By: Staff Writer
December 22, Colombo (LNW): Fitch Ratings recently upgraded Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating to ‘CCC+’ from ‘Restricted Default’ (RD), reflecting the country’s significant progress in resolving its debt crisis.
This follows the approval of a $12.55 billion debt restructuring plan and the acceptance by 98% of bondholders to exchange defaulted bonds for new securities issued on December 20. The move marks Sri Lanka’s exit from default status and improves its credibility in international financial markets.
The debt restructuring initiative is projected to save approximately $9.5 billion in debt servicing over four years, alleviating fiscal pressures. The freed-up funds can now be redirected to critical sectors, such as social services and infrastructure development.
Additionally, the introduction of governance-linked bonds (GLBs) and macro-linked bonds (MLBs) ties debt obligations to governance reforms and economic performance. Achieving specific targets under these instruments could lower interest payments, encouraging better fiscal management.
The credit upgrade is expected to boost investor confidence, potentially attracting foreign investment and fostering economic growth. Fitch emphasized the importance of continuing economic and governance reforms to sustain and further improve Sri Lanka’s credit ratings.
In its announcement, Fitch highlighted Sri Lanka’s success in normalizing relations with creditors, stating, “The upgrade reflects Fitch’s assessment that Sri Lanka has normalized relations with a majority of creditors after the final results of the invitation to exchange outstanding international sovereign bonds.”
However, one bond series, governed by older collective action clauses, failed to meet the 75% acceptance threshold due to opposition from Hamilton Reserve, which held approximately 25% of the series. Despite this, 96% of the total commercial external debt was successfully restructured.
Sri Lanka’s progress has been supported by its adherence to an International Monetary Fund (IMF) program. Since September 2022, broadly deflationary monetary policies implemented by the central bank have started yielding positive results in the balance of payments.
However, analysts caution that recent shifts toward mid-corridor policy rates could lead to inflationary pressures similar to those experienced during previous episodes of monetary instability.
The country’s government debt-to-GDP ratio is projected to decline to 90% by 2028, down from its pre-default level of 67%. While interest-to-revenue coverage is expected to improve, it will remain above the average for ‘CCC’-rated nations.
Sri Lanka’s experience highlights the challenges faced by countries with inconsistent monetary regimes, such as soft pegs or flexible exchange rates.
These frameworks often result in high inflation, repeated stabilization crises, and elevated nominal interest rates. Analysts drew parallels with the UK’s economic turmoil in the late 1970s when aggressive macroeconomic policies led to interest rates on long-term bonds nearing 20%.
