Fitch cuts Pakistan's sovereign credit rating to CCC-

ISLAMABAD: Global rating agency Fitch on Tuesday downgraded Pakistan’s long-term foreign currency issuer default rating (IDR) to ‘CCC-’ from ‘CCC+’, citing large refinancing risks, ARY News reported.

According to a statement issued by the rating agency, the downgrade reflects further sharp deterioration in external liquidity and funding conditions, and the decline of foreign-exchange (FX) reserves to critically low levels.

“While we assume a successful conclusion of the 9th review of Pakistan’s IMF (International Monetary Fund) programme, the downgrade also reflects large risks to continued programme performance and funding, including in the run-up to this year’s elections. Default or debt restructuring is an increasingly real possibility, in our view,” it added.

Fitch pointed out that the foreign exchange reserves were only about $2.9 billion on February 3, or less than three weeks of imports, noting that it was down from a peak of more than $20bn at the end of August 2021.

“Falling reserves reflect large, albeit declining, current account deficits (CADs), external debt servicing and earlier FX intervention by the central bank, particularly in 4Q22, when an informal exchange-rate cap appears to have been in place,” it added.

It further stated, “We expect reserves to remain at low levels, though we do forecast a modest recovery during the remainder of FY23, due to anticipated inflows and the recent removal of the exchange rate cap.”

The rating agency also highlighted difficult IMF conditions, a challenging political context and funding contingent on the IMF programme as other factors for the rating downgrade.

Fitch noted that shortfalls in revenue collection, energy subsidies and policies inconsistent with a market-determined exchange rate, were the reason behind delays with the ninth review of Pakistan’s IMF programme, originally due in November 2022.

The agency added that Pakistan’s traditional allies like China, Saudi Arabia and the United Arab Emirates have shown reluctance to fund it in the absence of an IMF programme, which is “also critical for other multilateral and bilateral funding”.

The agency however adds that following a successful review Pakistan will be able to unlock funds. Pakistan stands to receive $3.5 billion from other multilaterals during the fiscal year. Fitch anticipates external public-debt maturities will remain high in the next fiscal year.