*Moody’s on Thursday affirmed the Government of Pakistan’s B3 local andforeign currency issuer and senior unsecured debt ratings and changed theoutlook to negative from stable.*
The credit rating agency said in a statement that the decision to changethe outlook to negative is driven by Pakistan’s heightened externalvulnerability risk and uncertainty around the sovereign’s ability to secureadditional external financing to meet its needs.
Moody’s assesses that Pakistan’s external vulnerability risk has beenamplified by rising inflation, which puts downward pressure on the currentaccount, the currency and – already thin – foreign exchange reserves,especially in the context of heightened political and social risk.Pakistan’s weak institutions and governance strength adds uncertaintyaround the future direction of macroeconomic policy, including whether thecountry will complete the current IMF Extended Fund Facility (EFF)programme and maintain a credible policy path that supports furtherfinancing.
The decision to affirm the B3 rating reflects Moody’s assumption that,notwithstanding the downside risks mentioned above, Pakistan will concludethe seventh review under the IMF EFF programme by the second half of thiscalendar year, and will maintain its engagement with the IMF, leading toadditional financing from other bilateral and multilateral partners. Inthis case, Moody’s assesses that Pakistan will be able to close itsfinancing gap for the next couple of years. The B3 rating also incorporatesMoody’s assessment of the scale of Pakistan’s economy and robust growthpotential, which will provide the economy with some capacity to absorbshocks. These credit strengths are balanced against Pakistan’s fragileexternal payments position, weak governance and very weak fiscal strength,including very weak debt affordability.
The B3 rating affirmation also applies to the backed foreign currencysenior unsecured ratings for The Third Pakistan International Sukuk Co Ltdand The Pakistan Global Sukuk Programme Co Ltd. The associated paymentobligations are, in Moody’s view, direct obligations of the Government ofPakistan.
Read Top Stories
Concurrent to today’s action, Pakistan’s local and foreign currency countryceilings have been lowered to B1 and B3, from Ba3 and B2, respectively. Thetwo-notch gap between the local currency ceiling and sovereign rating isdriven by the government’s relatively large footprint in the economy, weakinstitutions, and relatively high political and external vulnerability risk.
The two-notch gap between the foreign currency ceiling and the localcurrency ceiling reflects incomplete capital account convertibility andrelatively weak policy effectiveness, which point to material transfer andconvertibility risks notwithstanding moderate external debt.