Moody’s Investors Service, a globally renowned credit rating agency, has altered its outlook for Pakistan’s banking system from stable to negative, citing concerns over the sector’s exposure to the nation’s low-rated sovereign debt and a decelerating economy.
Constantinos Kypreos, Senior Vice President at Moody’s, delivered a somber assessment in a statement on Monday, predicting a challenging period for Pakistani banks over the next 12-18 months. The high concentration of banks in the country’s low-rated sovereign debt, coupled with the economic slowdown, poses a significant threat to their credit profiles.
The report highlighted the formidable operating conditions awaiting Pakistani banks as the real GDP growth is anticipated to slow to 4.3 percent in the fiscal year ending June 2019, a considerable drop from the 5.8 percent recorded in 2018. The Pakistani rupee’s 30 percent depreciation against the US dollar, a 450 basis points rise in interest rates between December 2017 and February 2019, and a surge in inflation collectively amplify challenges faced by businesses, consumers, and the private sector’s ability to service debts.
Moody’s underscored the risk of macroeconomic contagion faced by Pakistan’s banks through various channels. Notably, the banks’ substantial holdings of government securities, tethering their credit profiles to the sovereign, pose a significant risk. Furthermore, the weakening capacity of authorities to support banks in times of need, as evidenced by the sovereign rating’s negative outlook, adds another layer of concern.
Constantinos Kypreos did, however, provide a glimmer of optimism amidst the gloom. He acknowledged that banks in Pakistan will continue to benefit from stable customer deposits and maintain high liquidity levels, which could serve as a buffer during these challenging times.
The negative outlook is based on Moody’s assessment of six key drivers: deteriorating operating environment, increasing asset risk, stable capital, stable profitability and efficiency, stable funding and liquidity, and deteriorating government support.
Moody’s assessment focuses on the five largest banks in Pakistan by assets, collectively responsible for approximately 50 percent of the country’s system deposits. The credit rating agency’s negative outlook underscores the urgency for strategic measures and prudent financial management by the banking sector to weather the impending economic challenges and maintain stability in the face of external pressures.
As Pakistan’s financial landscape faces headwinds, policymakers, regulators, and financial institutions must collaborate to navigate these turbulent times and safeguard the resilience of the banking system for the nation’s economic well-being.
