The agency said inflation has improved in the recent past and may remain low but the fiscal picture had to improve.
"Over the longer term, the government's credit profile would improve from more progress in fiscal consolidation and further reduction in external vulnerabilities," Moody's said.
"These would be helped by continued improvement in the investment environment and the maintenance of strong economic growth prospects.
"Continued progress in the economic integration of the northern and eastern regions would also improve the growth outlook."
The full statement is reproduced below:-
Moody's assigns (P)B1 rating to Sri Lanka's global bond offering
Singapore, January 06, 2014 -- Moody's Investors Service has assigned a provisional rating of (P)B1 to the Government of Sri Lanka's announced bond offering. The outlook is stable.
RATINGS RATIONALE
In July 2013 Moody's affirmed Sri Lanka's B1 rating and changed the outlook to stable from positive. The action was prompted by: 1) the stabilization in the external payments position, following the sizable loss of foreign reserves in 2011, but without enough improvement to support a positive rating action; and 2) the pause in significant reduction in the government's very high debt burden.
Sri Lanka's B1 government bond rating is supported by the country's relatively strong growth performance and prospects following the end of the nearly three-decade long civil war that ended in 2009. Our institutional strength assessment incorporates the government's default-free payments record.
Credit challenges largely lie in Moody's assessment of fiscal strength.
This reflects the government's large debt burden, almost twice as high as B and Caa-rated peers, and heavy debt service requirements in relation to both GDP and government revenues. Although fiscal reforms and improved public-sector enterprise financial performance have started to gain traction, budget deficits remain relatively high and revenue mobilization weak. Therefore, the path of fiscal consolidation and debt reduction will likely be gradual.
In addition, Sri Lanka has historically had relatively high inflation compared with peers, although inflation has recently moderated to the mid-single digit range where it is likely to remain in the near term.
The stable rating outlook reflects improvement in macroeconomic growth and inflation performance in 2013, as well as the resilience of the country's balance of payments. But it also incorporates the government's high debt burden.
Over the longer term, the government's credit profile would improve from more progress in fiscal consolidation and further reduction in external vulnerabilities. These would be helped by continued improvement in the investment environment and the maintenance of strong economic growth prospects. Continued progress in the economic integration of the northern and eastern regions would also improve the growth outlook.
GDP per capita (PPP basis, US$): 6,046 (2012 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 6.4% (2012 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 9.2% (2012 Actual)
Gen. Gov. Financial Balance/GDP: -6.4% (2012 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -6.6% (2012 Actual) (also known as External Balance)
External debt/GDP: 56.7% (2012 Actual)
Level of economic development: Low level of economic resilience
Default history: No default events (on bonds or loans) have been recorded.