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October 11, 2018

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Moody’s warns Pakistan on high debt refinancing

KARACHI: Pakistan is likely to face high refinancing cost for its international bonds maturing over the next two years that would increase the country’s debt burden, ratings agency Moody’s said on Wednesday.

Moody’s Investors Service said international bonds issued by frontier market governments in Asia Pacific and Africa are coming due over the next two years in a tighter refinancing environment.

Pakistan tops the countries that “will prove the most exposed to more costly debt financing as (its) international sovereign bonds mature in 2019 and 2020,” Moody’s said in a report titled ‘Sovereigns — Frontier markets: Maturing international bonds contribute to exposure to financing risks’.

“If the tighter financing conditions are pronounced and sustained, such a situation would weaken the debt affordability for these countries, and raise their debt burden, especially if local currencies depreciate,” the ratings agency said.

Currently, at least eight Pakistani bonds are trading in the international market. A five-year Eurobond that fetched the country one billion dollars in 2014 is maturing next year.

Pakistan was among the economies that rushed to international market to raise funds amid low interest rate scenario in the past.

Last year, the government raised $2.5 billion in dollar-denominated Eurobond and sukuk.

In December last year, Moody’s assigned B3 rating to Pakistan, reflecting a credit profile that balances robust growth potential and a relatively large economy, against low income levels, infrastructure constraints and very low global competitiveness.

The country is already facing immense pressure on its balance of payment position as the country’s foreign reserves plunged more than half a billion dollars at one fell swoop, forcing authorities to spring into action to avert external account crisis by letting the rupee value down around eight percent in a single day.

Moody’s said a further drain on foreign exchange reserves would raise the risk of lower capital inflows and higher refinancing costs, “posing negative pressure” on the credit profile.

In a previous report, Moody’s warned that the government’s high debt burden, very narrow revenue base, fragile external payments position and high political risk constrain the credit profile.

“Pakistan’s economy demonstrates relatively robust GDP growth, limited by supply-side constraints on the economy,” it said. “While the scale of the economy is relatively large, Pakistan’s per capita income is very low, indicating limited capacity to absorb negative shocks.”

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