Fitch affirms Pakistan in B category with stable outlook

ISLAMABAD: Fitch Ratings has affirmed Pakistan’s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at ‘B’ with Stable Outlooks.

The issue ratings on Pakistan’s senior unsecured foreign- and local-currency bonds, Country Ceiling as well as the Short-Term Local- and Foreign-Currency IDRs and are also affirmed at ‘B’.

Pakistan’s ratings balance broad gains achieved over the International Monetary Fund (IMF) programme against a high public debt/GDP ratio, low scores on the World Bank governance indicators and heightened security risks. Pakistan completed a three-year IMF Extended Fund Facility (EFF) in September 2016.

The country has entered 12 IMF programmes since 1988, but this the first programme that it has completed. Under the program, reserves were strengthened, the fiscal deficit reduced and significant progress was made on structural reform.

The country’s economic outlook has brightened since the start of the programme, with annual GDP growth rising to 4.7% in the financial year ending June-2016 (FY16), from 3.7% in FY13, above the ‘B’ median of 3.6%.

Fitch expects growth to strengthen to 5.3% in FY17, lifted by a recovery in agricultural output following poor weather conditions in the previous season and an influx of investment linked to the China-Pakistan Economic Corridor (CPEC).

They had forecasted continued strong domestic demand, with private consumption aided by faster credit growth. Remittances have moderated, as over half come from Gulf economies that are adjusting to lower energy prices, but a sharper slowdown is a downside risk. A sharp slowdown in remittances is a downside risk, as over half come from Gulf economies that are still adjusting to lower energy prices.

Fitch also stated that inflation slowed to 2.9% in FY16, a positive development for a country that has experienced higher and more volatile inflation than the ‘B’ median. Fitch expects inflation to increase to 4.5% in FY17 and 4.8% in FY18, as commodity prices slowly recover.

The banking sector has performed well, with improvements shown across IMF’s Financial Soundness indicators. Non-performing loans remained high at 11.1% of total loans at FYE16, though this is down from a peak of 14.8% at end-June 2013. Pakistan’s public debt/GDP ratio of 64.8% at end-FY16 was higher than the ‘B’ median of 56.7%, but Fitch expects the ratio to gradually fall in the medium-term if the country can sustain its progress with fiscal consolidation.

The general government budget deficit fell to 4.6% of GDP in FY16, from 5.3% in FY15, with revenues boosted by structural reforms. It projects the budget deficit to continue narrowing gradually if the economy performs in line with the rating agency’s baseline scenario and the government remains committed to the policy plans set out during the IMF programme.

Efficiency improvements, higher tariffs and lower energy prices have helped cut PSE losses. However, plans to sustain long-term efficiency gains through privatisation have been delayed due to objections from workers and political opposition.