Moody’s and Standard and Poor’s (S&P) – the two most influential international rating agencies have reviewed Pakistan’s current economic strength and future outlook and arrived at different conclusions. While Moody’s downgraded Pakistan’s sovereign credit rating by one notch, that is, from B3 to Caa1 with negative outlook, the S&P has maintained its previous rating for Pakistan at B-minus with stable outlook.
Although the two rating agencies have arrived at different conclusions by reading the same data set, there is, however, little difference between the ratings assigned to Pakistan’s sovereign credit by them. Both the agencies have termed Pakistan as a high credit risk country with possibility of default not being ruled out.
While downgrading Pakistan’s sovereign credit rating, Moody’s identified four major reasons for its action. These included the deterioration in balance of payments, large repayment to the IMF due in the current and next fiscal year, the declining foreign exchange reserves, and institutional weakness stemming from political instability and weak government finances. Moody’s has also warned that the current rating can be downgraded further if political instability worsens and foreign exchange reserves decline sizably.
Not surprisingly, Moody’s also downgraded the ratings of five Pakistani commercial banks by one notch to B3 from B2 with negative outlook owing to their large exposure to government’s debt securities. These five banks include Allied Bank, Habib Bank, United Bank, MCB Bank and the National Bank of Pakistan.
Besides reputational effect, the economic implications of rating downgrade are quite obvious. It will increase the confirmation charges of Letter of Credit thereby raising the cost of doing business in Pakistan. The private sector is likely to pass on the increase in charges to the consumers. The cost of foreign and local currency borrowing is likely to rise with implications for debt-servicing.
While I agree with Moody’s general assessment of risks associated with Pakistan’s economy, I am not convinced about the timing of its downgrading. Moody’s should have taken this decision two months earlier when external vulnerabilities were at a peak. The current decision has been taken at a time when the Pakistan-US relations are on the course of recovery and the chances of resumption of assistance are improving. Furthermore, the IMF and the Pakistani authorities are already discussing a proposal for Post-Programme Monitoring (PPM) because the outstanding IMF credit to Pakistan exceeds the 200 percent of quota threshold for PPM. Downgrading by Moody’s in the midst of these developments is at best “curious.”
Exactly one week after Moody’s downgraded Pakistan’s credit rating, S&P maintained its previous rating for Pakistan at B-minus with stable outlook. S&P’s action is very much in line with the abovementioned developments. While taking decisions about Pakistan’s rating, S&P has taken into account the weak fiscal balance and the associated rise in public and external debt, lower economic growth, and weak political and policy environment. These constraints were balanced against the rising inflow of remittances, which still help sustain adequate external liquidity position.
S&P did warn that Pakistan’s rating may be revised downward if the fiscal situation deteriorates further, resulting in rising public debt or the balance of payment worsens on account of fiscal slippages, and external liquidity position comes under greater stress. Notwithstanding the differing views, there is very little difference between B-minus and Caa1 ratings. They all point that Pakistan is a high credit risk country and the probability of default cannot be ruled out.
Over the last several years, Pakistan has proven itself to be one of the most fiscally irresponsible countries in the world with a budget deficit averaging 6.5 percent of the GDP and touching 8.5 percent in 2011-12. It has broken all the records of borrowing from the banking system (Rs1268 billion) in 2011-12 with average borrowing of Rs3.5 billion per day.
Owing to massive slippages in fiscal account, Pakistan’s balance of payments came under severe strain in 2011-12 with the current account deficit reaching $4.5 billion from a surplus of $0.5 billion last year. Financing of even this relatively low current account deficit in the midst of declining external flows has become a serious challenge for the country. The country financed this deficit by drawing down its foreign exchange reserves to the tune of $4 billion.
Economic growth has decelerated to an average of 3.0 percent and investment is down to 12.5 percent of the GDP – the lowest in 60 years and saving at 5.8 percent of the GDP is the lowest in the country’s history. Inflation has been persisting at double-digits for 5 years in a row, while both unemployment and poverty are on the rise and foreign investment is on the verge of extinction.
Given such a pathetic economic fundamental, what can one expect from the rating agencies? Should they upgrade, downgrade, or maintain a status quo? Thus, both the rating agencies have given a stern warning to Pakistan to take the economy seriously, bring fiscal discipline which means turning off the currency printing press, taking concrete steps to revive the economy, restoring the investors’ confidence and addressing the issues of energy bottlenecks and rotten PSEs. Lest these steps are not taken, then Pakistan must face further downgrading of sovereign credit rating.
The government and its economic team have used up to 90 percent of its tenure, but failed miserably in reviving the economy. It is humbly requested that the damage control exercise may be undertaken in the remaining 10 percent of its tenure to showcase its success to the masses during the election campaign. Today, the government has nothing to show to the electorates except rising unemployment and poverty, higher inflation, low economic growth, rising debt, loadshedding, gas shortages, rising crime, deteriorating law and order situation, foreign investors running away, bleeding PSEs, and, above all, the weakening of the state authority all around.
The writer is principal and dean of NUST Business School, Islamabad. Email: ahkhan@ nbs.edu.pk