Moody’s upgrades Pakistan’s outlook to ‘stable’ from ‘negative’

Experts say move to revive foreign investors’ confidence in Pakistan

Salman Siddiqui December 02, 2019

KARACHI: Moody’s Investors Service – a leading global agency – has upgraded Pakistan’s credit rating outlook to 'stable' from 'negative' ahead of the launch of Eurobond and Sukuk worth around $2 billion in the world markets.

"The change in outlook to stable is driven by Moody’s expectations that the balance of payments dynamics would continue to improve, supported by policy adjustments and currency flexibility," read a Moody’s report released on Monday.

“The improvement in the outlook is highly expected to revive foreign investors' confidence in Pakistan, compelling them to pour-in significant amounts in different sectors of the economy like manufacturing, agriculture and exports and portfolio investment in stocks and debt markets,” experts said.

The US-based rating agency revised upwards the outlook after a gap of 18 months. Earlier, it had downgraded the outlook to negative in June 2018.

"Moody’s upgrades Pakistan's outlook to B3 'stable' from 'negative'. The upgradation of outlook to stable is affirmation of government's success in stabilising the country’s economy and laying a firm foundation for robust long-term growth," Adviser to Prime Minister on Finance and Revenue Dr Abdul Hafeez Shaikh said in a tweet.

"Moody's acknowledges success of stabilisation measures and upgrades Pakistan’s outlook from negative to stable. Should help improve access to financing and reduce its cost," Federal Minister for Planning, Development and Reforms Asad Umar said a tweet.

The Moody's announcement pushed Pakistan’s stock market above 40,000 points level on Monday after a gap of 10 months. The Pakistan Stock Exchange’s (PSX) benchmark KSE 100 Index surged 2.08%, or 836.57 points, to 40,124.22 points.

BMA Research Executive Director Saad Hashmi said Moody's upgradation in the outlook would help Pakistan raise fresh debt at a comparatively low rate of return in the international markets.

The Pakistan Tehreek-e-Insaf government is expected to float Eurobonds and Sukuks over the next couple of months to stabilise the country's foreign currency reserves.

The country was expected to float the international bonds by this time, as it paid over $1 billion on Monday against a matured Sukuk floated in November 2014.

The payment is estimated to have shaken up the foreign currency reserves, which stood at $8.68 billion in the week ended on November 22.

"Foreign exchange reserves have fluctuated by around $7-8 billion over the past few months, sufficient enough to cover just two to two-and-a-half months of goods imports," the rating agency said.

The Moody's latest announcement would compel foreigners to start looking towards Pakistan in a positive manner.

The upgraded outlook would attract both foreign direct investment (FDI) and portfolio investment in the country.

"Foreigners seriously consider such sovereign credit ratings and outlook before investing in any country across the globe," he said. "This should lead to higher foreign inflows in the country."

This would also be positive for the stock and debt markets. Pakistan has so far attracted over $1 billion in debt instruments (mostly in Treasury Bills) since the beginning of the current fiscal year on July 1 as compared to zero investment in the prior 25 months.

"The hot money in debt instruments may be at around $3-4 billion in the current fiscal year," he added.

Moody’s also affirmed the government of Pakistan’s local and foreign currency long-term issuer and senior unsecured debt ratings at B3.

“Such developments reduce external vulnerability risks, although foreign exchange reserve buffers remain low and will take time to rebuild.”

Moody’s said the recent currency depreciation has pushed upwards Pakistan’s debt level and weakened Islamabad’s fiscal strength.

However, the credit rating agency said, “The ongoing fiscal reforms, including through the country’s International Monetary Fund (IMF) programme, would mitigate risks related to debt sustainability and government liquidity.

“The rating affirmation reflects Pakistan’s relatively large economy and robust long-term growth potential, coupled with ongoing institutional enhancements that raise policy credibility and effectiveness, albeit from a low starting point.

“Moody’s expects Pakistan’s current account deficit to continue narrowing in the current and next fiscal year (ending June of each year), averaging around 2.2% of the GDP, from more than 6% in fiscal year 2018 (the year ending in June 2018) and around 5% in fiscal 2019.

“Under Moody’s baseline assumptions, subdued import growth would likely remain the main driver of narrowing current account deficits. In particular, the ongoing completion of power projects will reduce capital goods imports, while oil imports would remain structurally lower given the gradual transition in power generation away from diesel to coal, natural gas and hydropower.

“Currently, tight monetary conditions and import tariffs on nonessential goods would also weigh on broader import demand for some time, although Moody’s sees the possibility of monetary conditions easing when inflation gradually declines towards the end of the current fiscal year.

“Moody’s expects exports to gradually pick up on the back of the real exchange rate depreciation over the past 18 months, also contributing to narrower current account deficits.

“The government is focusing on raising the country’s trade competitiveness and has recently rolled out a National Tariff Policy aimed at incentivising production for exports or import substitution.

“If effective, the policy, coupled with improvements in the terms of trade, would allow exports to grow more robustly. The substantial increase in power generation capacity over the past few years and improvements in domestic security have largely addressed two significant supply-side constraints and further support export-related investment and production.

“Moody’s expects policy enhancements, including strengthened central bank independence and the commitment to currency flexibility, to support the reduction in external vulnerability risks.

“In particular, the government is planning to introduce a new State Bank of Pakistan (SBP) Act to forbid central bank financing of government debt and clarify SBP’s primary objective of price stability.

“The central bank has already stopped purchases of government debt in practice since the start of fiscal year 2020. At the same time, it has strongly adhered to its commitment to a floating exchange rate regime since May 2019.

“These enhancements to the policy framework would foster confidence in the Pakistani rupee, while the use of the exchange rate as a shock absorber increases policy buffers.

“Coverage of external debt due also remains low, with the country’s External Vulnerability Indicator — which measures the ratio of external debt due over the next fiscal year to foreign exchange reserves — remaining around 160-180%.

“The IMF programme, which commenced in July 2019, targets higher foreign exchange reserve levels and has unlocked significant external funding from multilateral partners, including the Asian Development Bank and the World Bank.

“Nevertheless, unless the government can effectively mobilise private sector resources, foreign exchange reserves are unlikely to increase substantially from current levels.

”The report also included a rationale for Pakistan’s rating approval.

“The affirmation of Pakistan’s B3 rating is underpinned by the country’s relatively large economy and robust growth potential, coupled with ongoing enhancements to the institutional and policy framework that raise policy credibility and effectiveness, albeit from a low starting point. Pakistan’s economy is among the largest across similarly rated peers, while we estimate its growth potential to be around 5%, higher than the median for B3 rated sovereigns.

”The report further outlines scenarios for upward or downward changes in Pakistan’s credit rating. “Upward pressure on Pakistan’s rating would develop if ongoing fiscal reforms were to raise the government’s revenue base and debt affordability, and lower its debt burden markedly beyond Moody’s current expectations.

“Further reduction in external vulnerability risks, including through higher levels of foreign exchange reserve adequacy and/or increased economic competitiveness that were to lift export prospects, would also put upward pressure on the rating.

“Downward pressure on the rating would stem from renewed deterioration in Pakistan’s external position, including through a significant widening of the current account deficit and erosion of foreign exchange reserve buffers, which would threaten the government’s external repayment capacity and heighten liquidity risks.

“A continued rise in the government’s debt burden, without prospects for stabilisation over the medium term, would also put downward pressure on the rating,” read the Moody’s report.


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