Moody’s hints at downgrading Pakistan’s external credit rating

Agency says negative outlook is driven by heightened external vulnerability risk


Salman Siddiqui December 14, 2018
Expectations that government debt would continue to rise markedly, with a related deterioration in debt affordability from already weak levels, could also lead to a rating downgrade. PHOTO: FILE

KARACHI: Moody’s - the global credit rating agency - has hinted at the possibility of downgrading Pakistan’s external credit rating ahead of the country’s plan to float Eurobond aimed at raising $3 billion from world markets.

The debt level of Pakistan - whose foreign currency reserves have dropped to the critical level of around one and a half month of import cover - is expected to swell with weak repayment capacity. This grave situation may convince the agency to downgrade the rating.

At present, Moody’s maintains ‘B3 negative’ credit rating for Pakistan.

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“The negative outlook is primarily driven by heightened external vulnerability risk. A further deterioration in Pakistan’s external position, including a more pronounced erosion of foreign reserve buffers, which would threaten the government’s external repayment capacity and heighten liquidity risks further, would likely result in a downgrade of the rating,” Moody’s said in its annual credit analysis titled ‘Government of Pakistan - B3 Negative’ on Thursday.

“Expectations that government debt would continue to rise markedly, with a related deterioration in debt affordability from already weak levels, could also lead to a rating downgrade,” it said.

The global rating agency has issued the warning for the possible rating downgrade at a time when the county is planning to float Eurobond and Sukuk worth $3 billion in the international market to increase its capacity of making international payments.

The country remains in talks with the International Monetary Fund (IMF) to acquire a bailout of $8 billion during January-March 2019. Besides, it is in contact with friendly countries and strategic partners to get financial assistance worth $11-12 billion in following months.

“At around 72% of GDP as of end-fiscal year 2018, the government’s debt stock… burden (is) to rise further and peak at around 76% of GDP in fiscal 2020,” it said.

Economic growth forecast

Moody’s expects real GDP growth in Pakistan to slow to 4.3-4.7% in fiscal year 2019 (ending June 2019) and fiscal 2020 from 5.8% in FY18 in part due to policy measures taken to address the external imbalance.

“While we expect Pakistan’s growth to slow over the next two years, in part because of policy measures to address the external imbalance, economic activity will remain relatively robust in line with the country’s historical growth performance. Further institutional reforms planned by the new government, if effectively implemented, will also bolster institutional strength, which has increased in recent years with greater central bank autonomy and monetary policy effectiveness,” it said. “The longer-term economic prospects remain robust, in part because of improvements in power supply, infrastructure and national security that have raised the country’s growth prospects and hence business confidence.

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“The negative outlook signals that a rating upgrade is unlikely,” it said. “The outlook is likely to be changed to stable if external vulnerability risks decreased materially and durably, including through policy adjustments that strengthen the external payments position. A resumption of fiscal consolidation pointing to a significant reduction in the debt burden would also be credit positive.

Balancing credit challenges is the country’s strong growth potential, a relatively large but low-income economy and a stable banking sector. In particular, infrastructure investments and the significant increase in power supply, including through projects under the China-Pakistan Economic Corridor (CPEC), will address some of Pakistan’s long-term economic constraints and strengthen its growth potential.

Published in The Express Tribune, December 14th, 2018.

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