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External pressures continue to weigh on forex reserves: Moody’s


March 13, 2019

KARACHI: Global ratings agency Moody’s Investors Service on Tuesday raised alarm over Pakistan’s high susceptibility to event risk driven by heightened external vulnerability that it said might hold back the country’s growth potential.

“External pressures continue to weigh on Pakistan’s foreign exchange reserves adequacy, while political and government liquidity risks remain elevated in the country,” Moody’s said in a periodical review of the issuer.

In June last year, Moody’s changed the outlook on Pakistan’s rating to negative from stable and affirmed the B3 local and foreign currency long-term issuer and senior unsecured debt ratings. The decision to change the outlook to negative was driven by heightened external vulnerability risk as foreign exchange reserves fell to low levels.

In December 2018, the ratings agency maintained its credit profile of Pakistan at B3 negative, which reflected the sovereign’s high external vulnerability, weak debt affordability, and very low global competitiveness.

Moody’s, in the latest review, too noted the significance of the three key obstacles, saying they would harm growth potential.

Moody’s said the review did not involve a rating committee. The publication does not announce a credit rating action and is not an indication of whether or not a credit rating action is likely in the near future.

“Credit ratings and/or outlook status cannot be changed in a portfolio review and hence are not impacted by this announcement,” it added.

Moody’s, however, said the credit profile of Pakistan (issuer rating B3) reflects the country’s ‘moderate (+)’ economic strength, which is underpinned by the relatively robust GDP growth potential and large scale of the economy. It is limited by very low per capita incomes and global competitiveness and the country’s ‘very low (+)’ institutional strength that takes into account very weak scores in the Worldwide Governance Indicators, although greater central bank autonomy has increased monetary policy effectiveness.

“The government’s ‘very low (-)’ fiscal strength owing to its very narrow revenue base hinders debt affordability, reduces fiscal flexibility and increases the debt burden given ongoing infrastructure spending needs and rising interest expense,” Moody’s said.

The government said it is triumphing over external account challenges that sheared the country’s forex reserves down to the level not sufficient to meet less than two months of import bills.

The cash-strapped country is about to receive more than four billion dollars from Saudi Arab and UAE in the coming weeks. Together with other expected foreign financial injections, the Arab inflows are expected to jack up the country’s total foreign exchange reserves to $19 billion – enough for over three months of import bill – by the yearend.

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