Moody's Investors Service has revised the outlook on Pakistan's foreign currency government bond rating to stable from negative. The rating is affirmed at Caa1. Concurrently, Moody's has affirmed the government's issuer rating and senior unsecured rating at Caa1.
Pakistan's country ceilings remain unchanged. The long-term, local-currency bond and deposit country ceiling is affirmed at B1, while the long-term foreign currency bond and deposit ceilings are affirmed at B3 and Caa2 respectively. All short-term ceilings are also affirmed at Not Prime. The Local Currency Country Ceiling refers to risks affecting a given country that arise from political, institutional, financial and economic factors either within the country or externally. These ceilings act as a cap on ratings that can be assigned to the foreign- and local- currency obligations of entities domiciled in the country.
RATINGS RATIONALE Moody's decision to revise the outlook on Pakistan's foreign currency rating is primarily based on a stabilisation in the country's external liquidity position. This is supported by the government's strong commitment to reforms under an ongoing program with the International Monetary Fund (IMF). The continued implementation of structural reforms under the program would ensure additional tranche disbursements, further buffering Pakistan's foreign reserves.
FIRST DRIVER - AN IMPROVING EXTERNAL LIQUIDITY POSITION A key factor behind Moody's one-notch downgrade and outlook revision for Pakistan in July 2012 was a deterioration in the external liquidity position, due to a widening current-account deficit, large outflows from the financial account and a decline in international reserves to very low levels. This situation has reversed over the past year: the current-account deficit is modest, estimated at 1.0% of GDP for the fiscal year ended June 2014, while financial inflows have increased due to a $2 billion Eurobond sale earlier this year, privatisation proceeds, and multilateral and bilateral funding. Importantly, repayments to the IMF from the previously suspended program are tapering off, even as disbursements from the ongoing program continue.
As a result, foreign reserves have risen, from a low of $2.9 billion in early February 2014 to $9.0 billion by the end of June 2014. A fall in Moody's External Vulnerability Indicator - which gauges the adequacy of reserves with respect to maturing external debt obligations over the next year - to below the 100% threshold for the fiscal year ending June 2015 reflects the easing external pressures.
SECOND DRIVER - PROGRESS ON STRUCTURAL REFORMS
Despite a weak track record with previous programs, Pakistan is making steady progress in meeting reform benchmarks under the current, 36-month $6.8 billion Extended Fund Facility with the IMF, which it signed in September 2013. So far, Pakistan has cleared three program reviews, most recently at the end of June, and received $2.2 billion of financial assistance.
The government has met 10 of 17 structural benchmarks, and appears to be on track towards achieving the remainder. Broadly, these goals include tax and energy sector reforms, as well as efforts to privatise state-owned enterprises. Reform implementation may be challenging. Nonetheless, we think the authorities will persevere to achieve the overall intent of the package.
RATIONALE FOR AFFIRMING THE RATING AT Caa1 The rating captures Pakistan's structurally large fiscal imbalances and weak debt metrics relative to B-rated peers. The sovereign's 'Very Low' institutional strength assessment reflects implementation risks associated with economic reforms. It also factors in high susceptibility to event risk, both on the political front and in terms of economic vulnerabilities that could arise, primarily from Pakistan's inherent reliance on bilateral and multilateral support.
WHAT COULD MOVE THE RATING UP/DOWN Upward triggers to the rating would stem from the successful completion of the IMF programme, further improvements in the external liquidity position, continued fiscal consolidation, and progress on structural reforms which would remove infrastructure impediments and supply-side bottlenecks - eventually aiding a shift to a higher growth trajectory. Domestic political stability and steady relations with international donors would further support the rating.
Conversely, a stalling of the ongoing IMF program, a deterioration in the external payments position or a worsening political environment would be viewed as credit negative.
-- GDP per capita (PPP basis, US$): 3,149 (2013 Actual) (also known as Per Capita Income)
-- Real GDP growth (% change): 3.7% (2013 Actual) (also known as GDP Growth)
-- Inflation Rate (CPI, % change December-December): 5.9% (2013 Actual)
-- General Gov. Financial Balance/GDP: -8.1% (2013 Actual) (also known as Fiscal Balance)
-- Current Account Balance/GDP: -1% (2013 Actual) (also known as External Balance)
-- External debt/GDP: 25.5% (2013 Actual)
-- Level of economic development: Low level of economic resilience
-- Default history: At least one default event (on bonds and/or loans) has been recorded since 1983; these events occurred in 1998 and 1999.
On 10 July 2014, a rating committee was called to discuss the rating of the Pakistan, Government of. The main points raised during the discussion were: The issuer's governance and/or management, have materially increased. The issuer has become less susceptible to event risks.
The principal methodology used in this rating was Sovereign Bond Ratings published in September 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology. The weighting of all rating factors is described in the methodology used in this rating action, if applicable.
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