Is the economy recovering?

International credit rating agency, Moody’s, has given Prime Minister Nawaz Sharif and Finance Minister Ishaq Dar something to cheer about. It has upped its outlook on the credit rating of the government’s foreign currency bonds from stable to positive. The credit ratings firm has said the slight upgrade came on the back of improving macroeconomic indicators in the economy. The rating is around $3 billion worth of eurobonds the country issued last year. Moody’s has pointed to strengthening foreign exchange reserves, falling petrol prices and compliance with the IMF’s structural reform agenda as the main reasons behind the upgrade. Moody’s has also cited the China-Pakistan Economic Corridor (CPEC) project as a ‘credit positive’ for the country. The government’s commitment to the project is supposed to help spur investment, boost bilateral trade and ease the energy shortages.
The upgrade itself is a surprise given that the same credit agency had issued a stern warning that the January petrol crisis raised serious questions about the credit worthiness of Pakistan. The irony is that the actual credit ratings that Pakistani bonds have in the international market are pretty low. The Caa1 rating for Pakistan’s foreign currency bonds actually means they are ‘poor quality and high risk.’ Simply put, there is a lot to fear before buying a Pakistani government bond. Perhaps, this is why there is no surprise that the stock market appears to not buy the mantra as it lost 0.72 percent of its value late last week and the Karachi Stock Exchange (KSE)-100 index lost more than 1000 points on Monday. Moody’s is quick to point out that the stable liquidity position has more to do with the last tranche of IMF funds the country has received – not to an increase in direct investment flows. This means that, while the probability of default may have decreased, Pakistan remains a highly unstable economy and, in Moody’s words, ‘highly susceptible to event risk’. Moreover, the benefits of $46 billion, 2000-kilometre CPEC are not going to materialise before, at minimum, the year 2017. It may be worth their while for the elder Sharif and Ishaq Dar to hold back on their congratulations and read the stark warnings that the Moody’s statement contains.