Moody’s slashes Pakistan’s credit standing to Caa3 — lowest in 3 many years – Pakistan
World score company Moody’s on Tuesday cut Pakistan’s sovereign credit standing by two extra notches to ‘Caa3’ — the bottom in three many years — amid worldwide mortgage negotiations, saying the nation’s more and more fragile liquidity “considerably raises default dangers”.
The company additionally modified the nation’s outlook from damaging to steady.
The federal government has been in talks with the Worldwide Financial Fund (IMF) to safe a $1 billion mortgage, which has been pending since late final yr over coverage points.
It’s a part of a stalled $6.5bn bailout package deal, initially accepted in 2019.
A fee by the IMF could assist to cowl Pakistan’s instant wants, Moody’s mentioned, however warned that “weak governance and heightened social dangers impede Pakistan’s capacity to repeatedly implement the vary of insurance policies that will safe giant quantities of financing.”
Islamabad has been endeavor key measures akin to elevating taxes and eradicating blanket subsidies and synthetic curbs on the alternate charge to safe the funds to avert an financial disaster.
The score company additionally mentioned that there’s “very restricted visibility” on Pakistan’s sources of financing for its “sizeable exterior funds wants” past the life of the present IMF programme that ends in June 2023.
Pushed to the brink by final yr’s devastating floods, Pakistan has reserves barely sufficient for 3 weeks of important imports, whereas hotly contested elections are due by November.
A Reuters ballot on Tuesday confirmed Pakistan’s central financial institution may hike rates by 200 foundation factors in an off-cycle assembly this week to unlock the IMF funds.
Reasons for credit rating downgrade
Elaborating on the reasons for the sovereign credit rating’s downgrade, Moody’s said the government’s liquidity and external vulnerability risks had risen further since the last review in October and foreign exchange reserves had declined to a “critically low level”.
“Amid delays in securing official sector funding, risks that Pakistan may not be able to source enough financing to meet its needs for the rest of fiscal 2023 (ending June 2023) have increased.
“Beyond this fiscal year, liquidity and external vulnerability risks will continue to be elevated, as Pakistan’s financing needs will remain significant and financing sources are far from secure. At the same time, the prospects of the country materially increasing its foreign exchange reserves are low,” Moody’s said.
It estimated that Pakistan’s external financing needs for the rest of the fiscal year would be $11bn.
It added that the country would need to secure financing from the IMF and other multilateral and bilateral partners for these financing needs.
“Despite recent delays, Moody’s assumes successful completion of the ninth review of the existing IMF programme, although this is not secured yet. This would in turn catalyse financing from other multilateral and bilateral partners.
“At the same time, the government will also need to obtain the rollover of the $3bn China SAFE deposits and secure $3.3bn worth of refinancing from Chinese commercial banks for the rest of this fiscal year.”
Moody’s noted that even though this year’s external payment needs may be met, “the liquidity and external position next year will remain extremely fragile.”
“Pakistan’s external debt repayments will remain high for the next few years. Moody’s estimates Pakistan’s external financing needs for fiscal 2024 are around $35-36bn. Pakistan has about $25-26bn worth of external debt repayments (including interest payments) to make in fiscal 2024.”
The agency reiterated that financing options beyond June 2023 were “highly uncertain”.
“It is not clear that another IMF programme is under discussion and if it does happen, how long the negotiations would take and what conditions would be attached to it. However, in the absence of an IMF programme, Pakistan is unlikely to unlock sufficient financing from multilateral and bilateral partners.”
Another major reason it explained for the credit rating downgrade was the constraining of prospects for further reforms due to acute exposure to social risks and weak governance.
“Elevated social risks and weak governance compound the government’s difficulty in advancing further reforms.
“Households are already facing high and increasing costs of living. Inflation in
Pakistan is very high,” the agency said, pointing out that headline inflation was likely to rise further as energy prices increased in tandem with
the removal of energy subsidies.
“Implementing further measures to raise revenue or cut spending in this environment is extremely socially and politically challenging.”
At the same time, it noted that reforms to raise fiscal revenues remained key to further IMF financing.
Reason for stable outlook
Meanwhile, regarding the change in the country’s outlook, Moody’s said it reflected the agency’s assessment that “credit pressures that Pakistan faces
are broadly balanced at a Caa3 rating level.”
“Continued IMF engagement, including beyond the current programme, would likely help to support additional financing from other multilateral and bilateral partners, which could reduce default risk, if this is achieved urgently and without further raising social pressures.
“Conversely, this fiscal year or beyond, financing from the IMF and other partners may not be disbursed in time, which, given the extremely low reserves position, could lead to default,” the agency noted.
Factors leading to rating upgrade or downgrade
Regarding a possible change in the credit rating, Moody’s outlined the below conditions for the two scenarios:
“The rating would likely be upgraded if Pakistan’s government liquidity and external vulnerability risks decreased materially and durably. This could come with a sustainable increase in foreign exchange reserves. A resumption of fiscal consolidation, including through implementing revenue-raising measures, pointing to a meaningful improvement in debt affordability would also be credit positive.
“The rating would likely be downgraded if Pakistan were to default on its debt obligations to private-sector creditors and the expected losses to creditors as a result of any restructuring were larger than consistent with a Caa3 rating.”