Sri Lanka’s Construction Guarantee Fund ‘BB(lka)’ National IFS Rating affirmed by Fitch highlights continued resilience despite challenging operating conditions and elevated risks in the domestic construction sector.
Sri Lanka’s Construction Guarantee Fund ‘BB(lka)’ rating affirmed with stable outlook
Sri Lanka’s Construction Guarantee Fund ‘BB(lka)’ National IFS Rating affirmed by Fitch Ratings reflects a balance between constrained operating conditions and the fund’s underlying financial stability. The global ratings agency maintained a stable outlook, citing adequate capital buffers and a conservative investment strategy as key strengths offsetting sector-specific pressures.
The Construction Guarantee Fund (CGF), which plays a critical role in supporting contractors through guarantee facilities, has faced a subdued operating environment in recent years. This has been largely due to limited large-scale infrastructure activity and a slowdown in new project origination. Government-led construction initiatives have primarily focused on smaller rehabilitation and maintenance projects, reducing opportunities for significant premium growth.
Despite these constraints, there are early signs of recovery. Analysts expect a gradual pickup in CGF’s business volumes in 2026, supported by reconstruction activities and incremental infrastructure development. However, risks remain elevated, particularly due to ongoing contractor stress and project delays, which continue to weigh on underwriting performance.
Premium income showed a notable rebound in 2025, increasing sharply by 284 percent to 38 million rupees from a low base. This growth was driven by post-disaster reconstruction efforts and a modest resurgence in government-backed projects. At the same time, employer claims declined by 27 percent year-on-year to 23 million rupees, indicating some improvement in claims management.
Nevertheless, underwriting losses remain a concern. Fitch estimates that CGF recorded a loss of 104 million rupees in 2025, an improvement from the 140 million rupees loss in 2024 but still indicative of underlying structural challenges. The agency expects underwriting performance to remain weak in the near term, with only gradual improvements as business volumes recover. Over the past three years, CGF has maintained an average return on equity of around 13 percent, reflecting moderate profitability.
A defining feature of the fund’s operations is its relatively high risk appetite. CGF provides guarantees to small- and medium-sized contractors, often without requiring collateral. These contractors are typically registered under the Construction Industry Development Authority’s national framework, which aims to support industry participation but also introduces higher credit risk. To mitigate these exposures, CGF conducts detailed assessments of contractors’ technical and financial capabilities. Recent policy adjustments include the introduction of cash collateral requirements—10 percent for performance bonds and 20 percent for advance payment guarantees—designed to strengthen risk controls.
From a capital perspective, CGF remains adequately positioned. Total capital stood at approximately 2.0 billion rupees at the end of 2025, supported entirely through internally generated funds. The fund does not distribute dividends or levy payments to the government, allowing retained earnings to bolster capital growth. Net guarantee-risk exposure rose to 0.6 times capital in 2025, up from 0.1 times the previous year, reflecting increased activity. However, this level remains well below the fund’s internal ceiling of 10 times, indicating manageable leverage.
Cumulative claims since inception amount to around 205 million rupees, equivalent to roughly 9 percent of end-2025 equity. This relatively contained claims history provides some comfort regarding long-term sustainability, although the evolving risk environment warrants continued monitoring.
CGF’s investment strategy remains conservative, with approximately 60 percent of assets held in cash and term deposits at Bank of Ceylon. The remainder is primarily invested in government securities, including treasury bills. This approach prioritizes capital preservation and liquidity, aligning with the fund’s risk management objectives.
In terms of its overall profile, Fitch categorizes CGF as ‘Moderate’ relative to other insurers in Sri Lanka. The fund benefits from full state ownership, with governance overseen by a board of trustees comprising both public- and private-sector representatives. Its operational scale remains limited, with total assets of around 3.4 billion rupees and equity of 2.0 billion rupees at end-2025.
Looking ahead, rating sensitivities will depend on several factors. A sustained deterioration in financial performance, weaker risk management practices, or increased exposure to investment risks could exert downward pressure on the rating. Conversely, an improvement in business scale, diversification into more stable revenue streams, and stronger operating performance could support a potential upgrade.
Overall, Sri Lanka’s Construction Guarantee Fund ‘BB(lka)’ National IFS Rating affirmed underscores the institution’s resilience in a challenging sector, while highlighting the need for cautious navigation of risks as the construction industry gradually recovers.