Moody’s downgrades Pakistan’s sovereign credit rating to lowest ever

Move surprises analysts; most local observers see macroeconomic trends stabilising.

KARACHI: In a move that has surprised most local analysts, the credit rating agency Moody’s has downgraded Pakistan’s sovereign rating to its lowest level ever, citing a worsening current account balance, foreign exchange reserves, and looming payments to the International Monetary Fund.

The New York-based Moody’s – one of the three largest credit rating agencies in the world – downgraded Pakistan’s foreign and local currency bond ratings from B3 to Caa1, equal to the lowest rating Pakistan has ever gotten.

In a note issued on Friday, Moody’s Singapore-based analyst Thomas J Byrne listed four major reasons for the downgrade: “a deterioration in Pakistan's balance of payments over the past year, the looming large repayments to the IMF, the dwindling level of official foreign-exchange reserves, and the institutional weakness stemming from political instability and constrained government finances.” The ratings agency also issued a negative outlook for the country, meaning that a rating upgrade is unlikely in the medium term.

Yet many local economists and analysts questioned the move. In a note issued to clients on Friday afternoon, KASB Securities expressed incredulity at the fact that Moody’s has downgraded Pakistan to a rating level lower than the one the country had during the depths of the 2008 financial crisis.

“We are a little surprised by the timing of this downgrade,” said Imtiaz Gadar, an economist at KASB Securities. “If this announcement had come two months ago, we would have understood why. Oil prices were high and relations with the US were at a low point. But now, oil prices have dropped 20% and relations with the US have improved. So this comes as a bit of a surprise.”

The last time Moody’s downgraded Pakistan to a level this low was on October 23, 1998, soon after the country had tested six nuclear weapons. Indeed, the agency had immediately downgraded Pakistan from B2 to B3 on the very day that Pakistan conducted five nuclear weapons tests: May 28, 1998.

After those two back-to-back ratings downgrades, Pakistan’s ratings – according to Moody’s, at least – stayed at Caa1 until February 13, 2002, when it was upgraded again to B3. This was done shortly after Pakistan agreed to join the US-led coalition in what was then referred to as the “war against terror” and began receiving large amounts of financial assistance from Washington.

Moody’s highest rating ever for Pakistan was B1, which lasted between November 2006 to May 2008. The country was downgraded to B3 in October 2008, shortly before the IMF rescue package for Pakistan came into effect.

All of these ratings, however, classify Pakistani debt as “junk”. In order to jump to the lowest level of investment grade, Pakistan’s debt rating would have to go up seven notches.

Analysts at Burj Capital and KASB Securities expressed surprise that the recent improvement in relations between Islamabad and Washington – which is likely to result in the resumption of Coalition Support Funds payments – has not been taken into consideration.

“It is almost as if [Byrne] had prepared a report with a downgrade, and when the situation improved, he ignored it, added only one cursory reference to it [resumption of CSF payments] and sent out the report anyway,” said Gadar.

Moody’s offices in New York and Singapore did not respond to requests by The Express Tribune for comment.

Standard & Poor’s, the only other global rating agency that assesses Pakistani sovereign risk, has not changed its rating for Pakistan – a B- (equivalent of a B3 from Moody’s) – since August 24, 2009. S&P’s outlook on Pakistan’s rating is stable, which means it is unlikely to downgrade the country anytime soon. Fitch, the third major agency, does not rate Pakistan.

Published in The Express Tribune, July 14^th, 2012.