However the rating was affected by weak external liquidity, increasing external debt, fundamental fiscal weaknesses, and political institutions that lack transparency and independence, the rating agency said.
The full statement is reproduced below
Sri Lanka's Benchmark-Sized Global Dollar-Denominated Bonds Maturing 2022 Assigned 'B+' Rating
SINGAPORE (Standard & Poor's) July 17, 2012--Standard & Poor's Ratings Services today assigned its 'B+' foreign currency issue rating to the proposed U.S. dollar-denominated global senior unsecured benchmark-sized bond issuance by the Democratic Socialist Republic of Sri Lanka (B+/Stable/B). The bonds mature in 2022.
The rating incorporates Sri Lanka's favorable growth prospects, which we believe are partly due to the "peace dividend"--or the positive effects of the end of the civil war in 2009. We expect investments in the economy to edge upward to 30% of GDP, boosting per capita growth to more than 6% per year in the next few years.
The Sri Lankan administration has started to implement a part of its planned fiscal reforms, helped by increased political stability. Further reforms could gradually improve the country's competitiveness as well as fiscal and debt profiles.
However, the rating is constrained by: (1) Sri Lanka's weak external liquidity; (2) moderately high and increasing external debt; (3) fundamental fiscal weaknesses and the attendant high public debt and interest burden; and (4) political institutions that, in some cases, lack transparency and independence.
Sri Lanka's external liquidity has weakened in 2011 because of the larger current account deficits, equivalent of 7% of GDP. In response, the government and the central bank have recently begun to adjust their monetary and foreign exchange rate policies to curtail the pace of credit expansion and import growth.
The stable outlook on the sovereign credit rating reflects our view that Sri Lanka's strong medium-term growth prospects of more than 6% of GDP per capita and recent measures to improve the fiscal profile are balanced against vulnerable external liquidity and high fiscal and external debt. We also expect the recently announced monetary and foreign exchange policy to keep the country's external position from deteriorating further.
We may raise the sovereign rating on evidence of Sri Lanka's progress in addressing the external weaknesses and domestic problems. Fiscal or structural economic reforms that reduce the vulnerabilities from high debt and interest burdens and the still-narrow economic profile would indicate such improvement.
Conversely, we may lower the rating if the country's external liquidity deteriorates substantially, or if Sri Lanka's growth and revenue prospects fall below our current expectations.