Moody’s reconfirms Pakistan’s credit rating with a ‘Stable’ outlook

Moody’s Investors Service on Saturday confirmed Pakistan’s B3 credit rating with a stable outlook, as it concludes the review for downgrade initiated on 14 May 2020.

The stable outlook reflects Moody’s view that the pressures Pakistan faces in the wake of the coronavirus shock and prospects for its credit metrics, in general, are likely to remain consistent with the current rating level, the rating agency said.

“While Moody’s sees downside risks to Pakistan’s economy because of movement and activity restrictions related to the pandemic, which would, in turn, intensify the government’s fiscal challenges, strong support from development partners including for external financing, coupled with effective macroeconomic policies started ahead of the crisis, contain external vulnerability and liquidity risks.”

The rating agency said that it expects Pakistan’s economic growth to be positive in fiscal 2021 (ending June 2021) from a recession in fiscal 2020, but still low at around 1-2pc. “While Pakistan’s economy is relatively closed with low reliance on exports, movement restrictions due to coronavirus will keep economic activity below the pre-outbreak levels for some time.”

“The slow economic recovery will in turn weigh on government revenue, keeping the fiscal deficit wide at around 8-8.5pc of GDP in fiscal 2021 under Moody’s projections, at similar levels compared to fiscal 2020, and leaving the government’s debt burden high at around 90pc of GDP by the end of fiscal 2021.”

“Risks to the economy and government finances are to the downside, particularly if more stringent measures are implemented to curb the spread of the virus domestically. “

“However, even in downside economic and fiscal scenarios, Moody’s expects Pakistan to cover its external financing needs with continued significant financial support from its development partners, including the commitment to rollover most bilateral loans that come due, independent of how DSSI is implemented. “

“Moody’s also expects the government’s ongoing engagement with development partners on fiscal reforms, such as through the IMF EFF and other programmes with the Asian Development Bank and World Bank, to contribute to a modest widening of the revenue base, once the crisis passes, improving debt affordability and containing fiscal risks over the next few years.”

Moody’s said that external financing needs have declined relative to fiscal 2018-19 because of a narrower current account deficit, which occurred as a result of the macroeconomic adjustments over the past two years and continues to be supported by effective policies including currency flexibility.

Moody’s projects the current account deficit to be around 2pc of GDP in fiscal 2021, after 1.1pc in fiscal 2020, substantially narrower than the average of around 5.5pc over fiscal 2018-19.

Stability in the balance of payments will, in turn, allow the State Bank of Pakistan (SBP), to keep monetary policy accommodative as inflation declines. This keeps a lid on borrowing costs for the government domestically and lends further support to debt affordability.