Fitch bumped Sri Lanka up to B- on Tuesday and set the outlook to stable, noting that this level is still speculative and signals material default risk. Countries at a similar mark include Iraq, Angola and Pakistan. For a South Asian economy working its way back from a 2022 default, that step up is a confidence boost.
Analysts including Jeremy Zook credited policies and economic reforms "which have eased external financing risks and provide a degree of resilience to shocks." They pointed to stronger public finances and a healthier external position, and noted that foreign exchange reserves have been slowly replenished.
Progress on debt restructuring also helped. Sri Lanka completed the restructuring of liabilities at state-owned SriLankan Airlines and has already renegotiated billions in obligations held by commercial creditors and sovereign lenders. Those milestones line up with requirements of its $3 billion IMF program launched after the 2022 default.
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Investors liked what they saw. On Tuesday, Sri Lanka's dollar bonds climbed, with most ranking among the day's best performers in emerging markets, according to Bloomberg-compiled data. The South Asian economy also remains vulnerable to the recent upswing in oil prices. In response to higher fuel import costs, the government recently raised electricity tariffs and is slated to present its budget in November.
Fitch cautioned that public finances remain constrained because debt is elevated and servicing costs are high relative to similarly rated peers.
Fitch said Sri Lanka is considering a return to international bond markets in 2027, a meaningful waypoint on the road back to normal funding access. The current IMF program runs through March. "A follow-on IMF facility is possible, which could help anchor policy settings and provide a financing backstop," Fitch said.
For everyday investors, the takeaway is that turnarounds are possible but rarely linear. Keep an eye on oil costs, the November budget, and whether IMF support continues to see if this upgrade is the start of a steady climb or just a single notch up.
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