US credit downgrade sparks concern for Sri Lanka’s reserves

Moody’s recent downgrade of the United States’ long-term credit ratings is sending ripples across global financial markets, prompting Colombo-based Lanka Rating Agency (LRA), to closely monitor the potential impact on the island nation’s substantial holdings of U.S. Treasuries.

On May 16, 2025, Moody’s Investors Service lowered U.S.’ long-term issuer and senior unsecured ratings from the top-tier Aaa to Aa1. The outlook was simultaneously revised from negative to stable. This decision means the U.S. has now lost its pristine triple-A rating from all major global credit rating agencies.

According to the note circulated by LRA, Moody’s attributed the downgrade to several factors plaguing the U.S. economy. These include rising government debt levels, increasing pressure from interest payments, and a generally weakening fiscal outlook, which has been partly exacerbated by proposed tax cuts.

The implications of this downgrade are significant, particularly for countries such as Sri Lanka that hold a considerable portion of their foreign exchange reserves in the U.S. Treasuries. 

While traditionally valued for their relative stability, the diminished credit rating of U.S. debt may now introduce heightened risk perceptions and potential valuation concerns for Sri Lanka’s reserve managers.

Lanka Rating Agency stated it is “actively assessing the impact of this development on local financial markets and reserve management strategies.” The agency is urging all stakeholders in Sri Lanka to “remain vigilant about the evolving global economic landscape and its effects on Sri Lanka’s reserve assets.”

LRA emphasised its ongoing commitment to providing transparent and internationally aligned credit assessments to help guide informed decision-making within the country as the situation unfolds. 

The agency will continue to monitor the effects of the U.S. downgrade and its ramifications for Sri Lanka’s financial stability.