Fitch warns of impact in ratings five Asian nations including Pakistan

Fitch Ratings says a possible dip in foreign inflows, higher need for financing may hit credit ratings

KARACHI:

Fitch Ratings has set off alarm bells to alert five Asian nations including Pakistan that their credit ratings may be impacted due to a potential decline in foreign currency inflows on account of workers’ remittances and subsequent higher need for foreign financing in the second half of 2020.

The global credit rating agency said the receipt of record high remittances by Pakistan consecutively in June and July was due to temporary factors.

The receipts are set to drop due to a squeeze on income and loss of jobs by the expatriates abroad in the wake of Covid-19 pandemic and an international oil pricing crisis, particularly in the Gulf countries from where Islamabad attracts more than half of the total remittances every month, it said.

It estimated, on an average, 12% drop in annual remittances for the five nations, including Pakistan, Bangladesh, Sri Lanka, India and Philippines compared to 20% anticipated by the World Bank and Asian Development Bank (ADB).

“Remittances should improve beginning in 2021, but the recovery is likely to be gradual,” Fitch stated in its report titled ‘APAC (Asia-Pacific) Remittances and the Coronavirus Shocks: Remittances Set to Decline in 2020 Despite Recovery in Recent Months.’

Pakistan received record high workers’ remittances at $23.10 billion in the previous fiscal year ended June 30, 2020 and all-time high at $2.77 billion in the single month of July which is the first month of the current fiscal year 2021.

Pakistan is among the nations that rely on remittances, as the inflows stand at 7.9% of its gross domestic product (GDP). The potential drop in the flows would keep Islamabad fiscal and current account deficits (the gap between the government higher foreign expenditures and low income) on higher side and may impact its collection of revenue in taxes as well.

The rating agency, however, also foresaw moderate drop in need for foreign currencies in the backdrop of contraction in imports and low international oil prices.

“Declining remittances may affect sovereign ratings through external finances and economic growth,” Fitch said. “Remittances are a key source of foreign currency receipts…As a result, lower remittances will most likely widen current account deficits, contributing to higher external financing needs.”

According to the ADB, Fitch said, about 4% of households in Pakistan receive remittance income. The Gulf region is an important source of remittance flows, particularly for countries in South Asia. “The region accounts for roughly half of remittance inflows in Bangladesh (58%), Pakistan (54%), Sri Lanka (45%) and India (51%),” it said.

“For countries with fragile external finances, such as Pakistan and Sri Lanka, the expected shock to remittances could exacerbate existing challenges,” it said.

Pakistan has reduced its current account deficit, from a high of 6.1% of GDP in the fiscal year ending June 2018 (FY18) to 1.1% in FY20. It has also modestly rebuilt foreign-exchange reserves, in large part from a shift to a more market-determined exchange rate. Fitch forecasts the deficit to widen to 1.7% of GDP in FY21, in part as remittances fall and offset gains from lower oil prices. Financing from the IMF through an ongoing $6 billion programme and $1.4 billion Rapid Financing Instrument (RFI) facility, along with other multilateral and bilateral support and participation in the G-20s Debt Service Suspension Initiative, are a buffer against the fall in remittances, it said.

“Lower remittances, along with a decline in tourism and weaker exports, are forecast to widen the current account deficit to 3.5% of GDP this year - despite some relief from lower oil prices - from 2.2% in 2019.”

Remittance flows in the APAC (Asia-Pacific) region were mixed in the second quarter of 2020. Monthly data showed a considerable and broad decline in remittances during April and May, but a recovery in June and July. The rebound in flows was particularly robust in Pakistan and Bangladesh, where flows broke records in both June and July, it said.

“Anecdotal evidence points to temporary factors for the increase in recorded remittances in the recent period. These include migrant workers transferring their full savings in preparation to return home, the impact of lockdown restrictions on transferring funds and a shift to formal remittance channels,” it said.

Fitch does not expect the resilience in remittances to be sustained and forecasts a decline during the second half of the year as the temporary support factors fade. “Our forecasts are slightly more modest than the World Bank and ADB estimates, with a decline of about 12% across the region.”

Fitch expects remittance flows to decline in the second half of 2020, as many of the temporary effects supporting remittance flows dissipate. Tens of thousands of migrant workers have returned to their home countries, and travel restrictions have limited the flows of new workers.

Published in The Express Tribune, September 9^th, 2020.

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