Moody’s Investors Service (Moody’s) has downgraded the Government ofPakistan’s local and foreign currency issuer and senior unsecured debtratings to Caa3 from Caa1.
Moody’s has also downgraded the rating for the senior unsecured MTNprogramme to (P)Caa3 from (P)Caa1. Concurrently, Moody’s has also changedthe outlook to stable from negative.
The decision to downgrade the ratings is driven by Moody’s assessment thatPakistan’s increasingly fragile liquidity and external positionsignificantly raises default risks to a level consistent with a Caa3 rating.
In particular, the country’s foreign exchange reserves have fallen toextremely low levels, far lower than necessary to cover its imports needsand external debt obligations over the immediate and medium term. Althoughthe government is implementing some tax measures to meet the conditions ofthe International Monetary Fund’s (IMF) programme and a disbursement by theIMF may help to cover the country’s immediate needs, weak governance andheightened social risks impede Pakistan’s ability to continually implementthe range of policies that would secure large amounts of financing anddecisively mitigate risks to the balance of payments.
The stable outlook reflects Moody’s assessment that the pressures thatPakistan faces are consistent with a Caa3 rating level, with broadlybalanced risks. Significant external financing becoming available in thevery near term, such as through the disbursement of the next tranches underthe current IMF programme and related financing, would reduce default riskpotentially to a level consistent with a higher rating. However, in thecurrent extremely fragile balance of payments situation, disbursements maynot be secured in time to avoid a default. Moreover, beyond the life of thecurrent IMF programme that ends in June 2023, there is very limitedvisibility on Pakistan’s sources of financing for its sizeable externalpayments needs.
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The downgrade to Caa3 from Caa1 rating also applies to the backed foreigncurrency senior unsecured ratings for The Pakistan Global Sukuk ProgrammeCo Ltd. The associated payment obligations are, in Moody’s view, directobligations of the Government of Pakistan.
Concurrent to today’s action, Moody’s has lowered Pakistan’s local andforeign currency country ceilings to Caa1 and Caa3 from B2 and Caa1,respectively. The two-notch gap between the local currency ceiling andsovereign rating is driven by the government’s relatively large footprintin the economy, weak institutions, and relatively high political andexternal vulnerability risk. The two-notch gap between the foreigncurrency ceiling and the local currency ceiling reflects incomplete capitalaccount convertibility and relatively weak policy effectiveness. It alsotakes into account material risks of transfer and convertibilityrestrictions being imposed.