability, attract foreign investment, and support sustainable economic growth after years of hardship.

Global and Regional Perspectives
Sri Lanka’s credit upgrade amid a turbulent geopolitical and economic environment in South Asia is notable. Regional peers also continue to undergo credit rating reviews, influenced by fiscal and political developments, external debt situations, and economic reforms.

International agencies including Moody’s and Fitch monitor Sri Lanka’s fiscal trajectory, with Moody’s recently placing Sri Lanka’s rating under review following moderate upgrades over the past year.

Sources: TradingView, MarketScreener, S&P Global,  Moody’s Investors