• Warns that slow implementation of reforms could lead to delays or withdrawal of financial support from government partners
• With improved ratings, Islamabad can now obtain loans from foreign banks on more affordable terms.
In a positive development, international rating agency Moody’s on Wednesday upgraded Pakistan’s credit rating by one notch, from Caa3 to Caa2, citing improving macroeconomic conditions, including liquidity It has upgraded its outlook from stable to positive, citing an external position. Fragile surface.
The US-based rating agency, one of the top three, downgraded Pakistan’s rating from Caa1 to Caa3 in February last year, following the suspension of the IMF program.
The improved rating may now help Pakistan to obtain foreign loans from international commercial banks and bonds at more affordable terms, because of the country’s poor credit rating and higher interest rates due to delays in signing up for the IMF program. They were demanding interest.
Moody’s expects Pakistan to meet its financing needs with support from government partners, although uncertainty remains over the government’s ability to sustain and implement reforms.
“A coalition government formed after the elections in February 2024 may not have a strong enough electoral mandate to consistently implement revenue-raising measures without fueling social tensions,” it said. It added that implementation of reforms or slippage in results may result in delays or reversals. Financial support from government partners.
In a statement issued from Singapore, the rating firm said it has “upgraded the local and foreign currency issuer and senior unsecured debt ratings of the Government of Pakistan from Caa3 to Caa2”, it added. Said it also upgraded the senior unsecured medium-term note rating. MTN) program from (P) Caa2 to (P) Caa3.
“At the same time, the outlook for the Government of Pakistan has been revised from stable to positive,” Moody’s said, noting that Pakistan’s default risk has been reduced to a level consistent with a Caa2 rating. Following the sovereign’s staff-level agreement with the IMF to facilitate a 37-month extended fund facility of $7 billion on July 12, 2024, “Pakistan’s sources of external financing are now more confident.”
Moody’s expects the IMF board to approve the EFF in the next few weeks, and Pakistan’s foreign exchange reserves will almost double by June 2023, although they will still fall short of meeting its external financing needs. are below the required level. The agency said its earlier concerns about the high risks of a balance-of-payments crisis had subsided, although risks had increased as Pakistan continued to depend on timely and adequate disbursements of financial assistance from official partners. It has happened, The country depends on timely financing from government partners to meet its external debt obligations in full.
In recent weeks, the government has been trying to get approval for a financing rollover of about $12 billion from China, Saudi Arabia, and the United Arab Emirates, although those countries have not yet confirmed the rollover to the IMF. The IMF program is expected to help Pakistan access additional financing from other multilateral and bilateral partners.
At the same time, Moody explained that Pakistan’s Caa2 rating reflects its “very weak creditworthiness, which poses a high risk to debt sustainability” as it predicted that interest payments would be two to three times higher. It will continue to absorb nearly half of government revenue over the years. “The country’s weak governance and high political uncertainty have also been factored into the Caa2 rating,” it added.
The rating agency said Pakistan’s positive outlook reflects the balance of upside risks. It captures the possibility that the government can further reduce its liquidity and external vulnerability risks and achieve a better fiscal position than currently expected with the support of the IMF program.
Continued implementation of reforms, including revenue-raising measures, can increase the government’s revenue base and improve Pakistan’s debt sustainability. A record of timely completion of IMF reviews will allow Pakistan to continuously unlock financial assistance from official partners, sufficient to meet its external debt obligations and its foreign exchange reserves. It will help in further reconstruction.
The rating upgrade from Caa3 to Caa2 also extends to the foreign currency-backed senior unsecured ratings for Pakistan Global Sukuk Program Company Limited, as the related payment obligations are direct obligations of the government. The outlook for the Sukuk company has also been upgraded to positive.
As a result, Moody’s also upgraded Pakistan’s local and foreign currency country ratings from Caa1 and Caa3 to B3 and Caa2. The two-level difference between the local currency range and the sovereign rating is due to the relatively large government footprint in the economy and weak institutions. The gap between the foreign exchange threshold and the local currency threshold reflects incomplete capital account conversion and relatively weak policy effectiveness. The agency explained that it also takes into account the material risks of transfer and conversion restrictions.