S&P upgrades Sri Lanka to CCC+/C

• Says ratings reflect that Sri Lanka’s creditworthiness remains vulnerable and reliant on favourable financial and economic conditions
• Maintains a cautious note on potential downside risks, including renewed funding stresses, rising inflation or weaker fiscal performance

S&P Global Ratings yesterday raised Sri Lanka’s long and short-term foreign currency sovereign credit ratings to ‘CCC+/C’, from ‘SD/SD’, while affirming its ‘CCC+/C’ ratings on local currency debt. 

The outlook on both long-term foreign and local currency ratings is stable, with the transfer and convertibility assessment maintained at ‘CCC+’.

The rating upgrade indicates Sri Lanka’s progress in restructuring its remaining commercial debt, including government-guaranteed SriLankan Airlines (SLA) bonds, following the December 2024 Eurobond exchange. 

According to S&P, the ongoing negotiations over SLA debt have not disrupted the broader debt restructuring, supported by principles of comparability and most-favoured creditor clauses.

S&P highlighted the country’s strong economic recovery, rapid fiscal consolidation under the International Monetary Fund programme, accumulation of foreign exchange reserves and improvements in the external position as key strengths. These gains, however, are tempered by Sri Lanka’s high debt levels and heavy interest burden—expected to consume about 50 percent of government revenue in 2025.

“The ‘CCC+’ ratings reflect that Sri Lanka’s creditworthiness remains vulnerable and reliant on favourable financial and economic conditions, though the government does not face a near-term payment crisis,” the agency said.

Political stability and policy predictability, following the National People’s Power party’s supermajority in the 2024 elections, coupled with strong performance across manufacturing, services and tourism, underpin the improving macroeconomic indicators, S&P noted. 

Real GDP growth in the second quarter reached 4.9 percent, with the economy expected to expand 4.2 percent for 2025.

Fiscal consolidation has been reinforced by increased customs revenue, after the lifting of the vehicle import restrictions, driving a 26.5 percent rise in overall revenue in the first seven months of the year. S&P projects a primary surplus in 2025, with the general government debt ratio gradually declining to 93.4 percent of GDP by 2028.

External balances have also improved, supported by strong remittances and tourism flows, a stronger rupee and sustained foreign investment. Inflation has remained muted, giving the Central Bank greater flexibility in policy rates, while remaining minor foreign exchange restrictions are expected to be phased out over the next two years.

S&P maintained a cautious note on potential downside risks, including renewed funding stresses, rising inflation or weaker fiscal performance, while highlighting that continued robust growth and entrenched fiscal improvements could support a future ratings increase.