Fitch Rating gave the tropical island nation a sovereign rating of BB-minus with a long-term stable outlook. BB-minus is considered a speculative investment grade.

The government had no immediate comment on the announcement which came hours before it was due to release a budget expected to be laden with subsidies.

Financial analysts said the government will want to use the rating to help raise around 500 million dollars through an international bond issue next year for reconstruction efforts.

Despite a long-running conflict with Tamil Tiger rebels in the northeast, "Sri Lanka has proved resilient to adverse shocks over a long period of time, its institutions are strong and it has an unblemished debt service record," Fitch Ratings International said.

The island is also seeking to recover from last December's tsunami that killed 31,000 people and displaced nearly a million.

The main constraints on the rating were the island's "fragile security situation and weak public finances," the agency said.

"Peace and politics hold the key to Sri Lanka's future," senior Fitch director Paul Rawkins said in a statement.

The government has said it is banking on continued peace to boost growth and help pay for subsidies due to be promised in the budget.

An end to a ceasefire between security forces and the Tamil Tiger rebels would put "downward pressure" on Sri Lanka's rating.

"The absence of an enduring peace continues to hang over the country, intruding into the everyday business of government and the longer-term commitment to economic reform," Fitch said.

It added that weak coalition governments and public debt concerns have weighed down Sri Lanka's 20-billion-dollar economy which relies heavily on remittances from overseas workers and exports of garments and tea.

The rating should assist the government in sell bonds abroad as it provides investors with a means to assess the country's creditworthiness.

The awarding of the rating came against the backdrop of escalating violence in the northeast and heightened fears that Sri Lanka could slip back into civil war.

Sri Lanka's nearly four-year-long ceasefire with the Tamil Tiger rebels has improved the economic and business climate.

Treasury Secretary P.B. Jayasundara said government revenue and spending plans for 2006 will be aimed at achieving eight percent growth. The central bank has forecast growth of 5.0 to 5.5 percent this financial year.

Channa Amartunga, economist and chief investment officer of Boston Asset Management in Colombo, welcomed the ratings announcement.

"This is good," he said. "The key thing now is how Sri Lanka plans to use its rating to tap international markets and raise cheaper funds to ease the pressure on the local debt market.

"If you look at our expenditure, the bulk of it is spent on interest costs to service local debt. This will ease the pressure and perhaps allow top Sri Lankan corporates to tap the international market for funds as well."

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