In a statement dated the ratings agency said that a series of tropical cyclones and unusually heavy monsoon rains have battered South and Southeast Asia since mid-November, triggering severe flooding and landslides and causing the deaths of hundreds of people. It said the economic and fiscal consequences of these disasters would be “most material for Sri Lanka (Caa1 stable)”.
Moody’s placed Sri Lanka among the most exposed countries in the region to physical climate risks, alongside Indonesia, the Philippines and Vietnam.
However, it stressed that Sri Lanka stands apart because it has “much weaker fiscal capacity to increase its resilience than its neighbours”, heightening the long-term damage of the disaster for a state still struggling to stabilise after its historic sovereign default.
The agency further linked climate vulnerability to governance capacity, warning that institutional weakness exacerbates exposure to disasters. It noted that while recent reforms have led to some improvement, both Sri Lanka and Vietnam carry governance issuer profile scores of 4, signalling high credit exposure to governance risks.
Although Moody’s said the broader credit implications for other affected regional governments would be more limited due to stronger fiscal buffers, it cautioned that the severity of the flooding highlights structural vulnerabilities across South and Southeast Asia. Limited natural catastrophe insurance coverage, the agency warned, leaves governments dangerously exposed to long-term climate shocks.
Last October, before Cyclone Ditwah struck, Moody’s had said Sri Lanka’s macroeconomic recovery remained broadly on track. It had expected the current account to stay in surplus in 2025, supported by tourism earnings and worker remittances, despite rising vehicle imports. At the same time, it cautioned that Sri Lanka’s narrow revenue base, high debt burden and very low debt affordability continued to pose serious risks.
The agency had said that sustained reform momentum under the International Monetary Fund programme could strengthen Sri Lanka’s credit profile, while any weakening of external buffers or reversal of reforms would significantly heighten downside risks.
Those warnings have now been sharply reinforced by the cyclone. Moody’s said that although it does not expect a reversal of the government’s commitment to the IMF programme, the economic impact of the disaster and the additional spending required for recovery will stall post-default fiscal consolidation.
