S&P Global Ratings Thursday revised the outlook on Pakistan’s long-termratings to negative from stable on weakening external position due tohigher commodity prices, rupee depreciation, and tighter global financialconditions.
The Ratings agency also affirmed its ‘B-‘ long-term and ‘B’ short-termsovereign credit ratings on Pakistan, as well as ‘B-‘ long-term issuerating on Pakistan’s senior unsecured notes and Sukuk trust certificates.
It noted that the negative outlook reflects growing risks to Pakistan’sexternal liquidity position over the next 12 months amid an increasinglydifficult economic landscape.
The Ratings agency said it could lower its ratings if Pakistan’s externalindicators continue to deteriorate to the extent that the government’scommitments appear to be unsustainable in the long term.
“Downward pressure on the ratings would emerge if financial support frombilateral and multilateral partners quickly erodes, or usable foreignexchange reserves fall further to levels indicating distress in servicingPakistan’s external debt obligations,” it added.
Conversely, the agency said, it may revise the outlook to stable ifPakistan’s external position stabilizes and improves from current levels.Evidence of improvement could include a sustained rise in usable foreignexchange reserves.
The agency said that it revised the outlook to negative to reflectPakistan’s weakening external metrics against a backdrop of highercommodity prices, tighter global financial conditions, and a weakeningrupee.
“The Pakistan government has considerable external indebtedness andliquidity needs, and an elevated general government fiscal deficit and debtstock. Although the impact of these more difficult macroeconomic conditionshas been partially mitigated by various reform initiatives undertaken bythe government over the past few years, the risk of continued deteriorationin key metrics, including external liquidity, is rising,” it added.
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It said that the global economic slowdown poses fresh risks to Pakistan’spost-pandemic recovery. The agency said it expects Pakistan to achievemoderate growth over the next few years, but tighter domestic monetaryconditions and elevated inflation are likely to weigh on activity.
“Pakistan’s government has indicated a greater willingness to implementdifficult fiscal reforms, but these policies will be challenged byinflation and political risk over the next 12 months,” it added.
It said that the current government has adopted a variety of measures inorder to stabilize its fiscal position and to more closely align withInternational Monetary Fund (IMF) program objectives. However, the currentinflationary environment complicates the implementation of such policies.
“Achieving a primary fiscal balance surplus, and boosting its stock offoreign exchange reserves, will also be more difficult for the governmentto achieve against the current external backdrop,” it added.
The agency said that with parliamentary elections due by August 2023, thecurrent government has limited time in which to implement meaningfuleconomic reforms, especially those that may imperil electoral support forcoalition members. Political uncertainty will remain elevated over thecoming quarters, in our view.
The agency noted that Pakistan is experiencing a significantly highercurrent account deficit, owing primarily to higher import prices and strongdomestic demand. These dynamics are exerting pressure on Pakistan’s foreignexchange reserves, eroding nascent external buffers that had beenaccumulated over recent years. Higher debt service costs are also exertingpressure on the government’s fiscal position.