Moody’s Investors Service (Moody’s) has assigned a foreign currency seniorunsecured program rating of (P)B3 to the government of Pakistan’s globalmedium-term note program, as well as B3 ratings to the senior unsecured, USdollar-denominated notes issued under the program with maturities of 5, 10,and 30 years.
The payment obligations associated with the notes representing drawdownsfrom the program are direct, unsecured obligations of the government ofPakistan and rank pari passu with all its other unsecured andunsubordinated obligations.
Pakistan intends to use the net proceeds from each issuance for generalbudgetary purposes, it added.
Moody’s further stated that Pakistan’s B3 rating is underpinned by thecountry’s robust long-term growth potential, a relatively large butlow-income economy, and a stable banking sector.——————————
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Ongoing reforms and institutional enhancements also raise policycredibility and effectiveness, although from a low base.
Moody’s expects economic activity in Pakistan to continue to rebound overthe next two years as the country recovers from the coronavirus shock.
Supply-side improvements, including through projects under theChina-Pakistan Economic Corridor (CPEC), coupled with improvements indomestic security and trade policy, will also help spur long-terminvestments, with the potential to revitalize the economy’s industrial baseover time.
Balanced against these credit strengths are the government’s narrow revenuebase that weakens debt affordability, the country’s still materialstructural constraints to economic and export competitiveness, and stilllow, although rising, foreign exchange reserve adequacy, and long-termpolitical risks.
In particular, while revenue as a share of GDP grew in fiscal 2020 (endingJune 2020), it remains low and continues to limit fiscal flexibility in theface of shocks and the ability of the government to reduce its debt burden.
That said, Moody’s expects fiscal reforms, including under the country’sInternational Monetary Fund (IMF) program and projects with otherdevelopment partners, to mitigate risks related to debt sustainability andgovernment liquidity.
Pakistan’s ESG Credit Impact Score is highly negative (CIS-4), reflectingits high exposure to environmental and social risks, as well as its weakgovernance profile. Relatively weak institutions constrain the government’scapacity to address ESG risks.——————————
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The exposure to environmental risk is highly negative (E-4 issuer profilescore) because of Pakistan’s vulnerability to climate change and thelimited supply of clean, fresh, and safe water.
With varied climates across the nation, Pakistan is significantly exposedto extreme weather events, including tropical cyclones, drought, floods,and extreme temperatures.
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In particular, the magnitude and dispersion of seasonal monsoon rainfallinfluence the agricultural sector growth and rural household consumption.The agricultural sector accounts for around 20 percent of GDP and exports,and nearly 40 percent of total employment.
Overall, around 70 percent of the entire population lives in rural areas.As a result, both droughts and floods can create economic, fiscal andsocial costs for the sovereign.
The exposure to social risk is highly negative (S-4 issuer profile score),driven primarily by safety concerns that have limited investment anddiversification opportunities. Still, very low incomes as well as limitedaccess to quality healthcare, basic services, housing, and education,especially in rural areas, are also important social issues.
That said, the government is focused on reducing poverty and inequality,strengthening social safety nets, and promoting human capital as keypriorities through its expansive “Ehsaas” program, although effects willtake time to materialize and are limited by still weak institutions andgovernance.
The influence of governance is highly negative (G-4 issuer profile score).International surveys of various indicators of governance, while showingsome early signs of improvement, continue to point to weak rule of law andcontrol of corruption, as well as limited government effectiveness.
These weaknesses are balanced against a lengthening track record ofeffective checks and balances and judicial independence for the level ofdevelopment in the country, and gradually increasing transparency anddialogue in policymaking.
Upward pressure on Pakistan’s rating would develop if ongoing fiscalreforms were to expand the government’s revenue base, raise debtaffordability, and lower its debt burden beyond our current expectations.——————————
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Further reduction in external vulnerability risks, including through higherlevels of foreign exchange reserve adequacy and/or increased economiccompetitiveness that was to lift export prospects, would also put upwardpressure on the rating.
Downward pressure on the rating would stem from renewed deterioration inPakistan’s external position, including through a significant widening ofthe current account deficit and erosion of foreign exchange reservebuffers, which would threaten the government’s external repayment capacityand heighten liquidity risks.
A continued rise in the government’s debt burden, without prospects forstabilization over the medium term, would also put downward pressure on therating, it added.
A rising probability of private sector participation in the G20 DebtService Suspension Initiative (DSSI) would likely point to a lower rating,commensurate with the potential losses to be incurred.
