"However it is projected to remain above 100 percent for Sri Lanka and to remain above the end-2011 level for Mongolia.
"This factor is likely to weigh on these sovereigns' ratings."
Sri Lanka has a 'BB-' rating from Fitch.
However analysts say under laws governing Sri Lanka's central bank, all maturing state dollar debt can be directly settled against available foreign reserves (if available) when they fall due posing absolutely no threat to domestic monetary system or economy.
Even sovereign bonds can only sold before maturity to another dollar holder - usually foreign - in the secondary market with little impact on the domestic economy.
Maturing dollar loans and bonds can be repaid in the same way International Monetary Fund loans are settled, with no 'reserve pass-through' via domestic monetary base.
But rupee denominated Treasuries when sold in the domestic secondary market before maturity, can push interest rates up and also generate liquidity shortages by contracting the monetary base when the Central Bank tries to supply dollars to fleeing bond holders.If the central bank then sterilizes the forex interventions with fresh money to fill liquidity shortages and maintain the monetary base at the earlier level or to prevent interest rates going up, a full blown 'balance of payments crisis' can be generated, even when plenty of forex reserves are available.
Meanwhile Fitch said a negative gap between inflation and the policy rate in Sri Lanka was only second to Mongolia among 12 Asian countries tracked by Fitch Ratings. Four other countries had smaller negative policy rates.
Sri Lanka has two policy rates, the rate at which money is injected into the economy which was cut by 25 basis points to 9.50 percent in December and the rate at which money is drained from the market at 7.50 percent.
When bank credit is strong the upper policy rate tends to be active, when credit is weak the lower rate tends to be active.
Sri Lanka latest rate cut came as inflation rose to a near four year high of 9.5 percent in December, denting some of the Central Bank's inflation credentials.
However some analysts have pointed out that Sri Lanka's inflation is worsened by acts of the monetary authority other than the overnight policy rate, which has tended to make the country's soft-pegged arrangement prone to high inflation and balance of payment crisis.
They includes intervening in Treasury bill markets with term money to monetize debt or to sterilize forex sales, term auctions ostensibly for monetary policy purposes that undermine a given policy rate and provisional advances to the Treasury due to legalized fiscal dominance.
Sri Lanka's central bank also creates money through the purchase of foreign loan inflows to the state without allowing the dollars to hit the forex markets and strengthen the peg, at times when the exchange rate is already weakened by one or more of the loose money actions.
Fitch said emerging Asia had four of the world's 12 countries in the highest-risk '3 category of Fitch's macro-prudential risk assessment framework which were China, Mongolia, Indonesia and Sri Lanka.
Fitch said debt ratios are projected to fall slightly in India and Sri Lanka, but indebtedness was high giving limited scope for further fiscal easing if shocks materialize.
Critics however say Sri Lanka's biggest macro-economic shocks have always been triggered by 'fiscal easing'. Last year's balance of payments crisis for example involved at least a 1.5 percent of gross domestic product worth bank credit financed loss or 'fiscal easing' via state energy utilities.