Fitch downgrades Pakistan’s issuer default rating to 'CCC+' from ‘B-’

In yet another negative development, Fitch Ratings on Friday downgraded Pakistan's Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'CCC+' from 'B-'.

In a statement, the agency said that it does not typically assign outlooks to sovereign nations with a rating of 'CCC+' or below.

Giving rationale behind the downgrade, the agency flagged Pakistan's worsening liquidity and policy risks.

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“The downgrade reflects further deterioration in Pakistan's external liquidity and funding conditions, and the decline of foreign exchange reserves,” Fitch Ratings said.

“This is partly a result of widespread floods, which will undermine Pakistan's efforts to rein in twin fiscal and current account deficits.”

The downgrade “also reflects our view of increased risks of policies potentially undermining Pakistan's International Monetary Fund (IMF) programme and official financial support.”

Speaking about foreign exchange reserves, it said that the State Bank of Pakistan (SBP) had about $7.6 billion till 14 October 2022 which can cover about a month of current external payments.

It also noted that forex reserves had tumbled from over $20 billion at the end of August 2021.

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“Falling reserves reflect large, albeit, declining current account deficits (CADs), external debt servicing and earlier foreign exchange interventions by the SBP,” he said.

Before stabilising in the week to 14 October, reserves had been falling every week since the disbursement of $1.2 billion from the IMF in the week till 2 September, upon the completion of the 7th and 8th reviews of Pakistan's Extended Fund Facility (EFF), the ratings agency said.

It also noted that the CAD reached $17 billion (4.6% of GDP) in the fiscal year that ended in June 2022 (FY22), driven by soaring oil prices and higher non-oil imports on strong private consumption.

Fiscal tightening, higher interest rates and measures to limit energy consumption and imports underpin our forecast for the CAD to narrow to $10 billion (2.7% of GDP) in FY23, despite the hit to export revenue and import needs after the recent floods.

“Lower imports and commodity prices helped to narrow the CAD in recent months, to about $300 million in September,” Fitch said.

Pakistan's external public debt maturities in FY23 are over $21 billion, mostly to bilateral and multilateral creditors, which mitigates rollover risks, and there are already agreements to roll over some of these.

Quoting authorities, Fitch placed estimated flood damage at $10 billion-30 billion, but reconstruction costs are likely to be lower, as is the impact on Pakistan's twin deficits.

“Pakistan recently received funding commitments of $2.5 billion from the World Bank and Asian Development Bank, although we understand that much of this is repurposed from ongoing programmes,” the statement cited. “It remains unclear to what degree the IMF will be able to relax Pakistan's programme targets, or augment Pakistan's access under the extended fund facility (EFF).”

“We assume Pakistan will continue to receive disbursements under its IMF programme, but risks to this have risen,” it said.

Fuel price cuts from October 1 may not be compatible with commitments to the IMF, it feared, adding that a quarterly electricity tariff adjustment due in October is also yet to happen.

The new finance minister has re-affirmed commitment to the programme, but prefers a strong exchange rate, and may revisit the SBP law that was amended in early 2022 to grant the SBP greater autonomy, as previously agreed with the IMF, Fitch said.

Earlier during the month, Moody’s Investors Service (Moody’s) downgraded the government of Pakistan’s local and foreign currency issuer and senior unsecured debt ratings to ‘Caa1’ from ‘B3’.

The decision to downgrade the ratings to ‘Caa1’ is driven by increased government liquidity and external vulnerability risks and higher debt sustainability risks, in the aftermath of devastating floods that hit the country since June 2022.