COLOMBO : Fitch ratings on Friday, Dec.21 ,upgraded Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘CCC+’ from ‘RD’ (Restricted Default). This followed approval by creditors of the country’s US$ 12.55 billion International Sovereign Bond (ISB) debt earlier last week. This essentially means that Sri Lanka has emerged from its bankruptcy.
The Bondholders overwhelmingly signed off on the Government’s proposal to restructure international bonds. “Sri Lanka has normalised relations with a majority of the creditors,” Fitch said, as it also upgraded the country’s local-currency IDR to ‘CCC+’ from ‘CCC-’.
The ratings agency typically does not assign an outlook to sovereigns with a rating of ‘CCC+’ or below, sources at Fitch said.
With the decision by the Hong Kong based Fitch Ratings to upgrade Sri Lanka’s credit rating, the island nation has officially ended its debt default, the Finance Ministry said. Fitch upgraded Sri Lanka’s long term credit default rating to CCC+ from CCC- on Friday as it said that “the risk of another default on local currency debt has been reduced by the completion of the international sovereign bond restructuring and an improved outlook for macroeconomic indicators.”
Finance Secretary Mahinda Siriwardena said in a statement: “December 20 marked a major milestone in our economic recovery process as Sri Lanka officially exited sovereign default.” Siriwardena said the crisis was man-made and could have been averted if the early warnings had been heeded with an early engagement with the International Monetary Fund (IMF).
“This is indeed a historic moment and a time to celebrate but it is a moment that should never be repeated,” he said.
Former Central Bank of Sri Lanka (CBSL) Deputy Governor Dr. W.A. Wijewardena told the Sunday Observer that Moody’s had upgraded Sri Lanka to the same credit rating scale just three days earlier.
“This is a positive development for Sri Lanka as it has now moved out of the ‘selective default’ category,” Dr. Wijewardena said. “This is a step forward. The country was once classified as a selective debt defaulter, and now we have started to walk the path where we can aim for our borrowings to be considered non-risk investments.” He said: “Our target should be to be upgraded to ‘BBB’ and above on the credit rating scale.”
In April 2022, Sri Lanka suspended its debt repayments due to a severe financial crisis, including both principal and interest payments, as the country faced an acute shortage of foreign exchange reserves. The Government later reached an agreement with the IMF, which supported the suspension as part of a broader economic restructuring plan.
As part of the IMF-backed program, Sri Lanka entered into negotiations with its bondholders for a comprehensive debt restructuring plan aimed at reducing the country’s debt burden, extending repayment terms, and easing immediate financial pressure.
Dr. Wijewardena said that on December 20, 2024, Sri Lanka successfully completed this debt restructuring process. “As a result, the country is now set to begin repaying both the principal and interest on the bonds as they mature, marking a crucial step towards stabilising the economy and restoring investor confidence,” he said.
Fitch also upgraded Sri Lanka’s Local-Currency IDR to ‘CCC+’ from ‘CCC-’, aligning it with the Long-Term Foreign-Currency IDR. This change reflects reduced risk of a default on local-currency debt, following the completion of the international sovereign bond restructuring and an improved outlook for macroeconomic indicators, sources added.
Sri Lanka completed the local-currency portion of its domestic debt optimisation in September 2023, following the exchange of Treasury Bills and provisional advances held by the CBSL into new Treasury Bonds and Bills.
According to the Government, the new restructuring package is expected to save the country US$ 9.5 billion in debt service payments over the course of its four-year IMF program. Sri Lanka secured a US$ 2.9 billion four-year Extended Fund Facility (EFF) from the IMF in March last year.
Sri Lanka defaulted on its foreign debt for the first time in its post-Independence history in May 2022 due to its high debt burden and dwindling foreign exchange reserves.
Under the debt overhaul plan, Sri Lanka’s defaulted bonds will be swapped for a series of new fixed income instruments, rewarding the country a 75 basis-point reduction in the interest rate provided it meets certain governance targets.
Sri Lanka is in line to be the fourth country to conclude a bond restructuring this year following Ghana, Ukraine and Zambia. Sunday Observer
