• GDP growth potential, incomes and institutions are stronger than many other similarly rated sovereigns
• Very weak public finances, large refinancing needs, remain a key credit weakness

Moody's Investors Service says in a new report that the credit profile of Sri Lanka (B2 stable) reflects ongoing government liquidity and external vulnerability risks.

Key credit challenges include large borrowing requirements, with a high reliance on external funding, and low foreign exchange reserves coverage of forthcoming economy-wide external debt maturities.

In addition, the government has a very high government debt burden, weak revenue generation and very low debt affordability. The volatile domestic political environment can also exacerbate refinancing risk.

These credit challenges are balanced against moderate per capita income levels and relatively strong institutions when compared to many similarly rated sovereigns.

The stable outlook reflects balanced credit risks. Moody's expects the government will remain focused on implementing important fiscal, monetary and economic reforms that should strengthen the credit profile over the medium term.

However, Moody's expects that the government's ability to refinance will remain highly vulnerable to sudden shifts in investor sentiment, further tightening in financing conditions, and political and policy uncertainty, with limited buffers to mitigate such risks.