KARACHI: Moody’s Investors Service has changed Pakistan’s credit rating outlook to stable from negative following the International Monetary Fund IMF bailout program that stabilized south Asian country’s economy.
Moody’s had downgraded Pakistan’s ratings outlook to negative in June 2018, citing soaring external vulnerability risk due to depleting foreign exchange reserves.
The rating agency has affirmed Pakistan’s local and foreign currency long-term issuer and senior unsecured debt ratings at B3.
The change in outlook to stable is driven by Moody’s expectations that the balance of payments dynamics will continue to improve, supported by policy adjustments and currency flexibility.
Rationale for outlook change are narrowing current account deficits, in combination with enhancements to the policy framework including currency flexibility, lower external vulnerability risks in Pakistan. However, foreign exchange reserve adequacy will take time to rebuild, Moody’s said in a statement on Monday.
“The upgradation of outlook to stable is affirmation of government’s success in stabilizing the country’s economy and laying a firm foundation for robust long term growth,” Dr. Abdul Hafeez Shaikh, Pakistan’s de facto Finance Minister, tweeted after Moody’s announcement.
In Pakistan such upgrading and downgrading of ratings and economic indicators are also used for political points scoring to large extent by political rivals. On Monday after the Moody’s announcement Asad Umar, federal Minister of planning, took to twitter to take the credit of the rating updgration.
“After 5 years of PML-N govt on June 20, 2018 Moody’s downgraded Pak outlook from stable to negative. This was 2 months BEFORE PTI formed govt. After 15 months of PTI govt Moody’s upgrades Pak from negative to stable. Now you decide who destroyed Pak economy & who is rebuilding it,” Umar tweeted.
Pakistan posted current account surplus in October for the first time in four years after $6 billion IMF bailout program. The country has increased key interest rates to more than double and devalued Pak rupee around 50 percent during last two years.
Moody’s says the fiscal strength has weakened with higher debt levels largely as a result of currency depreciation, ongoing fiscal reforms, including through the country’s (IMF) program, will mitigate risks related to debt sustainability and government liquidity.
The rating agency expects Pakistan’s current account deficit to continue narrowing in the current and next fiscal year, averaging around 2.2% of GDP, from more than 6% in fiscal 2018 and around 5% in fiscal 2019.
Under Moody’s baseline assumptions, subdued import growth will likely remain the main driver of narrowing current account deficits.
The country’s current account deficit has narrowed by 73.5 percent during the July-October of current fiscal year FY20 mainly due to declining imports, according to ministry of Finance.
Moody’s sees the possibility of monetary conditions easing when inflation gradually declines toward the end of the current fiscal year.
The rating affirmation reflects Pakistan’s relatively large economy and robust long-term growth potential, coupled with ongoing institutional enhancements that raise policy credibility and effectiveness, albeit from a low starting point.
“These credit strengths are balanced against structural constraints to economic and export competitiveness, the government’s low revenue generation capacity that weakens debt affordability, fiscal strength that will remain weak over the foreseeable future, as well as political and still-material external vulnerability risks,” the statement added.
On the fiscal side, Pakistan’s metrics have weakened recently, with wider fiscal deficits and an increase in government debt burden largely as a result of currency depreciation over the course of fiscal 2019. However, Moody’s expects ongoing fiscal reforms, anchored by the IMF program and technical assistance from other development partners, to contribute to a gradual narrowing of fiscal deficits. The reforms would also mitigate debt sustainability and government liquidity risks, according to the statement.
Moody’s expects the government’s fiscal deficit to remain relatively wide at around 8.6% of GDP in fiscal 2020, compared to 8.9% in fiscal 2019, before narrowing to an average of around 7% over fiscal 2021-23. High interest payments owing to policy rate hikes will continue to weigh on government finances and significantly constrain fiscal flexibility, the statement added.
Pakistan stocks exchange’s key index KSE-100 has surged by 39 percent since a low in August that makes it the top global performer in the world in last four months, according to the date shared by ministry of finance.