KARACHI: International credit ratings agency Moody’s warned on Wednesday that some emerging markets, including Pakistan, will likely use its foreign exchange reserves to repay debts, keeping its near-term default risks high.
Pakistan has been struggling to put its fragile $350 billion economy on track by searching for enhanced economic cooperation and collaboration with regional partners. Islamabad has also sought loans from multilateral allies and international financial institutions as it faces a chronic balance of payment crisis.
The South Asian country’s macroeconomic crisis put it on the brink of a sovereign default last year before it secured a last-gasp deal with the International Monetary Fund (IMF). Pakistan is currently in talks with the IMF for another loan program.
“Barring new or additional foreign currency financing from development partners, Pakistan, Argentina and Tunisia will likely use their foreign exchange reserves to repay debt,” Moody’s rating agency said in a detailed report on emerging markets.
“This will reduce their foreign exchange liquidity buffers and keep near-term default risks high.”
Moody’s Investors Service – one of the world’s top three rating firms – periodically issues assessment reports to help clients protect themselves against economic and financial risks.
The report cited large debt repayments to be made by emerging markets, including Pakistan, over the next two years. It added that inflation and labor market dynamics threaten to keep interest rates higher for longer, further weakening debt affordability for Pakistan, Egypt, Kenya and Nigeria.
Moody’s said interest payments by Bahrain, Egypt, Nigeria and Pakistan are likely to exceed a third of their total revenue in 2028.
“For Egypt, Nigeria and Pakistan, higher for longer interest rates would result in a further reduction in already limited budgetary resources to respond to shocks or spend on longer-term credit enhancing policies,” the report said.
The report said this would hamper these countries’ efforts to build resilience to climate shocks and strengthen their social safety nets.
Moody’s noted that some countries like Egypt and Pakistan have attempted to lengthen their debt maturities and reduce their exposure to interest rate risks.
“However, this is difficult to do in a high interest rate environment,” the report said.
