*LAHORE:* Fitch on Thursday downgraded Pakistan’s outlook from stable tonegative and reaffirmed the ‘B’ credit rating, citing political uncertaintyand upcoming elections later in the year.
According to Fitch’s analysis, Pakistan has been unable to sustain thegains made under the three-year IMF Extended Fund Facility which ended inSeptember 2016. The credit rating cited a fall in foreign exchange reservescoupled by widening fiscal deficit as a major indicator of reversals madeafter the IMF’s programme ended in Sep 2016.
It albeit mentioned the government had made an effort to address theseissues and allowed rupee’s depreciation, tax rebates on exports and importduties on non-essential items to curb imports but failed in stemming thedecline in forex reserves.
Fitch said upcoming elections later in the year and continuing politicaluncertainty won’t allow the government to address these issuesconvincingly. It predicted the forex reserves could decline to $16.8billion by end of financial year 2017-18 and takes into account $2.5billion raised via Islamic Sukuk and Eurobond issuances at end-November2017.
It warned forex reserves could further decline if currency flexibilitywasn’t followed and tightening of macro policies to restrain domesticdemand wasn’t enforced. Forex reserves decline was attributed to anincrease in Pakistan’s current account deficit which touched 4.1 percent ofGDP at end of FY 2017-18.
CA deficit rise was attributable to increase in CPEC based project imports,higher energy prices, stagnancy in exports and weak macroeconomic policieson part of the government. It predicted CA deficit would widen to 4.7percent of GDP by end of FY 2017-18 on basis of recent rise in exports andmeasures enforced to curtail imports aside currency depreciation.
The rating agency said State Bank of Pakistan’s decision to loosen its gripover exchange rate and allowing market forces in its determination wouldheld in alleviating pressure on the country’s forex reserves and currentaccount.
Also, Fitch shared fiscal consolidation efforts weren’t enough as itrestricted progress in decreasing the public debt/GDP ratio as it shot upto 5.8 percent of GDP in FY 2016-17 against 4.6 percent in FY 2015-16.
It attributed the rise to increases in provincial government expenditureand underperformance in revenues. Fitch forecast deficit for FY 2017-18 totouch 5 percent of GDP, which could contribute to a fall in public debtratio from 67.2 percent of GDP in FY 2016-17 to 66.8 percent in FY 2017-18.
Regarding Pakistan’s economic growth, Fitch stated despite increase inexternal and fiscal pressures, the economy grew 5.3 percent during FY2016-17, and it expected the growth momentum to be sustained at 5.5 percentfor FY 2018-19 and FY 2019-20. This growth would be sustained on back ofrecent investment under China-Pakistan Economic Corridor (CPEC).
Furthermore, Fitch predicted improvement in power generation would addresscapacity constraints issue and help the manufacturing and export sectors.
Mentioning about losses in public-sector enterprises (PSEs), Fitch said“The accumulation of losses in public sector enterprises (PSE),particularly electricity distribution companies, previously led to fundinjections from the federal government to clear debt. Efficiencyimprovements, higher tariffs and relatively low global energy prices havehelped cut PSE losses from previous highs, but losses have begun to trendupward again. The lack of faster progress towards privatisation impedesfurther progress in this area. PSE losses could rise considerably ifPakistan suffers an economic shock or there is a sharp rise in energyprices, ultimately feeding through to the government balance sheet.”
Inflation for FY 2017-18 as per Fitch had remained low compared tohistorical average of 4.1 percent but it predicted it would rise to 5.5percent over the next year due to higher energy prices and pass-throughfrom rupee depreciation. It highlighted that credit growth in bankingsector remained solid and non-performing loans (NPLs) decline continuedfrom a peak of 14.8 percent of total loans in end June 2013 to 9.4 percent.
Fitch highlighted structural weaknesses linked to level of development andgovernance indicators and per capita GDP stood at $1,541 well below its ‘B’rated peers of $3,376. The credit rating agency also said governancequality remained low in Pakistan.