Moody’s Warns Sri Lanka Faces Region’s Worst Climate Credit Shock

Moody’s Investors Service has issued a stark warning that Sri Lanka now faces the most severe credit consequences from the wave of climate-related disasters that have struck South and Southeast Asia in recent weeks.

In its 5 December statement, the rating agency highlighted that the region has endured a series of tropical cyclones combined with unusually intense monsoon rains since mid-November, leading to widespread flooding, landslides and substantial loss of life.

According to Moody’s, while several countries across the region share exposure to physical climate risks, Sri Lanka stands out due to its significantly weaker fiscal buffers.

The agency groups Sri Lanka, Indonesia, the Philippines and Vietnam among the countries with high sensitivity to climate-related shocks, but stresses that Sri Lanka’s constrained public finances give it far less room to absorb economic losses or invest in adaptation.

This amplifies the credit impact at a time when the country is still attempting to stabilise after its historic sovereign default.

Moody’s also linked the scale of climate risk exposure to the strength of public institutions. Although recent reforms have somewhat improved Sri Lanka’s policy framework, it still carries a governance issuer profile score of 4 the same as Vietnam indicating substantial vulnerability to governance-related credit pressures.

In contrast, peers with stronger governance and fiscal capacity are expected to face more limited credit fallout from the same disasters.

 The agency also noted that the severity of flooding across the region exposes deeper structural weaknesses, including the widespread absence of natural catastrophe insurance. As climate-related events grow more frequent and more destructive, the credit implications for governments are expected to intensify unless resilience investment increases.

Last October, Moody’s assessed that Sri Lanka’s macroeconomic stabilisation was progressing broadly as expected, with the current account projected to remain in surplus through 2025 due to tourism and remittances.

However, the country’s narrow tax base, dependence on external financing, and extremely low debt affordability remained major risks, particularly if global financial conditions tightened.

Moody’s said that maintaining reform momentum under the IMF-supported programme is essential for improving the island’s credit profile. Any rollback of reforms or weakening of external buffers, it warned, could quickly reverse recent gains.

Following Cyclone Ditwah, Sri Lanka has requested around US$200 million under the IMF’s Rapid Financing Instrument to help address emergency fiscal needs.

The Fifth Review of the IMF’s Extended Fund Facility originally scheduled to conclude on 15 December and unlock a US$347 million disbursement has now been deferred to early 2026 due to the new fiscal pressures created by the disaster.