By Staff Reporter
KARACHI: S&P Global Ratings on Tuesday affirmed Pakistan’s long-term sovereign credit rating at ‘CCC+’ and short-term rating at ‘C’, with a stable outlook, citing the country’s reliance on sustained external support and hefty debt-servicing costs.
“Pakistan’s foreign exchange reserves have increased with official aid, but the country remains dependent on sustained support and the rollover of credit facilities to maintain its external buffers, which are still low,” S&P Global said in a statement.
The ratings agency noted that “hefty debt-servicing costs continue to exert pressure on the government’s fiscal position, at a time of high inflation, tight monetary conditions, and elevated political uncertainties that may affect the efficacy of policymaking.”
S&P said the stable outlook balances the risks to Pakistan’s external liquidity position and fiscal performance against the prospect of support from multilateral and bilateral partners.
The ratings agency warned that a rapid deterioration in Pakistan’s external indicators or a widening of fiscal deficits could lead to a downgrade. “We could lower our ratings if Pakistan’s external indicators deteriorate rapidly or fiscal deficits widen to exceed the domestic banking system’s financing capacity, to the extent that the government’s willingness or ability to service its commercial debt is diminished.”
One potential indication of domestic financing stress would be further increases in the government’s interest burden, which we estimate will exceed 45 percent of government revenues over the next few years.
Conversely, an improvement in external and fiscal positions could result in an upgrade. “We may raise our ratings if Pakistan’s external and fiscal positions improve materially from current levels. Signs of improvement could include a sustained rise in foreign exchange reserves, as well as a reduction of Pakistan’s debt-service costs relative to revenues and a lengthening of debt maturities,” S&P Global said.
Pakistan has shored up its foreign reserves over the last 12 months and near-term default risks have lessened. But the agency believes the country remains reliant upon favorable macroeconomic and financial developments to meet its obligations over the long term.
“Sustained external concessional help will be key to rebuilding buffers, in our view. Continued strong foreign fund inflows alongside moderate current account deficits would likely be required for Pakistan to restore its external buffers.”
Pakistan continues to face high gross external financing needs, vulnerabilities to energy price developments, and the availability and timing of foreign support. A notable inflow of funds from the International Monetary Fund (IMF) and prospective rollovers with Saudi Arabia, United Arab Emirates (UAE), and China, will support Pakistan in managing its external financial requirements over the next six to 12 months.
“We expect the ratio of government debt to GDP and budgetary deficits to remain elevated. In combination with continued high domestic interest rates, this means that over 50 percent of government receipts will likely be used to service debt in fiscal 2025 (July 1, 2024-June 30, 2025), with a gradual reduction in the government’s cost of borrowing in subsequent years. Pakistan’s interest servicing-to-revenue ratio remains one of the highest globally among rated sovereigns,” S&P said.
The agency expects Pakistan’s economic growth to remain moderate, at around 3.5 percent in fiscal year 2025, due to tight monetary conditions and persisting inflationary pressures. “Economic growth will remain modest in the current fiscal year at 3.5%, as elevated prices and daunting reform measures will weigh on economic activities; prices are gradually declining, however.”
It added that the the government’s reform efforts will face volatile social and political resistance toward austerity and tax enhancing measures.
“We expect political uncertainty to remain high owing to a fractious political environment. The government’s ability to navigate the necessary reform implementation under the IMF program without significant social unrest, will have significant bearing on policy efficacy over the coming quarters.”
Pakistani politics has been in a state of flux since the ouster of former Prime Minister Imran Khan of the Pakistan Tehreek-e-Insaf (PTI) party in a parliamentary no-confidence motion in April 2022. The political turmoil has hampered the government’s reform efforts to deal with economic challenges in the last two years and has damaged sovereign credit metrics. We believe a more stable political environment in Pakistan is likely an important precondition to repairing the government’s creditworthiness.
“The ratings on Pakistan remain constrained by elevated domestic and external security risks. The country’s security situation has improved since the early 2010s, but the potential to deteriorate in the future remains. Possible border tensions with India and Afghanistan could also have a short-term impact on economic sentiments.”
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