Moody's Investors Service (Moody's) on Tuesday downgraded the Government of Pakistan's local and foreign currency issuer and senior unsecured debt ratings to Caa3 from Caa1.
The ratings agency also downgraded the rating for the senior unsecured MTN programme from (P)Caa1 to (P)Caa3. On the other hand, Moody's changed the country's outlook from negative to stable.
https://twitter.com/KhurramHusain/status/1630544736107757569
Moody’s said that the downgrade to Caa3 from Caa1 rating also applies to the backed foreign currency senior unsecured ratings for the Pakistan Global Sukuk Programme Co. Ltd. The associated payment obligations are, in Moody's view, direct obligations of the Government of Pakistan.
Earlier this month, global ratings agency Fitch also downgraded Pakistan’s sovereign credit rating from CCC+ to CCC- citing concerns about policy, high refinancing risks, critically low reserves, and the International Monetary Fund’s (IMF) stringent conditions.
Moody’s said that the decision to downgrade the ratings is driven by its assessment that Pakistan's increasingly fragile liquidity and external position significantly raises default risks to a level consistent with a Caa3 rating.
“In particular, the country's foreign exchange reserves have fallen to extremely low levels, far lower than necessary to cover its import needs and external debt obligations over the immediate and medium term,” Moody’s said.
The ratings agency said that the government is implementing some tax measures to meet the conditions of the IMF programme and a disbursement by the IMF may help to cover the country's immediate needs.
“Weak governance and heightened social risks impede Pakistan's ability to continually implement the range of policies that would secure large amounts of financing and decisively mitigate risks to the balance of payments,” it said.
“Significant external financing becoming available in the very near term, such as through the disbursement of the next tranches under the current IMF programme and related financing, would reduce default risk potentially to a level consistent with a higher rating”.
“However, in the current extremely fragile balance of payments situation, disbursements may not be secured in time to avoid a default,” it highlighted.
“Moreover, beyond the life of the current IMF programme that ends in June 2023, there is very limited visibility on Pakistan's sources of financing for its sizeable external payments needs,” it added.
Moody’s said that the stable outlook reflects its assessment that the pressures that Pakistan faces are consistent with a Caa3 rating level, with broadly balanced risks.
Overall, Moody's estimated that Pakistan's external financing needs for the rest of the fiscal year ending June 2023 would be around $11 billion, including the outstanding $7 billion external debt payments due within that time frame. The remainder includes the current account deficit, taking into account a sharp diminution as imports have been choked.
Moody’s said that in order to meet its financing needs, Pakistan will need to secure financing from the IMF and other multilateral and bilateral partners.
“Moody's assumes successful completion of the ninth review of the existing IMF programme, although this is not secured yet. This would in turn catalyse financing from other multilateral and bilateral partners”.
“At the same time, the government will also need to obtain the roll-over of the $3 billion China SAFE deposits and secure $3.3 billion worth of refinancing from Chinese commercial banks for the rest of this fiscal year. Of this $3.3 billion, Pakistan has already received a deposit of $700 million from the China Development Bank on 24 February 2023,” it said.
Moody’s said that while this year's external payments needs may be met, the liquidity and external position next year will remain extremely fragile.
“Pakistan's financing options beyond June 2023 are highly uncertain. It is not clear that another IMF programme is under discussion and if it does happen, how long the negotiations would take and what conditions would be attached to it.
“However, in the absence of an IMF programme, Pakistan is unlikely to unlock sufficient financing from multilateral and bilateral partners,” it said.
Moody’s was of the view that the headline inflation is likely to rise further as energy prices increase in concert with removal of energy subsidies.
At the same time, reform measures to raise fiscal revenue are likely to remain key to unlocking further financing from the IMF, as they will help assuage debt sustainability risks.
Moreover, Moody’s said that the stable outlook reflects their assessment that the credit pressures Pakistan faces are "broadly balanced" at the Caa3 rating level.
“Continued IMF engagement, including beyond the current programme, would likely help to support additional financing from other multilateral and bilateral partners, which could reduce default risk, if this is achieved urgently and without further raising social pressures,” Moody’s stipulated.
The ratings agency also downgraded the rating for the senior unsecured MTN programme from (P)Caa1 to (P)Caa3. On the other hand, Moody's changed the country's outlook from negative to stable.
https://twitter.com/KhurramHusain/status/1630544736107757569
Moody’s said that the downgrade to Caa3 from Caa1 rating also applies to the backed foreign currency senior unsecured ratings for the Pakistan Global Sukuk Programme Co. Ltd. The associated payment obligations are, in Moody's view, direct obligations of the Government of Pakistan.
Earlier this month, global ratings agency Fitch also downgraded Pakistan’s sovereign credit rating from CCC+ to CCC- citing concerns about policy, high refinancing risks, critically low reserves, and the International Monetary Fund’s (IMF) stringent conditions.
Fragile liquidity, vulnerable financial position
Moody’s said that the decision to downgrade the ratings is driven by its assessment that Pakistan's increasingly fragile liquidity and external position significantly raises default risks to a level consistent with a Caa3 rating.
“In particular, the country's foreign exchange reserves have fallen to extremely low levels, far lower than necessary to cover its import needs and external debt obligations over the immediate and medium term,” Moody’s said.
The ratings agency said that the government is implementing some tax measures to meet the conditions of the IMF programme and a disbursement by the IMF may help to cover the country's immediate needs.
“Weak governance and heightened social risks impede Pakistan's ability to continually implement the range of policies that would secure large amounts of financing and decisively mitigate risks to the balance of payments,” it said.
“Significant external financing becoming available in the very near term, such as through the disbursement of the next tranches under the current IMF programme and related financing, would reduce default risk potentially to a level consistent with a higher rating”.
“However, in the current extremely fragile balance of payments situation, disbursements may not be secured in time to avoid a default,” it highlighted.
“Moreover, beyond the life of the current IMF programme that ends in June 2023, there is very limited visibility on Pakistan's sources of financing for its sizeable external payments needs,” it added.
Pakistan's risks consistent with Caa3 rating
Moody’s said that the stable outlook reflects its assessment that the pressures that Pakistan faces are consistent with a Caa3 rating level, with broadly balanced risks.
Overall, Moody's estimated that Pakistan's external financing needs for the rest of the fiscal year ending June 2023 would be around $11 billion, including the outstanding $7 billion external debt payments due within that time frame. The remainder includes the current account deficit, taking into account a sharp diminution as imports have been choked.
Moody’s said that in order to meet its financing needs, Pakistan will need to secure financing from the IMF and other multilateral and bilateral partners.
“Moody's assumes successful completion of the ninth review of the existing IMF programme, although this is not secured yet. This would in turn catalyse financing from other multilateral and bilateral partners”.
“At the same time, the government will also need to obtain the roll-over of the $3 billion China SAFE deposits and secure $3.3 billion worth of refinancing from Chinese commercial banks for the rest of this fiscal year. Of this $3.3 billion, Pakistan has already received a deposit of $700 million from the China Development Bank on 24 February 2023,” it said.
Pakistan’s external position under significant long-term stress
Moody’s said that while this year's external payments needs may be met, the liquidity and external position next year will remain extremely fragile.
“Pakistan's financing options beyond June 2023 are highly uncertain. It is not clear that another IMF programme is under discussion and if it does happen, how long the negotiations would take and what conditions would be attached to it.
“However, in the absence of an IMF programme, Pakistan is unlikely to unlock sufficient financing from multilateral and bilateral partners,” it said.
Moody’s was of the view that the headline inflation is likely to rise further as energy prices increase in concert with removal of energy subsidies.
Successful reforms key to unlocking financial inflows
At the same time, reform measures to raise fiscal revenue are likely to remain key to unlocking further financing from the IMF, as they will help assuage debt sustainability risks.
Moreover, Moody’s said that the stable outlook reflects their assessment that the credit pressures Pakistan faces are "broadly balanced" at the Caa3 rating level.
“Continued IMF engagement, including beyond the current programme, would likely help to support additional financing from other multilateral and bilateral partners, which could reduce default risk, if this is achieved urgently and without further raising social pressures,” Moody’s stipulated.