Sri Lanka’s vulnerability to climate-driven economic shocks has been cast into sharp focus as Moody’s Investors
Service warns that the island is likely to absorb the region’s heaviest credit impact from the destructive cyclones and torrential rains that have swept across South and Southeast Asia since mid-November.
The agency said that despite several countries sharing similar physical exposure to climate risks, Sri Lanka’s weak fiscal space and limited resilience mechanisms leave it uniquely exposed.
Moody’s underscores the growing structural challenge facing the region: the absence of adequate natural catastrophe insurance coverage.
With climate disasters intensifying, countries without protection mechanisms face higher reconstruction costs, heavier debt burdens and prolonged economic dislocation. Sri Lanka, already grappling with a debt crisis and fragile public finances, is among the least equipped to absorb these shocks.
Unlike Indonesia, the Philippines or Vietnam all of which Moody’s categorises as having stronger fiscal positions and greater policy flexibility Sri Lanka’s constrained budget leaves little room for emergency response or long-term climate adaptation.
The agency warns that this combination of high exposure and low capacity significantly magnifies the current disaster’s credit implications.
Governance strength, another factor Moody’s uses to assess resilience, also plays a key role. Sri Lanka and Vietnam both carry governance issuer profile scores of 4, signalling heightened vulnerability to institutional weaknesses that can slow recovery and worsen fiscal outcomes. Effective governance, Moody’s notes, is often associated with better climate-risk mitigation and faster disaster response.
Sri Lanka’s recent climate crisis comes on the heels of what Moody’s previously described as a “fragile but progressing” macroeconomic recovery. Tourism inflows, remittances and expectations of a current account surplus through 2025 had supported cautious optimism.
Yet the country’s persistent structural weaknesses including its narrow tax base and heavy reliance on external financing mean that any shock can rapidly erode stability.
Cyclone Ditwah has already added new fiscal pressures, leading the Government to request around US$200 million in emergency support under the IMF’s Rapid Financing Instrument. The Fifth Review of the IMF’s Extended Fund Facility, expected to unlock an additional US$347 million in December, has now been postponed to early 2026 as both sides reassess the post-disaster fiscal landscape.
Moody’s latest warning reinforces a broader message: Sri Lanka must accelerate efforts to strengthen climate resilience, expand disaster insurance coverage and deepen institutional reforms. Without these measures, each new climate event risks pushing the country back into instability, undermining both its economic recovery and its long-term creditworthiness.
