ISLAMABAD: Fitch Ratings has downgraded Pakistan’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to “CCC+” from “B-”.
The rating agency stated that it typically does not assign Outlooks to sovereigns with a rating of “CCC+” or below. It stated that the downgrade reflects further deterioration in Pakistan’s external liquidity and funding conditions, and the decline of foreign exchange (FX) reserves. 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.
The agency further noted that liquid net FX reserves of the State Bank of Pakistan (SBP) were about USD 7.6 billion by 14 October 2022, or about a month of current external payments, down from more than USD20 billion at end-August 2021.
Falling reserves reflect large, albeit, declining current account deficits (CADs), external debt servicing and earlier FX interventions by the SBP. Before stabilising in the week to 14 October, reserves had been falling every week since the disbursement of USD1.2 billion from the IMF in the week to 2 September, upon the completion of the 7th and 8th reviews of Pakistan’s Extended Fund Facility (EFF).
Moody’s cuts Pakistan’s rating to Caa1
The CAD reached USD17 billion (4.6per cent of GDP) in the fiscal year to 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 USD10 billion (2.7percent 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 USD300 million in September.
Pakistan’s external public debt maturities in FY23 are over USD21 billion, mostly to bilateral and multilateral creditors, which mitigates rollover risks, and there are already agreements to roll over some of these. The authorities estimate the flood damage at USD10 billion-30 billion, but reconstruction costs are likely to be lower, as is the impact on Pakistan’s twin deficits.
Fitch stated Pakistan recently received funding commitments of USD2.5 billion from the World Bank and Asian Development Bank, according to the authorities, although we understand that much of this is repurposed from ongoing programmes. It remains unclear to what degree the IMF will be able to relax Pakistan’s programme targets, or augment Pakistan’s access under the EFF.
“We assume Pakistan will continue to receive disbursements under its IMF programme, but risks to this have risen. Fuel-price cuts from 1 October may not be compatible with commitments to the IMF. A quarterly electricity tariff adjustment due in October has 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”, the rating agency added.
It further stated the previous finance minister said before resigning that Pakistan would seek debt relief from non-commercial creditors, although he reiterated the intention to repay the USD1 billion bond due in December 2022. Prime Minister Shehbaz Sharif also appealed for debt relief within the Paris Club framework. More recently, however, the Minister of Finance publicly ruled this out.
Pakistan’s debt to private creditors (or official Paris Club creditors) is only a small fraction of the total and the authorities maintain that they have no intention to restructure debt to private creditors.
Former prime minister Imran Khan, who was ousted in a no-confidence vote on 10 April, continues to put political pressure on the government, organising protests across the country calling for early elections. Khan’s PTI party won by-elections in the key Punjab province in July, defeating the incumbent PML-N, and PTI won more national and provincial seats in by-elections on 17 October. Regular elections are due in October 2023, creating the risk of policy slippage after the conclusion of the IMF programme due in June.
The fiscal deficit widened to 7.9per cent of GDP (over PKR5 trillion) in FY22, from 6.1per cent in FY21. Tax reductions and subsidies on fuel and electricity account for most of the fiscal deterioration; these were introduced by the previous government in February and lasted until June. We expect a narrowing of the deficit to 6.2per cent of GDP (about PKR5 trillion or USD23 billion) in FY23, driven by some spending restraint and higher taxes.
Pakistan’s debt/GDP ratio was 73per cent at FYE22, broadly in line with the current ‘B’ median. We expect debt/GDP to fall to 70per cent in FY23 and continue decreasing, helped by high inflation and a modest primary deficit. A low FX exposure at just over 30per cent of total debt limits the negative impact of currency depreciation on debt dynamics. Nevertheless, debt/revenue (at over 600per cent in FY22) and interest/revenue (at about 40per cent) are significantly worse than the ‘B’ median. This largely reflects low general government revenue of 12per cent of GDP in FY22.
Copyright Business Recorder, 2022
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