Moody’s cuts Pakistan’s credit rating citing ‘increased liquidity’

SINGAPORE: Moody’s Investors Service (Moody’s) on Tuesday downgraded Pakistan’s local and foreign currency issuer and senior unsecured debt ratings to Caa3 from Caa, citing increased fragile liquidity and external position, ARY News reported.

In a statement, Moody’s said it has also downgraded the rating for the senior unsecured MTN programme to (P)Caa3 from (P)Caa1. Moreover, the rating agency has also changed the outlook to stable from negative.

“The decision to downgrade the ratings is driven by Moody’s assessment that Pakistan’s increasingly fragile liquidity and external position significantly raises default risks to a level consistent with a Caa3 rating,” the statement noted.

It pointed out that the country’s foreign exchange reserves have fallen to extremely low levels, far lower than necessary to cover its imports needs and external debt obligations over the immediate and medium term.

“Although the government is implementing some tax measures to meet the conditions of the IMF [International Monetary Fund] programme and a disbursement by the Fund 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,” the statement added.

The stable outlook reflects Moody’s assessment that the pressures that Pakistan faces are consistent with a Caa3 rating level, with broadly balanced risks.

The rating agency explained 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. 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.

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.

Concurrent to today’s action, Moody’s has lowered Pakistan’s local and foreign currency country ceilings to Caa1 and Caa3 from B2 and Caa1, respectively. The two-notch gap between the local currency ceiling and sovereign rating is driven by the government’s relatively large footprint in the economy, weak institutions, and relatively high political and external vulnerability risk.

“The two-notch gap between the foreign currency ceiling and the local currency ceiling reflects incomplete capital account convertibility and relatively weak policy effectiveness. It also takes into account material risks of transfer and convertibility restrictions being imposed,” the statement added.

Liquidity and external vulnerability risks

Moody’s stated that the government liquidity and external vulnerability risks have risen further since the agency’s last review in October 2022. “Amid delays in securing official sector funding, risks that Pakistan may not be able to source enough financing to meet its needs for the rest of fiscal 2023 (ending June 2023) have increased,” it stated.

“Beyond this fiscal year, liquidity and external vulnerability risks will continue to be elevated, as Pakistan’s financing needs will remain significant and financing sources are far from secure. At the same time, prospects of the country materially increasing its foreign exchange reserves are low,” it added.

Overall, Moody’s estimates that Pakistan’s external financing needs for the rest of the fiscal year ending June 2023 to be around $11 billion, including the outstanding $7 billion external debt payments due. The remainder includes the current account deficit, taking into account a sharp narrowing as imports have contracted markedly.

To meet these financing needs, Pakistan will need to secure financing from the IMF and other multilateral and bilateral partners. Despite recent delays, 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.

While this year’s external payments needs may be met, the liquidity and external position next year will remain extremely fragile. Pakistan’s external debt repayments will remain high for the next few years.

Moody’s estimates Pakistan’s external financing needs for fiscal 2024 are around $35-36 billion. Pakistan has about $25-26 billion worth of external debt repayments (including interest payments) to make in fiscal 2024, including a $1 billion Eurobond due in April 2024. In addition, Moody’s estimates Pakistan’s current account deficit at around $10 billion.

“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 added.