Moody's said on Wednesday it had raised Pakistan's credit rating by one notch to 'Caa1' from 'Caa2' due to an improving external financial position and it assigned the country a "stable" outlook.
The announcement came within hours of Pakistan's Finance Minister Mohammed Aurangzeb saying there was more room for the central bank to cut the country's key policy rate from 11% on the back of positive economic indicators.
"The credit rating's improvement is a sign that economic policies are heading toward the right direction," Prime Minister Shehbaz Sharif said in a statement.
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Pakistan's international bonds rose as much as 1 cent to between 90 and 100 cents on the dollar following the ratings upgrade. It lifted most of them to their highest since early 2022 when fears of a full-blown debt crisis sent them plunging to as little as 30 cents.
Moody's decision to raise the rating by one notch after Fitch and S&P did the same will help Pakistan's capability to raise external debt. Pakistan says its economy is on a recovery path after a $7 billion IMF bailout helped to stabilise it.
"We changed the outlook for the Government of Pakistan to stable from positive," Moody's said in a statement.
"The upgrade to Caa1 reflects Pakistan's improving external position, supported by its progress in reform implementation under the IMF Extended Fund Facility (EFF) program," it said.
Pakistan's debt affordability has improved, but remains one of the weakest among rated sovereigns, Moody's said, adding that the Caa1 rating also reflected the country's weak governance and high degree of political uncertainty.
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Aurangzeb told a gathering of businessmen in Islamabad ahead of the Moody's announcement that he was expecting an improvement in Pakistan's credit rating by other agencies after Fitch and S&P.
"We are hopeful of progress in terms of the policy rate going south," he added.
Aurangzeb said it was his personal view that there was more room for a rate cut towards the end of the year, adding that it was for the central bank to make the final call on the issue.
The next policy rate announcement is due on September 15.
The central bank left its key interest rate unchanged at 11% on July 30, going against analyst expectations. In a Reuters poll they had forecast a reduction of 50 to 100 basis points.
The bank said the inflation outlook had deteriorated due to rising energy prices.
Inflation accelerated to 4.1% year-on-year in July.
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