Pakistan
Moody’s changes Pakistan’s outlook to negative from stable
The government’s inability to secure additional external financing, widening current account deficit, political instability and terror attacks in the country have hit Pakistan’s economic reputation as credit rating agency Moody’s Thursday changed the outlook for the country from stable to negative.
However, Moody’s Investors Service (“Moody’s”) has affirmed the Government of Pakistan’s B3 local and foreign currency issuer and senior unsecured debt ratings, and the (P)B3 senior unsecured MTN program rating.
“The decision to change the outlook to negative is driven by Pakistan’s heightened external vulnerability risk and uncertainty around the sovereign’s ability to secure additional external financing to meet its needs,” the rating agency said.
“Moody’s assesses that Pakistan’s external vulnerability risk has been amplified by rising inflation, which puts downward pressure on the current account, the currency and – already thin – foreign exchange reserves, especially in the context of heightened political and social risk,” a statement issued from Moody’s said.
It said that Pakistan’s weak institutions and governance strength added uncertainty around the future direction of macroeconomic policy, including whether the country will complete the current IMF Extended Fund Facility (EFF) program and maintain a credible policy path that supports further financing.
Not so bleak picture
However, the rating agency has not downgraded Pakistan’s rating from B3 to C — a step that would have reflected a complete lack of faith in the country.
Moody’s assigns C ratings to counties on the verge of economic collapse. The rating agency’s decision to not downgrade Pakistan’s B3 rating could be seen as a ray of hope.
The agency said it expected Pakistan to successfully negotiate an agreement with the IMF.
“The decision to affirm the B3 rating reflects Moody’s assumption that, notwithstanding the downside risks mentioned above, Pakistan will conclude the seventh review under the IMF EFF programme by the second half of this calendar year, and will maintain its engagement with the IMF, leading to additional financing from other bilateral and multilateral partners.
“In this case, Moody’s assesses that Pakistan will be able to close its financing gap for the next couple of years. The B3 rating also incorporates Moody’s assessment of the scale of Pakistan’s economy and robust growth potential, which will provide the economy with some capacity to absorb shocks. These credit strengths are balanced against Pakistan’s fragile external payments position, weak governance and very weak fiscal strength, including very weak debt affordability.”
The B3 rating affirmation also applies to the backed foreign currency senior unsecured ratings for The Third Pakistan International Sukuk Co Ltd and The Pakistan Global Sukuk Programme Co Ltd, the rating agency said adding that the associated payment obligations are, in Moody’s view, direct obligations of the Government of Pakistan, the rating agency said.
Low faith in Pakistani rupee
The rating agency has lowered Pakistan’s local and foreign currency country ceilings from Ba3 and B2 to to B1 and B3, respectively, showing a lack of trust in the Pakistani rupee.
“The two-notch gap between the local currency ceiling and sovereign rating is driven by the government’s relatively large footprint in the economy, weak institutions, and relatively high political and external vulnerability risk. The two-notch gap between the foreign currency ceiling and the local currency ceiling reflects incomplete capital account convertibility and relatively weak policy effectiveness, which point to material transfer and convertibility risks notwithstanding moderate external debt,” Moody’s said.
Current account deficit, political instability, terror attacks to blame
The international agency explained the rationale behind its decision to downgrade Pakistan’s economic outlook from stable to negative.
It said Pakistan’s high current account deficit (CAD) which had ballooned to $13.8 billion by April due to high international commodity prices, depleting foreign currency reserves that declined to $9.7 billion at the end of April 2022 — with only two months of import cover left — were to be blamed for its decision.
Moody’s estimated the current account deficit to be 4.5-5% of GDP for fiscal 2022 slightly wider than the government’s expectations, adding that CAD would decline to 3.5-4% as global commodity prices decline gradually in 2023.
The rating agency also pinned the blame on the political uncertainty in the country. “Moody’s assesses that political uncertainty in Pakistan remains high, even after the new government has been installed. The new ruling coalition comprises of multiple political parties with divergent interests, which is likely to make the enactment of any legislation difficult, including those related to reforms under the IMF EFF programme,” it said.
Moody’s said that since the next elections were due by the middle of 2023 political parties will find it difficult to continually enact significant revenue-raising measures in the run-up to the elections, especially in a high inflation environment.
Rising interest rates are also likely to increasingly constrain the government’s policy choices, especially since interest payments already absorb more than 40% of revenue, it said.
“Meanwhile, domestic political risk has also risen with a higher frequency of terrorist attacks over the last year,” Moody’s said.
