Fitch Ratings unveil Pakistan’s longterm foreign currency default ratings
ISLAMABAD - *Fitch Ratings unveil Pakistan’s longterm foreign currency default ratings.*
Fitch Ratings, the American credit rating agency has affirmed Pakistan's Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘B-‘ with a Stable Outlook.
The ‘B-‘ rating reflects a challenging external position characterised by a high external financing requirement and low reserves, weak public finances including large fiscal deficits and a high government debt-to-GDP ratio, and weak governance indicators, said Fitch on Monday.
The agency said that progress is being made towards strengthening external finances and positive steps have been made on the fiscal front, but considerable risks remain.
“External vulnerabilities have been reduced over the past year as a result of policy actions by the authorities and financing unlocked through an IMF programme, which have narrowed the current account deficit and supported a modest rebuilding of reserves. Still, external finances remain fragile with relatively low foreign-exchange reserves in the context of an elevated external debt repayment schedule and subdued export performance," the report said.
The report revealed that Pakistan's liquidity ratio is 111.4 percent, much weaker than the historic ‘B' median of 161.2pc.
The agency forecasts a further narrowing of the current account deficit to 2.1pc of GDP in the year ending June 2020 (FY20) and 1.9pc in FY21, from 4.9pc in the last fiscal year. Import compression remains the predominant driver of the narrowing deficit, facilitated by a depreciation of the rupee against the US dollar of around 30pc since December 2017 and tighter monetary conditions. Exports are forecast to grow modestly from a low base.
SBP flexible exchange rate
The State Bank of Pakistan's (SBP) adoption of a more flexible exchange rate last May and capital inflows are also supporting a rebuilding of foreign-exchange reserves. Fitch expects gross liquid foreign-exchange reserves rise to around USD11.5 billion by FYE20, from USD7.2 billion at FYE19.
The SBP has also reduced its net forward position by over USD3 billion since June, contributing to a considerable improvement in its net foreign-exchange reserves, although these remain negative. We expect continued adherence to the new exchange rate regime to help rebuild foreign-exchange reserves and improve external resilience.