Moody's slashes Pakistan's rating further into junk as external risks rise

Country's external financing needs for the rest of the fiscal year ending June 2023 are estimated at about $11 billion

A vegetable market in Karachi. Pakistan's finances have been wrecked by years of financial mismanagement and political instability. AFP

Moody's Investors Service cut the rating of Pakistan deeper into junk territory due to the country's deteriorating finances that raise the risk of it defaulting.

The rating agency downgraded Pakistan's local and foreign currency issuer and senior unsecured debt ratings to “Caa3”, from “Caa1”. It also cut the rating for the senior unsecured Medium Term Note (MTN) programme to "(P)Caa3”, from "(P)Caa1".

The rating downgrade is driven by Moody's assessment that Pakistan's “increasingly fragile liquidity and external position significantly raises default risks”, the agency said.

“In particular, the country's foreign exchange reserves have fallen to extremely low levels, far lower than necessary to cover its imports needs and external debt obligations over the immediate and medium term.”

A non-investment grade rating means the country and companies in it will find it more difficult to gain access to capital markets and raise funding.

While Pakistan's government is introducing some tax measures to meet the conditions of an International Monetary Fund programme, weak governance and heightened social risks are impeding the country's ability to enforce policies that would secure large amounts of financing and reduce risks to its balance of payments, Moody's said.

Last month, the IMF team left the country after failing to reach a deal on financial aid but said the fund welcomed the commitment of Pakistan's government to enforce policies needed to buttress the stability of its economy.

However, the fund said the cash-strapped country needs to press forward with key reforms to strengthen its finances and reduce debt.

Rising prices worldwide and delayed policy action by Pakistan's government hit the country’s finances, leading to a significant exchange-rate depreciation, a surge in inflation and an erosion of its foreign currency reserves.

Torrential rain and flooding in June, which left a third of the country partially submerged and killed more than 1,000 people, piled pressure on its faltering economy.

Before the flooding, a weakening economy forced the government to raise fuel prices by more than 20 per cent this year. The country has struggled to recover since then.

In addition to slashing Pakistan's rating, Moody's changed the outlook on the country to stable, from negative, as it anticipates external financing will become available to it in the near term, which would reduce the potential of a default risk potentially to a level consistent with a higher rating.

“However, in the current extremely fragile balance of payments situation, disbursements may not be secured in time to avoid a default,” the rating agency said.

“Moreover, beyond the life of the current IMF programme that ends in June 2023, there is very limited visibility on Pakistan's sources of financing for its sizeable external payments needs.”

In August, the IMF released about $1.1 billion to Pakistan as part of its seventh and eighth reviews of the country's bailout programme, helping it avoid a default crisis similar to Sri Lanka's.

The fund also agreed to extend the programme by a year to the end of June 2023 and increase the total amount of funding by about $940 million.

The country's IMF loan programme, which was agreed upon in 2019, had stalled under the government of former prime minister Imran Khan, which backtracked on subsidy agreements and failed to improve tax collection.

However, Pakistan and the fund restarted a staff-level agreement in July to resume the funding facility.

Pakistan's foreign exchange reserves have declined to “a critically low level, sufficient to cover less than one month of imports”.

Amid delays in securing funding, risks that the country may not be able to source enough financing to meet its needs for the rest of the 2023 fiscal year ending this June have increased, Moody's said.

“Beyond this fiscal year, liquidity and external vulnerability risks will continue to be elevated as Pakistan's financing needs will remain significant and financing sources are far from secure. At the same time, prospects of the country materially increasing its foreign exchange reserves are low,” it said.

Moody's estimates Pakistan's external financing needs for the rest of the fiscal year ending June 2023 at about $11 billion, including the outstanding $7 billion external debt payments due.

Pakistan will need to secure financing from the IMF and other multilateral and bilateral partners to meet its financing needs, it said.

Moody's forecasts Pakistan's GDP growth at between zero per cent to 1 per cent for the country's 2023 fiscal year.