LAHORE: Moody’s in a report released on Thursday said Pakistan’s grossborrowing requirement was amongst the highest in its sovereign list,standing between 27 to 30 percent of GDP.
The report shared an appreciation of the dollar had caused a sharp currencydepreciation and a major decline in foreign exchange reserves for emergingand frontier market countries.
The credit rating agency said Pakistan was facing increased externalpressures arising from strong domestic and capital import heavy investmentsunder China-Pakistan Economic Corridor (CPEC).
It projected the current account deficit for the financial year 2017-18 tobe 4.2 percent of GDP and reserve coverage of external debt repayments wassufficient for now but projected it to erode.
It added until a major improvement in capital inflows wasn’t recorded,there was a high risk of foreign exchange reserves of further diminishing.
Moody’s report stated 30 percent of government debt was denominated inforeign currency and the country’s gross borrowing requirement was amongstthe highest in its list, standing between 27 to 30 percent of GDP.
The credit rating agency highlighted this was fueled by persistent fiscaldeficits and the government’s dependence on short-term debt, with anaverage maturity timeframe of 3.8 years.
Also, Moody’s said the country wasn’t a major recipient of volatile capitalinflows and rupee depreciation to address external pressures could increaseinflation and force further domestic rate hikes by the State Bank ofPakistan (SBP).
The hike in domestic rates by SBP would eventually be passed through to thegovernment’s borrowing costs and further erode the government’s alreadyfragile fiscal position, said Moody’s.
Earlier this month it was reported current account deficit in the first 11months of 2017-18 amounted to $15.9 billion, up 43.2 per cent from theprevious year.
According to data released by the central bank, the gap was $1.9 billion inMay. This was nominally down from the preceding month, data showed.
The current account tracks a country’s overseas transactions, such as nettrade, earnings on cross-border investments and transfer payments.
Exports of goods amounted to $22.8 billion in July-May, up 13.2 per centfrom a year ago. However, the corresponding rise in imports which wereworth $50.7 billion, remained 16.4 per cent over the same period.
Exports have mostly grown at a single-digit rate since 2010-11. A recoveryin advanced economies from the second half of 2017 with the United Statesexperiencing one of the fastest quarterly growth rates in the last threeyears, played a key role in the recent surge in exports, according to theSBP.
It boosted demand for products exported by emerging economies, includingPakistan, it said.
Last month, data released by SBP revealed Pakistan’s external debt andliabilities have risen over 50 percent or around $31 billion in nearly fiveyears of the previous government’s tenure.
Adding insult to injury, Pakistan’s external debt and liabilitiesskyrocketed to a record high of $91.8 billion till the end of March andthis figure for external debt and liabilities is 50.6 percent higher orincreased by $30.9 billion compared to June 2013 when the PML-N took reinsof the government.
From the total external debt and liabilities, government’s public debtincluding foreign exchange liabilities stood at $76.1 billion by end ofMarch 2018.
Public debt linked obligations in almost five years’ time has risen by 42.5percent or $22.7 billion, revealed SBP data.
According to the report, these currency variations reveal capital outflowsor notably lower external inflows and termed them credit negative forsovereigns with huge external funding requirements.
Moody’s analyzed the vulnerability of a group of emerging and frontiermarkets to a strengthening US dollar and termed Pakistan (B3 negative)alongside Argentina (B2 stable), Ghana (B3 stable), Mongolia (B3 stable),Sri Lanka (B1 negative), Turkey (Ba2 RUR-), Zambia (B3 stable) the mostvulnerable to a US dollar appreciation.
The report added nations with huge current account deficits, majorforeign-currency government debt and high external repayments were the mostsusceptible.
Moody’s said “The US dollar has appreciated by nearly 6% in trade-weightedterms since mid-April, while capital flows to emerging markets have slowed.Although we expect only a moderate further appreciation of the US dollar,the US Federal Reserve’s balance sheet shrinking may have furtherimplications for external financing conditions in emerging markets.”
“Economies rely on capital inflows to meet import payments and repayexternal debt. When risk appetite weakens, investors tend to theirportfolios away from the economies most reliant on such capital inflows, inparticular, those with low reserve buffers. In turn, lower capital inflowserode foreign exchange reserves, potentially starting a negative feedbackloop”, said Moody’s.
And the credit rating agency added “In addition to the balance of paymentsconsiderations, governments with a large share of foreigncurrency-denominated debt will see their debt servicing costs increase whenthe local currency depreciates.
When debt affordability is already weak, and reliance on short-term debthigh, refinancing a higher debt burden at higher costs exacerbates pressureon the sovereign’s fiscal strength. Moreover, when the central bank needsto raise interest rates in order to mitigate the depreciation of thecurrency, higher external financing costs spill over into higher domesticfinancing costs.”