Fitch Ratings today cut Sri Lanka's credit rating by one notch to B+ with a negative outlook, weeks after it asked for a bailout from the International Monetary Fund.
The ratings agency said the island's mounting debt, depleted foreign exchange reserves and evidence of capital flight had led to the downgrade.
The move is a signal to investors that Sri Lanka's sovereign debt is now considered riskier, and will make it more expensive for the country to borrow on international markets.
Fitch also downgraded its outlook for the economy from stable to negative.
"In Fitch's view, (the downgrade) partly reflects a weakening in policy coherence that increases the likelihood of Sri Lanka requiring external liquidity support from the IMF and other multilateral institutions," its statement said.
Sri Lanka is currently in talks with the IMF for a bailout, although the sum it is seeking has not been disclosed.
The IMF, which sent a mission to review Sri Lanka's economy earlier in February, said it had warned the authorities they should make a "stronger effort" immediately to reduce the deficit.
The government went on a spending spree after taking power in January 2015, to deliver on election promises of higher wages and lower prices.
But this has increased the budget deficit and caused concern over the balance of payments.
The island last week received pledges of over $2 billion in loans and equity from the Asian Development Bank to be spread over three years.
Sri Lanka received $2.6 billion from the IMF in 2009 to boost its financial reserves, which dropped below $1 billion at the height of fighting between Tamil Tiger rebels and the army.
