‘Strong dollar likely to worsen external account vulnerability’

KARACHI: Strong dollar raises credit risk for Pakistan with large external funding needs, ratings agency Moody’s said, as the country’s foreign debts have already surpassed 30 percent of GDP.

“The strengthening US dollar since mid-April has led to sharp currency depreciation and significant declines in foreign exchange reserves in a number of emerging and frontier market countries, increasing credit risks for those with large external funding needs,” Moody’s Investors Service said in a statement on late Wednesday.

US credit ratings agency said Pakistan is among the countries that are “most vulnerable to a stronger US dollar”. Rupee lost around 15 percent against the dollar since December last year.

“Countries with large current account deficits, high external debt repayments and substantial foreign-currency government debt are most exposed to the impact of a stronger US dollar,” the statement quoted Alastair Wilson, global managing director of the Sovereign Risk Group at Moody’s as saying. “To the extent that these currency fluctuations reflect capital outflows or significantly lower external inflows, they are credit negative for sovereigns with large external funding needs.”

The International Monetary Fund projected Pakistan’s external debt and liabilities could peak to $144 billion in the next five years from $93 billion in the current fiscal year of 2018. External debt repayment would reach $19.7 billion by 2023 as against $7.739 billion in the fiscal year of 2018, it said.

Moody’s recently looked at the external exposure of 40 emerging and frontier market sovereigns with some of the highest levels of external debt, either in US dollar terms or in relation to the size of their respective economies.

Moody’s said emerging markets that have been prone to large shocks to external financing conditions in the past are -- all else equal - more likely to experience large shocks now unless past shocks led to adjustments that reduced their reliance on external funding.

“Sustained and severe shocks to external financing conditions can have credit implications, in particular when they result in a significant further erosion of financial buffers, raise liquidity risks and/or take fiscal metrics onto a more unfavourable path than Moody’s had previously expected,” the ratings agency said.

Last week, Moody’s changed Pakistan’s rating outlook to negative from stable on “heightened external vulnerability risk”.

“Foreign exchange reserves have fallen to low levels and, absent significant capital inflows, will not be replenished over the next 12-18 months,” Moody’s said in a statement then. “Low reserve adequacy threatens continued access to external financing at moderate costs, in turn potentially raising government liquidity risks.” The country’s current account deficit widened to 5.5 percent of GDP in the July-May period, much above the annual target of 4.4 percent.