Moody''''s Investors Service said that currency depreciation poses risks to Pakistan credit due to its high external financing needs and wide current account deficits.
Moody''''s in its latest report "Sovereigns - Asia Pacific: Currency depreciation will weigh on sovereigns with high external funding needs" states the currency depreciation witnessed across Asia Pacific in recent months poses risks to the region''''s emerging and frontier markets. Sovereigns with high external financing needs are most exposed. Most currencies in APAC have depreciated against the US dollar this year, with the largest depreciations in the key Asian emerging markets of India (Baa2 stable), Indonesia (Baa2 stable) and the Philippines (Baa2 stable).
Moody''''s maintained that the credit implications are more negative for those with high external financing needs. Frontier markets, including Pakistan (B3 stable) stand out due to their wide current account deficits.
Nearly all economies in the APAC region have seen their currencies depreciate against the US dollar over the course of this year (with the exception of a handful that has seen their currencies appreciate). Foreign exchange pressures have most pronounced in the key Asian emerging markets of India, Indonesia and the Philippines, but also some frontier markets like Bangladesh (Ba3 stable) and Sri Lanka, while the Pakistani rupee has adjusted by over 4.0% this year, on top of a 5% fall against the dollar over three trading days last December.
Country-specific factors have also played a role in risk aversion. In Pakistan, the adjustment of the PKR was driven by pressures on the external account that has weighed on Pakistan''''s foreign exchange reserves. These external pressures have arisen from elevated imports related to the China-Pakistan Economic Corridor (CPEC), combined with sluggish exports and weak remittances. The State Bank of Pakistan announced in December 2017 that it would allow the PKR to reflect supply and demand conditions in the foreign exchange market, and has allowed two rounds of depreciation of about 5% each since.
A recent analysis that takes into consideration the tenor, level and affordability of debt, finds that in the APAC region, Pakistan, Mongolia, Sri Lanka and Maldives are most exposed to a higher cost of debt that feeds mostly through weaker debt affordability. For Mongolia, Pakistan and to some extent, Maldives, reliance on short-term debt implies that higher yields feed through to debt servicing costs relatively quickly.
Apart from the implications for the emerging markets, during times of weaker risk appetite, countries with large current account deficits are most vulnerable to capital outflows prompting such depreciation, and this could ultimately be reflected in lower foreign reserve positions. Within the region, frontier markets such as Pakistan, Mongolia, Maldives, and Cambodia particularly stand out as those with wide current account deficits.
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