Ratings downgrade

Fitch, the New York-based global credit rating agency, on Friday nudged lower Pakistan’s long-term foreign currency issuer default rating to ‘B-’ from ‘B’, citing a rise in external financing risk from low reserves and high external debt repayments, along with a continued worsening in the economy’s fiscal position. It, however, judged the country’s rating outlook as stable. This downgrade comes as inflation has risen because of a significant rupee depreciation and higher energy prices, the global rater noted in its country report. Credit ratings are determined by whether there is a realistic chance that the country will default on interest payments and repaying its credit. While Islamabad can legitimately draw satisfaction from the fact that it has no history of default on its sovereign debt, the risks ahead cannot be glossed over. Adding to the foreign debt stock in the future will be the borrowings made from China to execute the humongous China-Pakistan Economic Corridor (CPEC) project. The jury is still out on whether that level of foreign debt can be sustainable for a country like Pakistan.

With depleting foreign exchange reserves, the pressure is already mounting on the country to quickly conclude another bailout package with the International Monetary Fund (IMF), the second one since 2013, when Islamabad was loaned $6.7 billion. Officials have set mid-January as the target date for the international lender to sign off on the deal. Fitch said successful talks on IMF support could help in stabilising Pakistan’s external finances but added a note of caution that the programme will face a significant implementation risk. In October, Finance Minister Asad Umar announced that Saudi Arabia had offered $3 billion in foreign currency support to the country’s central bank and a further loan worth $3 billion in deferred payments for oil. That announcement came as a godsend for the country desperately looking for balance of payments support. As Fitch notes, the financial commitments given to the country by Saudi Arabia, China and the United Arab Emirates have helped the economy plug its near-term financing gap. A dire comment it appended to its report is that Pakistan’s tensions with neighbouring countries pose a geopolitical risk.

Published in The Express Tribune, December 17^th, 2018.

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