By Staff Reporter
KARACHI: Rating agency Moody’s Investors Service downgraded Pakistan outlook to negative from stable on Thursday, citing higher fiscal risks due to a delay in the revival of International Monetary Fund’s bailout programme.
“The decision to change the outlook to negative is driven by Pakistan’s heightened external vulnerability risk and uncertainty around the sovereign’s ability to secure additional external financing to meet its needs,” the rating agency said in a statement.
Moody’s assessed that Pakistan’s external vulnerability risk has been amplified by rising inflation, which puts downward pressure on the current account, the currency and already thin foreign exchange reserves, especially in the context of heightened political and social risk.
“Pakistan’s weak institutions and governance strength adds uncertainty around the future direction of macroeconomic policy, including whether the country will complete the current IMF Extended Fund Facility (EFF) programme and maintain a credible policy path that supports further financing.” Pakistan’s B3 local and foreign currency issuer and senior unsecured debt ratings, the (P)B3 senior unsecured MTN programme rating, was affirmed by the agency.
The decision reflected the assumption that, “notwithstanding the mentioned downside risks, Pakistan would conclude the seventh review under the IMF EFF programme by the second half of this calendar year, maintaining its engagement with the Fund, which would lead to additional financing from other bilateral and multilateral partners”.
In case of additional funding, Pakistan would be able to close its financing gap for the next couple of years. The B3 rating also incorporates Moody’s assessment of the scale of Pakistan’s economy and robust growth potential, which would provide the economy with some capacity to absorb shocks.
“These credit strengths are balanced against Pakistan’s fragile external payments position, weak governance and very weak fiscal strength, including very weak debt affordability,” the statement said. The agency said the B3 rating affirmation also applies to the backed foreign currency senior unsecured ratings for The Third Pakistan International Sukuk Co Ltd and The Pakistan Global Sukuk Programme Co Ltd. The associated payment obligations were, in Moody’s view, direct obligations of the Pakistan government. Concurrent to the action on Thursday, Pakistan’s local and foreign currency country ceilings were lowered to B1 and B3, from Ba3 and B2, respectively. “The two-notch gap between the local currency ceiling and sovereign rating is driven by the government’s relatively large footprint in the economy, weak institutions, and relatively high political and external vulnerability risk,” the rating agency said. The two-notch gap between the foreign currency ceiling and the local currency ceiling reflects incomplete capital account convertibility and relatively weak policy effectiveness, which point to material transfer and convertibility risks notwithstanding moderate external debt.
Copyright © 2021 Independent Pakistan | All rights reserved
