Moody’s cuts Pakistan’s growth forecast to 2-2.5%

Moody's says revision in Pakistan's GDP projection reflects impact of coronavirus pandemic

​ Our Correspondent April 03, 2020
A Reuters' file photo

KARACHI: Moody’s Investors Service has said that Pakistan’s economy continues to grow unlike the likely recession in several other economies amid the global health crisis but has revised down its growth projection to 2-2.5% for the current fiscal year ending June 30, 2020.

The global credit rating agency had foreseen the country’s gross domestic product (GDP) growth at 2.9% before the coronavirus pandemic hit people, businesses and economic activities in Pakistan early last month.

Besides, it found the country’s central bank measures to protect people, businesses and the economy supportive towards the banking system.

Moody’s said the downward revision in GDP growth “reflected the impact of the coronavirus pandemic”.

Talking to a private TV channel the other day, former finance minister Dr Hafiz Pasha hinted at a recession in Pakistan in the “extreme situation” if the health crisis worsened and took a toll on people’s lives and jobs.

He estimated around five million layoffs in the worst-case scenario in the country.

Prime Minister Imran Khan has said that the country can handle up to 25,000 coronavirus cases and will be in trouble if infections reach around 50,000. So far the number of such cases stands at around 2,300.

The State Bank of Pakistan (SBP) revised down its projection for GDP growth to 3% in the middle of the coronavirus-fuelled crisis some two weeks ago compared to the forecast of 3.5% in January 2020.

Moody’s stated, “Consumption of services, which has underpinned growth in recent years, will be adversely affected by the movement restrictions (the lockdown that has been extended till April 14).”

The textile sector, the country’s key manufacturing sector which accounted for around 60% of export earnings, had also been hit by supply-chain disruptions and a decline or postponement of export orders, it said.

Manufacturing loans (mainly to the textile and food sectors) accounted for 62% of private-sector loans as of February 29, 2020, it noted.

SBP measures

“Pakistani central bank’s measures will soften coronavirus effects on banks,” Moody’s said.

The SBP cut the benchmark interest rate cumulatively by 225 basis points to 11%, reduced banks’ capital conservation buffer by 100 basis points to 1.5%, relaxed terms for new and existing loans and announced other forbearance measures to increase banks’ cushion against the economic effects of coronavirus, it said.

“We expect the measures to mitigate banks’ asset-quality deterioration amid less business generation and loan growth in an economic slowdown,” it said.

“Additionally, Pakistani banks we rate - Habib Bank Limited, National Bank of Pakistan, United Bank Limited, MCB Bank Limited and Allied Bank Limited - benefit from high or very high levels of government support, which will shield their credit profiles from impairment of their standalone credit assessments,” it said.

“The policy rate reduction…will help maintain credit growth, which we expect will remain below nominal GDP growth (including inflation impact). Lower interest rates on loans will also improve borrowers’ repayment capacity. However, the lower rates will reduce net interest margins and diminish banks’ earnings.”

Reducing the capital conservation buffer to 1.5% will free up Rs800 billion of capital, or 10% of outstanding loans, according to the SBP’s estimate. The lower buffer will support banks’ lending activities, but creates potential asset-quality pressure, it said. The SBP has offered cash-flow relief through loan refinancing schemes and loan payment holidays to borrowers such as exporters and manufacturers affected by the coronavirus disruptions.

The central bank is allowing delayed principal payments (but not interest) for up to one year at the discretion of the lender, but application for the delay must be made by June 30, 2020. “The grace period lowers the risk of asset impairment and supports the value of securitised assets over the longer term,” it said.

The central bank is allowing banks to classify restructured loans as performing unless the borrower has taken no action for 180 days after the originally scheduled payment date.

It has also postponed for two months until August 30, 2020 the preparation of pro forma accounts based on the International Financial Reporting Standard No 9 (IFRS9), requiring full implementation by January 1, 2021.

“The delay supports capital ratios that would be adversely affected by higher provisions if IFRS9 were to have taken effect earlier. These measures will hide risks that, if prolonged, will reduce the transparency of loan underwriting and asset quality,” Moody’s said.

Published in The Express Tribune, April 3rd, 2020.

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