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Sri Lanka’s credit rating was cut to five levels below investment grade by Standard & Poor’s, citing mounting public debt and political and security concerns.

The nation’s long-term foreign currency rating was lowered by one notch to B from B+, S&P said in a statement today. The new rating places the country on par with Burkina Faso and Cameroon. Moody’s Investors Service does not have a rating for Sri Lanka.

A lower credit rating will make it more expensive for the island nation to borrow from international financial markets to fund expenses on defense, roads and ports. President Mahinda Rajapaksa’s government may be forced to turn to the domestic economy to raise funds, preventing interest rates from declining.

“Pressure on borrowing costs in Sri Lanka will rise,” said Gehan Rajapakse, general manager at Eagle NDB Co., the nation’s biggest mutual fund company. “Growth will suffer.”

Expansion in Sri Lanka’s $32 billion economy, which has Asia’s second-highest borrowing costs after Pakistan, may have slowed to 6.1 percent last quarter, the weakest pace since March 2007, according to the median forecast of five economists surveyed by Bloomberg News. The country’s statistics department will unveil the growth numbers at 11 a.m. tomorrow in Colombo.

The nation’s central bank has kept interest rates high to slow inflation that’s averaged more than 20 percent this year. The bank has been loosening monetary policy to support growth, as consumer prices in the capital Colombo slowed to 16.3 percent in November from 20.2 percent in October.

Reserve Requirements

Governor Nivard Cabraal last month cut the statutory reserve requirement for the second time since October to 7 direct payday loan lenders.75 percent from 9.25 percent, aiming to lower borrowing costs to spur spending and investment to make up for slowing exports.

Sri Lanka’s parliament this month approved the government’s plan to increase external financing, including loans from foreign governments, by 25 percent to 154 billion rupees ($1.4 billion) in 2009. That will help fund more than a tenth of the government’s total spending of 1.19 trillion rupees.

“The ratings on Sri Lanka reflect high government and external indebtedness, weak revenue mobilization, political and security concerns, rising balance of payments pressures and the resultant decrease in foreign reserve cushion,” S&P said. “In the unfolding environment of slowing economic growth, unfavorable global economic and financial market conditions, it increases the stress on Sri Lanka’s debt service.”

Sri Lanka’s external debt amounted to $12 billion at the end of 2007, almost 40 percent of gross domestic product, according to the central bank. The government plans to spend a sixth of its budget for next year on defense, aiming to defeat Tamil Tiger rebels who have been waging a civil war for a quarter of a century.

“Although there is the possibility of outright military defeat of the separatists, a potentially different style and lower-intensity conflict will continue to pose a risk to growth prospects and public finances,” S&P said today.

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