S&P Global affirms Pakistan’s long-term outlook ‘stable’

The US-based rating agency Ratings has affirmed its ‘B-‘ long-term and ‘B’ short-term sovereign credit ratings on Pakistan. The outlook for the long-term rating is stable.

The agency also affirmed our ‘B-‘ long-term issue rating on Pakistan’s senior unsecured debt and sukuk trust certificates.

The stable outlook reflects the agency’s expectations that donor and partner financing will ensure that Pakistan can meet its external obligations over the next 12 months and that the country will continue to roll over its commercial credit lines.

Giving the rationale behind the ratings, it said that the ratings on Pakistan reflect the fallout of the COVID-19 pandemic on the country’s already weak economy, considerable external indebtedness and liquidity needs, and an elevated general government fiscal deficit and debt stock.

“While Pakistan had made progress toward consolidating its fiscal accounts during the first nine months of its Extended Funding Facility (EFF) program with the IMF, related imbalances have been worsened by much slower economic growth since March 2020.”

“The pandemic has worsened Pakistan’s deep economic downturn. In particular, domestic demand in the economy remains very weak, as evident from contractions in both real consumption and imports in the fiscal year ended June 2020,” it said.

Prospects for a near-term recovery have dimmed following strict domestic virus containment measures implemented between March and June, and in the face of a much weaker global economic outlook.

Prior to the onset of the pandemic, Pakistan was making important headway toward implementing economic and fiscal reforms under its EFF program with the IMF. As of end-December 2019, the government had met all performance criteria and completed all structural benchmarks of the IMF program. In particular, Pakistan had made strong progress toward containing its twin current account and primary fiscal deficits, and had begun to rebuild its foreign exchange reserves alongside a more flexible rupee exchange rate regime.

The pandemic will challenge further progress in some of these areas, especially fiscal consolidation and reserve accumulation. Despite having stabilized in the first three quarters of the fiscal year, a deep downturn in the April-June period led the Pakistani economy to a full-year contraction of nearly 0.4% in fiscal 2020.

Renewed weakness in the economy will undermine revenue generation while complicating the government’s efforts to curtail expenditure. The government is likely to focus on implementing last year’s new revenue measures in the current fiscal period, rather than to introduce additional policies against a backdrop of poor business and consumer sentiment.

The ratings on Pakistan remain constrained by a narrow tax base and domestic and external security risks, which continue to be high. Although the country’s security situation has gradually improved over the recent years, ongoing vulnerabilities weaken the government’s effectiveness and weigh on the business climate.

Pakistan’s economy is likely to recover only gradually as the global pandemic is progressively better contained. Following Pakistan’s worst economic performance on record in fiscal 2020, we forecast a modest expansion of 1.3% in fiscal 2021. Taken together with its relatively fast population growth of approximately 2.0% per year, real per capita economic growth will likely remain negative for a third straight year, at -0.7%. That will contribute to a further decline in Pakistan’s 10-year weighted average per capita growth rate to just 0.6%, well below the global median of 1.5% for economies at a similar level of income.

The Pakistani rupee’s approximately 38% depreciation against the U.S. dollar between 2017 and 2020 has also contributed to a considerable decline in the economy’s nominal GDP per capita. We forecast GDP per capita to remain just above US$1,200 by the end of this fiscal year, versus closer to US$1,600 in fiscal 2018.

“Although we believe the government’s adoption of reforms under the IMF program has been constructive in addressing accumulated economic and external balances, the economy is likely to face further stress until the pandemic is meaningfully contained and global conditions materially improved,” it said.

Growth will also be constrained by domestic security challenges and extended hostility with neighboring India and Afghanistan. These conditions, along with inadequate infrastructure, mainly in transportation and energy, are additional bottlenecks to foreign direct investments. The former Pakistan Muslim League government improved the security situation within the country, and we would expect the Pakistan Tehreek-e-Insaf (PTI) government to continue this positive momentum. However, tensions with neighboring India flared on multiple occasions in 2019, and further incidents, especially in the vicinity of the line of control in Kashmir, cannot be ruled out, the agency added.