Credit rating downgrade

Contrary to any reassurances Finance Minister Ishaq Dar has to offer, Pakistan is now closer than ever to defaulting on its sovereign debt. Fitch Ratings, one of the world’s big three credit rating agencies, has downgraded Pakistan to CCC-, putting it among the most precariously placed countries in the world. Anything below BBB is considered to not be “investment grade”, meaning that products offered by such entities are unsafe investments. CCC is defined as “vulnerable and dependent on favorable economic conditions to meet its commitments” which means Pakistan is increasingly dependent on events beyond its control if it is to avoid default. There are two full grades — CC and C — before the default rating, and the country is already on the verge of meeting some of the conditions for these lower ratings, including “indications that the authorities are considering debt restructuring or further deterioration in external liquidity and funding conditions.”

Indeed, the only thing standing between Pakistan and default right now is, possibly, “strong performance” on IMF conditions, rebuilding reserves, and external risk reduction. Fitch did not offer a detailed projection of its own as it does not do this for countries rated below CCC+. However, the agency did cite foreign exchange reserves hitting “critically low levels”. Making things worse is the fact that Fitch analysts “assume a successful conclusion of the ninth review of Pakistan’s IMF programme”, meaning that even the IMF’s blessings may not be enough to turn the tide.

Dar-enomics also got some criticism, as Fitch cited his “informal exchange-rate cap” among the problems that created pressure. Even the silver linings appear more akin to rusted metal, as resolving the container crisis at ports could cancel out the reduction in the current account deficit, and conditions tied to IMF loan approval “are likely to prove socially and politically difficult”, especially in an election year. We know that sometimes things must get worse before they get better. But how much worse can they get?

Published in The Express Tribune, February 16^th, 2023.

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