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January 11, 2019

Moody’s doubts Pakistan’s debt repayment outlook


January 11, 2019

KARACHI: Moody’s on Thursday said Pakistan’s ability to refinance its foreign debt and fund its growing deficits is at stake given low foreign exchange reserves and gross borrowing requirements.

“Foreign exchange reserves are low, and gross borrowing requirements are large in Pakistan and Sri Lanka, threatening the ability of these governments to refinance debt and fund deficits affordably,” the credit rating company said in a report.

The country’s foreign exchange reserves have been declining persistently owing to ballooning current account deficit, which has widened over the past two years.

“The reserves coverage of imports has also fallen, particularly in Pakistan, where reserves are now worth less than two months of goods and services imports,” it added.

Pakistan has been facing an economic crisis due to depleting foreign reserves and a widening current account deficit since the government of Prime Minister Imran Khan took office in August. The current account deficit surged to a four-month high at $1.25 billion in November 2018, while official foreign exchange reserves stood at $7.048 billion during the week ended January 4.

Moody’s said its external vulnerability indicator (EVI) 5 reading for the country exceeded 160 percent for 2019, indicating that total public and private external debt due over the next year was larger than foreign exchange reserves.

“Tighter global funding conditions resulting in higher credit risk premia and/or domestic interest rates would quickly transmit to government finances in both countries (Pakistan and Sri Lanka) – where debt affordability is already weak – owing to large gross borrowing requirements,” it added.

“Low foreign exchange reserves could also threaten macroeconomic stability.”

Moody’s, in last June, downgraded Pakistan’s rating to negative from stable. The decision to change the outlook to negative was driven by heightened external vulnerability risk as ongoing balance of payment pressures erode foreign exchange buffers.

Moody’s then said the foreign exchange reserves had fallen to low levels and in the absence of significant capital inflows “would not be replenished over the next 12-18 months”.

Pakistan, which has borrowed heavily from abroad, faces a tough foreign repayments schedule over the next two years as well as a rising bill from China-Pakistan Economic Corridor- (CPEC) related projects.

The country is looking to bridge a gap of at least $12 billion caused by its latest balance-of-payments crisis and is currently negotiating a bailout package with the International Monetary Fund.

Prime Minister Khan has been shuttling between China, Saudi Arabia and the United Arab Emirates in an effort to secure bilateral funding from those allied nations.

Moody's just-released research and analysis document titled "Sovereigns -Asia Pacific: 2019 outlook stable as domestic strengths counter rising external, policy uncertainties" said sovereign creditworthiness in Asia Pacific (APAC) in 2019 is stable overall, reflecting its expectations for the fundamental credit conditions that would drive sovereign credit over the next 12-18 months.

It said solid domestic fundamentals, including rising incomes and competitiveness, generally ample foreign exchange reserves and often sizeable domestic savings, would continue to underpin government credit quality.

However, Moody’s said, growth was slowing and further downside risks had intensified.

“Risks stem from tensions between the US and China, tightening global financing conditions, and shifting political and policy priorities domestically,” it said.

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