ISLAMABAD: With deteriorating external and fiscal indicators, Moody’s Investor Service downgraded Pakistan’s outlook to negative from stable on Thursday amid a delay in a deal with the International Monetary Fund (IMF) for an economic bailout.
The New York-based credit rating agency affirmed the government of Pakistan’s B3 local and foreign currency issuer and senior unsecured debt ratings.
“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,” Moody’s said in a statement.
It assessed that Pakistan’s external vulnerability risk had 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.
“Pakistan’s weak institutions and governance strength add uncertainty around the future direction of macroeconomic policy, including whether the country will complete the current IMF Extended Fund Facility (EFF) programme and maintain a credible policy path that supports further financing,” it said.
The decision to affirm B3 — a junk rating — reflects Moody’s assumption that, notwithstanding the downside risks mentioned above, Pakistan will conclude the seventh review under the IMF programme by the second half of this calendar year, and will maintain its engagement with the multilateral lender, leading to additional financing from other bilateral and multilateral partners.
In this case, Moody’s assessed that Pakistan would 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 associated payment obligations are, in Moody’s view, direct obligations of the government of Pakistan.
Moody’s expected Pakistan’s current account to remain under significant pressure on the back of elevated global commodity prices through 2022 and 2023.
Pakistan’s current account deficit widened to $13.8 billion during the first 10 months (July to April) of the current fiscal year, compared to a deficit of $543 million a year earlier. In the absence of an equivalent inflow in the financial account, the rapid widening of the current account deficit has led to a large drawdown of the foreign exchange reserves.
According to data from the IMF, Pakistan’s foreign exchange reserves have declined to $9.7 billion at the end of April, which can only cover less than two months of imports. This compares with the $18.9 billion of reserves at the end of July last year.
Moody’s projected the current account deficit to come in at 4.5-5pc of GDP for the ongoing fiscal year, slightly wider than the government’s expectations.
As global commodity prices decline gradually in 2023 and as domestic demand moderates, Moody’s expected the current account deficit to narrow to 3.5-4pc of GDP.
The rating agency’s current account deficit forecasts are higher than previous (early February) projections of 4pc and 3pc for the 2022 and 2023 fiscal years, respectively. The larger current account deficits underscore the need for Pakistan to secure additional external financing, especially given its “very low” foreign exchange reserves, it said.
However, Moody’s assessed that the balance of risks was on the downside. An agreement with the IMF could take longer than expected, as the government may find it difficult to reduce fuel and power subsidies given rising inflation.
Moody’s assesses that political uncertainty in Pakistan remains high, even after the new government has been installed. The new ruling coalition comprises 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 programme.
Moreover, the next elections are due by the middle of 2023. In Moody’s view, 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.
Published in Dawn, June 3rd, 2022
