Moody’s assigns B3 rating to Sukuk

Says rating is underpinned by relatively large economy, robust growth potential

KARACHI:

Moody’s Investors Service – a global credit rating agency – has assigned “B3 backed senior unsecured rating” to Pakistan’s planned sale of US dollar-denominated, seven-year sovereign Sukuk (Shariah-compliant bond) in the international market.

“Pakistan’s B3 issuer rating is underpinned by its relatively large economy and robust long-term growth potential, as well as ongoing reforms that may strengthen policy effectiveness over time,” Moody’s said while giving the rationale behind the rating on Tuesday.

“Credit challenges include structural constraints to export competitiveness, the government’s high debt burden and a narrow revenue base that reduces fiscal flexibility and weakens debt affordability, as well as political risks that can influence the reform trajectory,” it added.

The government has appointed Credit Suisse, Deutsche Bank, Dubai Islamic Bank and Standard Chartered Bank as advisers for the Sukuk issue, it has been learnt.

The launch of Sukuk will help increase Pakistan’s foreign exchange reserves and improve its capacity to make international payments for imports and repay foreign debt.

However, the timeframe and amount of the debt planned to be raised through the Sukuk remains unknown.

The government may opt to launch the Sukuk after the International Monetary Fund (IMF) board approves the resumption of $6 billion loan programme, which has been on hold since June 2020.

The IMF board is scheduled to meet on January 28 to discuss Pakistan’s case.

“External financing needs of Pakistan stand at $26 billion for FY22 (current fiscal year), which are likely to be comfortably met and they are anticipated to help fuel the reserves,” Arif Habib Limited said in a report in late December 2021.

During the initial months of FY22, Pakistan raised around $1 billion by issuing Eurobond in the international market.

“Pakistan will be relying on financing from the IMF and other bilateral partners to meet its external debt requirements in FY22,” it added. “We have assumed that the net increase in foreign exchange reserves during FY22 will be $1.3 billion (to close at $27.5 billion).”

Moody’s said “proceeds from the Sukuk issuance will be used by the company (a special purpose vehicle) to purchase assets from the National Highway Authority.”

The amount subsequently received by the government of Pakistan in consideration for the transaction will be used for general budgetary purposes.

It said that upward pressure on Pakistan’s rating would develop if ongoing fiscal reforms were to expand the government’s revenue base, raise debt affordability, and lower its debt burden “beyond our current expectations”.

“A structural reduction in external vulnerability risks, including through higher levels of foreign exchange reserve adequacy that were sustainable 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.

In addition, participation in official sector debt relief programmes that raised the probability of private sector participation would likely point to a lower rating and commensurate with the potential losses to be incurred.

Commenting on Pakistan’s environmental, social and governmental considerations, Moody’s said that the country’s ESG credit impact score was highly negative (CIS-4), reflecting its high exposure to environmental and social risks, as well as its weak governance profile.

Relatively weak institutions constrain the government’s capacity to address ESG risks.

The exposure to environmental risk is highly negative (E-4 issuer profile score) because of Pakistan’s vulnerability to climate change and the limited supply of clean, fresh and safe water.

With varied climates across the nation, Pakistan is significantly exposed to extreme weather events, including tropical cyclones, drought, floods and extreme temperatures.

Published in The Express Tribune, January 19^th, 2022.

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