Moody's Investor Service said Sri Lanka was among countries that would be most vulnerable to rising interest rates given its large debt burden and imminent debt repayments.
"Those economies most sharply hit by weakening exchange rates, wider risk premia and lower capital inflows so far this year share the characteristic of twin current account and budget deficits, while country-specific factors - often relating to policy credibility - have likely also fueled the financial market sell-off," the rating agency said, publishing its report, 'Sovereigns - Global Contagion risks greatest where external vulnerability, weak debt affordability meet low policy credibility'.
"Looking at the size and composition of their balance of payments and the amount of financial buffers in the form of foreign exchange reserves, Moody's identified Argentina, Ghana (B3 stable), Mongolia (B3 stable), Pakistan (B3 negative), Sri Lanka (B1 negative) and Zambia, beside Turkey, as the emerging and frontier market sovereigns most vulnerable to dollar appreciation."
Last month Moody's affirmed the B1 rating of three Sri Lankan banks, whilst maintaining the negative outlook, citing continued external vulnerability risk.
"The negative outlook reflects Moody's view that Sri Lanka's credit profile is dominated by the government's and country's elevated exposure to refinancing risk. Sri Lanka could face significantly tighter external refinancing conditions at some point during the next five years, which would quickly lead to much weaker debt affordability, especially if the currency were to depreciate as a result," Moody's said.
"With a persistently high debt burden, weak debt affordability, large borrowing needs and low foreign reserve adequacy, Sri Lanka's vulnerability to a shift in domestic and external financing conditions is high."
