Country risk in Sri Lanka is high. The OECD has a country credit grade of 7. The three major ratings agencies have speculative grade sovereign credit ratings. The increasingly challenging external-debt repayment position over the medium term, a sharp rise in the government debt-to-GDP ratio associated with the COVID-19 shock and economic downturn, and narrowing financing options have all heightened debt sustainability risks. This led all three major rating agencies to downgrade the sovereign rating over the past year. This indicates an elevated risk of Sri Lanka being unable and/or unwilling to meet its external debt obligations.
The World Bank ranks Sri Lanka 99th out of 190 economies in the ease of doing business survey. Sri Lanka lags the emerging Asian average in contract enforcement, registering property and getting credit. Trading across borders, protecting minority investors and starting a business are somewhat easier in Sri Lanka.
Sri Lanka’s scores on Worldwide Governance Indicators are broadly in line with, or even stronger, than the average for emerging Asian countries. The unconstitutional nature of political developments in late 2018 highlighted effectiveness in the rule of law. Under the IMF program, the government has in recent years stepped up efforts to curb corruption, including amending the Bribery Act in July 2018 to hear bribery and corruption cases. Still, most indicators rank in the bottom half of all countries.
The risk of expropriation in Sri Lanka is moderate, consistent with governance scores around control of corruption and rule of law.
Political risk in Sri Lanka is moderate. The return of a majority government has restored stability to the political environment. But ethnic and social tensions remain a risk to growth prospects.