Islamabad, March 12, 2025 – The global credit rating agency Moody’s has upgraded Pakistan banking outlook from stable to positive, reflecting improved economic conditions and strengthened financial sector performance.
(more…)Tag: Moody’s
-
Moody’s Upgrades Pakistan’s Credit Rating to Caa2
Moody’s Investors Service has upgraded Pakistan’s local and foreign currency issuer and senior unsecured debt ratings from Caa3 to Caa2.
(more…) -
IMF Deal Offers Lifeline, But Reforms Key for Pakistan: Moody’s
Islamabad, July 16, 2024 – Pakistan’s economic outlook has received a cautious boost with the recent staff-level agreement reached with the International Monetary Fund (IMF) for a new $7 billion Extended Fund Facility (EFF). While this agreement offers a crucial source of financing, Moody’s Ratings Agency warns that Pakistan’s ability to sustain reforms will be the ultimate determinant of its success.
(more…) -
Political Uncertainty Clouds Pakistan’s Credit Rating: Moody’s
In the aftermath of inconclusive elections that failed to produce a clear majority for any political party, Moody’s Investors Service has highlighted the clouded credit rating outlook for Pakistan due to the ensuing political uncertainty.
(more…) -
Pakistan’s fragile liquidity raises default risks: Moody’s
Moody’s Investors Service on Tuesday downgraded Pakistan’s rating, which is driven by assessment that country’s increasingly fragile liquidity and external position significantly raises default risks.
(more…) -
Moody’s downgrades Pakistan rating to Caa1 from B3
SINGAPORE: Moody’s Investors Service on Thursday downgraded the government of Pakistan’s local and foreign currency issuer and senior unsecured debt ratings to Caa1 from B3.
The global rating agency also downgraded the rating for the senior unsecured MTN programme to (P) Caa1 from (P)B3. The outlook remains negative.
It said that 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.
“The floods have exacerbated Pakistan’s liquidity and external credit weaknesses and vastly increase social spending needs, while government revenue is severely hit,” the rating agency added.
Debt affordability, a long-standing credit weakness for Pakistan, will remain extremely weak for the foreseeable future.
The Caa1 rating reflects Moody’s view that Pakistan will remain highly reliant on financing from multilateral partners and other official sector creditors to meet its debt payments, in the absence of access to market financing at affordable costs.
In particular, Moody’s expects that Pakistan’s IMF Extended Fund Facility (EFF) program will remain in place and provide an avenue for financing from the IMF and other multilateral and bilateral partners in the near term.
The negative outlook captures risks around Pakistan’s ability to secure required financing to fully meet its needs in the next few years.
Elevated social and political risks compound the government’s difficulty in implementing reforms, including revenue-raising measures, that would improve the country’s fiscal position and alleviate liquidity stresses.
The floods will also raise Pakistan’s external financing needs, raising the risks of a balance of payments crisis.
Pakistan’s weak institutions and governance strength adds uncertainty around whether the country will maintain a credible policy path that supports further financing.
The negative outlook also captures risks that, should a debt restructuring be needed, it may extend to private sector creditors.
The Caa1 rating also applies to the backed foreign currency senior unsecured ratings for The Third Pakistan International Sukuk Co Ltd and The Pakistan Global Sukuk Programme Co Ltd. The associated payment obligations are, in Moody’s view, direct obligations of the Government of Pakistan.
Concurrent to today’s action, Moody’s has lowered Pakistan’s local and foreign currency country ceilings to B2 and Caa1 from B1 and B3, respectively. The two-notch gap between the local currency ceiling and sovereign rating is driven by the government’s relatively large footprint in the economy, weak institutions, and relatively high political and external vulnerability risk.
The two-notch gap between the foreign currency ceiling and the local currency ceiling reflects incomplete capital account convertibility and relatively weak policy effectiveness, which point to material transfer and convertibility risks notwithstanding moderate external debt.
Pakistan’s economic outlook in the near and medium term has deteriorated sharply as a result of the floods. The government’s preliminary estimates put the economic cost of the floods at about $30 billion (10 per cent of GDP), far above the estimated $10 billion economic cost of the 2010 floods, which was until now the country’s worst flooding episode.
Moody’s has lowered Pakistan’s real GDP growth to 0-1 per cent for fiscal 2023 (the year ending in June 2023), from a pre-flood estimate of 3-4 per cent. The floods will affect all sectors, with the impact likely more acute in the agriculture sector, which makes up about one-quarter of the economy.
As the economy recovers from the floods, Moody’s expects growth to pick up next year but stay below trend.
The supply shock due to the floods will increase prices further, at a time when inflationary pressures are already elevated. The monthly inflation rate averaged 25 per cent from July-September 2022.
Moody’s expects inflation to pick up to 25-30 per cent on average for fiscal 2023, compared to a pre-flood estimate of 20-25 per cent. Social risks may increase as households face higher costs of living for a more protracted period of time, which would have attendant negative economic and fiscal implications.
Moreover, the floods are likely to have long-term negative effects on economic and social conditions. There is already a significant increase in water-borne diseases, and education is again disrupted for many displaced children not long after schooling resumed following the pandemic.
The economy’s susceptibility to climate events is captured in Moody’s assessment of highly negative environmental risks, as explained below.
The growth shock will lower government revenues, while government expenditures will be raised by the costs of rescue and relief operations. Moody’s expects the fiscal deficit to widen to 7-8 per cent of GDP for fiscal 2023, from a pre-flood estimate of 5-6 per cent of GDP.
Pressures on public finances are likely to persist in the next few years, as expenditures remain high because of reconstruction and social needs.
Accordingly, Pakistan’s debt affordability – which is already one of the weakest among the sovereigns Moody’s rate – will worsen. Against a backdrop of increasing interest rates and weaker revenue collection, Moody’s estimates that interest payments will increase to around 50 per cent in fiscal 2023, from 40 per cent of government revenue in fiscal 2022, and stabilise at this level for the next few years.
A significant share of revenue going towards interest payments will increasingly constrain the government’s capacity to service its debt while also meeting the population’s essential social spending needs.
Meanwhile, because of the narrow revenue base, the government’s debt as a share of revenue is very high at about 600 per cent in fiscal 2022. Moody’s expects this ratio to rise further to 620-640 per cent in fiscal 2023, well above the median of 320 per cent for Caa-rated sovereigns, despite a more moderate debt to GDP ratio at 65-70 per cent in fiscal 2023.
Moody’s expects the current account deficit to widen to 3.5-4.5 per cent of GDP for fiscal 2023, compared to a pre-flood estimate of 3-3.5 per cent. While imports of a range of goods are likely to decline as demand shrinks, imports of food and other essential items such as medical supplies will increase, while export capacity will be hit.
That said, Moody’s expects the larger trade deficit to be partially offset by an increase in remittances which tend to increase at times of crises.
While the current account deficit widens, Pakistan’s foreign exchange reserves have remained at very low levels, sufficient to cover less than two months of imports even after the recent IMF disbursement of $1.1 billion from the seventh and eighth review of the EFF programme.
This low level of reserves limits Pakistan’s ability to substantially draw down on them to meet debt or imports payments needs, without risking a balance of payments crisis.
External liquidity conditions have also tightened significantly for Pakistan. Its access to market financing at affordable cost is extremely constrained, and will likely remain so for some time.
Therefore, Pakistan will remain highly reliant on financing from multilateral and bilateral partners. Moody’s expects Pakistan’s continued engagement with the IMF to enable it to access financing from the IMF and related financing from other multilateral partners and official creditors.
Moody’s understands that the government has secured additional commitments from multilateral partners to meet higher financing needs due to the floods. Nonetheless, risks remain in particular related to Pakistan’s weak institutions and governance strength which adds uncertainty about the sovereign’s capacity to maintain a credible and effective policy stance.
The negative outlook captures the downside risks beyond what would be consistent with a Caa1 rating.
Elevated social and political risks compound the government’s difficulty in implementing reforms, including revenue-raising measures, that would improve the country’s fiscal position and alleviate liquidity stresses. Moreover, as mentioned above, Pakistan faces risks of a balance of payments crisis, which would increase if its external payments needs are higher than currently expected, for instance because of larger imports needs, while access to external financing is more restricted.
Moreover, while Moody’s assumes that access to official sector financing will be maintained and will be enough to meet Pakistan’s needs, lower financing and/ or higher needs would raise the risk of default to a level no longer consistent with a Caa1 rating.
On 25 September, the then Finance Minister indicated that Pakistan would seek debt relief from official creditors, on a bilateral basis. The negative outlook also captures risks that, should a debt restructuring be sought, it may extend to private sector creditors, despite assurances by the government late September that it is not seeking debt relief from commercial banks or Eurobond holders. In this case, it would likely constitute a default under Moody’s definition.
-
Moody’s changes Pakistan’s outlook to negative
SINGAPORE: Moody’s Investors Service on Thursday June 2, 2022 affirmed the Government of Pakistan’s B3 local and foreign currency issuer and senior unsecured debt ratings, the (P) B3 senior unsecured MTN programme rating, and changed the outlook to negative from stable.
A statement issued by the Moody’s stated that the decision to change the outlook to negative is driven by Pakistan’s heightened external vulnerability risk and uncertainty around the sovereign’s ability to secure additional external financing to meet its needs.
Moody’s assesses that Pakistan’s external vulnerability risk has been amplified by rising inflation, which puts downward pressure on the current account, the currency and – already thin – foreign exchange reserves, especially in the context of heightened political and social risk.
“Pakistan’s weak institutions and governance strength adds uncertainty around the future direction of macroeconomic policy, including whether the country will complete the current IMF Extended Fund Facility (EFF) programme and maintain a credible policy path that supports further financing,” it added.
The decision to affirm the B3 rating reflects Moody’s assumption that, notwithstanding the downside risks mentioned above, Pakistan will conclude the seventh review under the IMF EFF programme by the second half of this calendar year, and will maintain its engagement with the IMF, leading to additional financing from other bilateral and multilateral partners.
In this case, Moody’s assesses that Pakistan will be able to close its financing gap for the next couple of years. The B3 rating also incorporates Moody’s assessment of the scale of Pakistan’s economy and robust growth potential, which will provide the economy with some capacity to absorb shocks.
These credit strengths are balanced against Pakistan’s fragile external payments position, weak governance and very weak fiscal strength, including very weak debt affordability.
The B3 rating affirmation also applies to the backed foreign currency senior unsecured ratings for The Third Pakistan International Sukuk Co Ltd and The Pakistan Global Sukuk Programme Co Ltd. The associated payment obligations are, in Moody’s view, direct obligations of the Government of Pakistan.
Concurrent to today’s action, Pakistan’s local and foreign currency country ceilings have been lowered to B1 and B3, from Ba3 and B2, respectively. The two-notch gap between the local currency ceiling and sovereign rating is driven by the government’s relatively large footprint in the economy, weak institutions, and relatively high political and external vulnerability risk.
The two-notch gap between the foreign currency ceiling and the local currency ceiling reflects incomplete capital account convertibility and relatively weak policy effectiveness, which point to material transfer and convertibility risks notwithstanding moderate external debt.
Moody’s expects Pakistan’s current account to remain under significant pressure, on the back of elevated global commodity prices through 2022 and 2023.
Pakistan’s current account deficit has widened to a cumulative $13.8 billion since the start of the current fiscal year in July 2021 up until April 2022, compared to a deficit of $543 million in the same period a year earlier.
In the absence of an equivalent inflow in the financial account, the rapid widening of the current account deficit has led to a large drawdown of the foreign exchange reserves.
According to data from the IMF, Pakistan’s foreign exchange reserves have declined to $9.7 billion at the end of April 2022, which is sufficient to cover less than two months of imports. This compares with the $18.9 billion of reserves at the end of July 2021.
Moody’s projects the current account deficit to come in at 4.5-5 per cent of GDP for fiscal 2022 (ending June 2022), slightly wider than the government’s expectations. As global commodity prices decline gradually in 2023 and as domestic demand moderates, Moody’s expects the current account deficit to narrow to 3.5-4 per cent of GDP. Moody’s current account deficit forecasts are higher than previous (early February 2022) projections of 4 per cent and 3 per cent for fiscal 2022 and 2023, respectively.
The larger current account deficits underscore the need for Pakistan to secure additional external financing, especially given its very low foreign exchange reserves. Pakistan is in negotiations with the IMF on the seventh review of the EFF programme. Moody’s expects Pakistan to successfully conclude the review by the second half of the year, with the associated IMF financing to be disbursed then. Conclusion of the seventh review, and further engagement with the IMF, will also help Pakistan secure financing from other bilateral and multilateral partners. In this scenario, Moody’s expects Pakistan to be able to fully meet its external obligations for the next couple of years.
However, Moody’s assesses that the balance of risks is on the downside. An agreement with IMF could take longer than expected, as the government may find it difficult to reduce fuel and power subsidies given rising inflation. Recent moves by the government to raise fuel prices signal its commitment to addressing issues raised by the IMF. Still, political and social challenges will complicate the government’s efforts to agree on and implement further reforms, such as revenue raising reforms. While not Moody’s baseline scenario, if Pakistan is unable to secure additional financing later this year, foreign exchange reserves will continue to be drawn down from already very low levels, increasing the risk of a balance of payments crisis.
The Moody’s stated Pakistan’s rising external vulnerability risk has been amplified by rising inflation, particularly in the context of heightened political and social risks. In April 2022, inflation reached 13.4 per cent year-on-year, with particularly high inflation in food and energy which account for a very large share of the most vulnerable households’ budgets.
Moody’s assesses that political uncertainty in Pakistan remains high, even after the new government has been installed. The new ruling coalition comprises of multiple political parties with divergent interests, which is likely to make the enactment of any legislation difficult, including those related to reforms under the IMF EFF programme. Moreover, the next elections are due by the middle of 2023. In Moody’s view, political parties will find it difficult to continually enact significant revenue-raising measures in the run-up to the elections, especially in a high inflation environment.
Rising interest rates are also likely to increasingly constrain the government’s policy choices, especially since interest payments already absorb more than 40 per cent of revenue.
Meanwhile, domestic political risk has also risen with a higher frequency of terrorist attacks over the last year. According to the Pak Institute for Peace Studies think-tank, the number of terrorist attacks increase 42 per cent in 2021 compared to a year ago. More frequent terrorist attacks add to safety concerns, which may increase social risks, as well as constrain business conditions and limit investment.
Moody’s assesses that there is a material probability of a recurrence in domestic political stress that will impinge on the effectiveness of policymaking and the government’s ability to implement timely economic reforms aimed at achieving macroeconomic stability.
The affirmation of the B3 rating reflects Moody’s assumption that Pakistan will secure external financing, including through the conclusion of the seventh review and subsequent reviews under the IMF EFF programme and avoid a balance of payment crisis.
Pakistan’s B3 rating also reflects Moody’s assessment that the country’s large size and robust potential growth provides it with some capacity to absorb economic shocks. Pakistan’s potential growth of about 5 per cent in part reflects the country’s favourable demographics with its sizable under-30 population. Nonetheless, Pakistan’s potential growth is constrained by structural challenges, including weak governance and weak competitiveness.
Moody’s projects Pakistan’s real GDP growth to slow to 4.2 per cent in fiscal 2023, moderately lower than the government’s projections. This compares with growth of 6.0 per cent in fiscal 2022. The moderation in economic activity reflects the drag on domestic demand from rising inflation and a tightening in monetary policy by the State Bank of Pakistan. Moody’s expects Pakistan’s real GDP to pick up gradually reaching 4.5-5 per cent over fiscal 2024 and 2025.
Meanwhile, Pakistan’s fiscal strength is very weak, a long-standing feature of the sovereign’s credit profile. Moody’s expects fiscal consolidation to stall ahead of the next general elections. Moody’s projects Pakistan’s government debt to stabilise at around 70 per cent of GDP for fiscal 2022 and 2023, higher than the median of 63 per cent for B-rated sovereigns.
Meanwhile, given a very narrow revenue base, Pakistan’s government debt as a share of revenue is very high at around 560 per cent in fiscal 2021. Moody’s expects this ratio to remain elevated at 550-590 per cent over fiscal 2022 to 2024, well above the 290 per cent for the median B-rated sovereign. As mentioned, the sovereign also has very weak debt affordability – one of the weakest among Moody’s rated sovereigns.
READ MORE: Moody’s changes Pakistan’s rating to stable from negative
-
Moody’s assigns stable outlook to top five Pakistani banks
KARACHI: Following the improved outlook of Pakistan economy, Moody’s Investors Service on Thursday affirmed the B3 long-term local currency deposit ratings of five top Pakistani banks and changed the outlook to stable from negative.
The rating agency in a statement said that affected banks include Allied Bank Limited (ABL), Habib Bank Ltd. (HBL), MCB Bank Limited (MCB), National Bank of Pakistan (NBP) and United Bank Ltd. (UBL).
The rating actions follow Moody’s decision on 2 December to affirm the B3 rating for the Government of Pakistan and change the outlook on the sovereign rating to stable from negative.
The banks’ rating actions reflect improvements in the operating environment in Pakistan and in the country’s sovereign credit profile, which affect the banks’ given (1) their high government exposures that link their credit profiles to that of the government; and (2) the expectation that the government’s capacity to support banks in case of need will not deteriorate.
The primary driver of Moody’s decision to change the five Pakistan banks’ outlooks to stable is the extensive interconnectedness between their balance sheets and sovereign credit risk, owing to the banks’ high exposures to government securities.
According to Moody’s estimates as of the latest available information, the five banks’ direct exposure to government credit risk stood at around 10.2x of Tier-1 capital for ABL, 8.1x for HBL, 6.4x for MCB, 9.5x for NBP and 6.8x for UBL.
The high direct exposure to government credit risk, in addition to the primarily Pakistan focus of their operations, links the banks’ credit profile to that of the government. As a result, the improvements in the operating environment and in the sovereign credit profile have eased pressures on banks as well.
The stable outlook assigned to the banks’ local currency deposit ratings also reflects Moody’s expectation that the government’s capacity to support banks in case of need will not deteriorate.
This is reflected by the stable outlook on Pakistan’s sovereign B3 bond rating which is driven by reduced external vulnerability risks on the back of policy adjustments and currency flexibility, as well as ongoing fiscal reforms that will mitigate risks related to debt sustainability and government liquidity.
The local currency deposit ratings of NBP and HBL incorporate one notch of support uplift from their caa1 baseline credit assessments.
Moody’s decision to affirm the banks’ ratings reflects their stable deposit-based funding structures, high liquidity buffers and good earnings generating capacity, as well as Pakistan’s high growth potential.
These credit strengths balance banks’ modest capital buffers and high asset risks, as well as their high exposure to the government, which links their credit profile to that of the government.
Moody’s does not have any particular environmental, social or governance concern for the banks included in this action, and does not apply any corporate behavior adjustments to them.
-
Economic environment becomes stable, international community recognizes: Hafeez Shaikh
ISLAMABAD: Dr Hafeez Shaikh Adviser to Prime Minister on Finance and Revenue Dr. Abdul Hafeez Shaikh on Wednesday said that after 15 months efforts the economic environment of Pakistan becomes more stable as being recognized by international community.
“We inherited a very grim economic situation with the debt levels and the fiscal and current account deficits reaching at the highest level, but through serious work and collaboration with international community, we have stabilised the economy and the international community is also recognising our efforts,” he said while addressing the inaugural session of the two-day conference arranged at a local hotel on the theme of “Rethinking Microfinance: Developing a New Inclusive Finance Compass”.
The adviser said that an over US$ 1 billion investment in Pakistan’s bond market and a 238 per cent growth in the foreign direct investment in the first four months of this fiscal year which comes to $650 million, were reflection of an increased level of confidence the international community had begun to show in the Pakistani market.
“Similarly, IMF applauding Pakistan for meeting all agreed structural benchmarks with comfortable margins in the first quarter, Bloomberg declaring Pakistan Stock Exchange as the world’s best performing market in last three months and now Moody’s upgrading Pakistan’s ranking from the negative to stable are positive developments and signs of the progress achieved on the economic front by the government,” he added.
He further pointed out that the government also inherited the highest ever current account deficit of $ 20 billion but this massive current account deficit was contained and turned into a surplus for the first time in many years in the month of November.
Similarly, the fiscal deficit adjusted for interest payment which is also called primary balance had also turned into a surplus in the first quarter of this year.
Dr. Abdul Hafeez Shaikh also told the participants about government efforts to boost the exports which had previously shown negative growth for five consecutive years, but because of incentives given to exporters in terms of no taxes on export sector as well as subsidization of gas and electricity and grant of additional Rs 300 billion subsidized loans, the exports had gone up by 3.4 per cent during the first four months of current fiscal year with 9.6 per cent growth recorded in the month of November alone.
“The government is working on a strategy to lead a transition away from a largely import-oriented economy to the one where the focus is on exports and earning of dollars to improve the quality of life of the common Pakistanis,” he said.
Talking about the microfinance sector, the Adviser asked the conference participants to deliberate on how the cost of doing business could be reduced in terms of reduced rate of interest and the time lost in processes, and how one could increase access or scale up and how we could enhance the impact and what exactly the impact meant in terms of jobs and tackling poverty.
“We also need to debate how we can keep learning as these are important questions that need to be debated and answered to formulate strategies for furthering growth in this sector,” he said.
Meanwhile, Adviser to PM on Finance and Revenue Dr. Abdul Hafeez Shaikh also held a detailed interaction with a group of television anchorpersons in his office.
During the informal discussion that continued for about two hours, the adviser briefed the anchors on the current state of economy with a focus on what state of economy the government inherited in 2018 and what policy steps and measures were adopted by the government for stabilisation of economy and subsequent success achieved in various areas, including 16.4 per cent revenue growth, 238 per cent growth in FDI, 3.4 per cent growth in exports in the first four months of this fiscal year as well as stabilisation of exchange rate, declaration of Pakistan Stock Exchange as the world’s best performing stock by Bloomberg and the upgradation of economic outlook of Pakistan from the negative to stable by the Moody’s.
-
SBP welcomes Moody’s stable outlook on Pakistan
KARACHI: State Bank of Pakistan (SBP) on Tuesday welcomed Moody’s change in outlook on Pakistan from negative to stable.
(more…)