Fitch maintains Pakistan’s credit rating at B negative on external finance risks

KARACHI: Global credit rating agency Fitch on Friday maintained Pakistan’s long-term foreign-currency issuer default rating at B- with a stable outlook, but it warned that political opposition might derail the IMF-backed structural reforms aiming at economic stability.

“Pakistan’s ratings reflect challenging external finances and low reserve coverage, high public debt, and weak governance indicators,” the U.S.-based Fitch Ratings said in a statement. Last year, the ratings agency downgraded the country’s credit rating to B negative from B.

“Recent policy actions, including an agreement with IMF (International Monetary Fund) staff on a forthcoming program, should ease external finance risks, but reserve levels will take time to rise and the program will face significant implementation risks.”

The ratings agency said the authorities' policy adjustments and the broader structural reform agenda should further support near-term macroeconomic rebalancing and could improve governance and the business environment over the medium term.

Fitch Ratings said the policy actions are driving a sizeable narrowing of the current account deficit that is expected to narrow at 3 percent of GDP in the fiscal year ending June 2020 from a peak of 6.3 percent in FY18, largely through import compression.

Fitch forecasts reserves to begin rising during FY2020 on the back of the improved access to external financing.

The ratings agency expected GDP growth to rise slightly to 3.5 percent in FY2020, “although it will be constrained by fiscal consolidation and tighter monetary policy”. Inflation is set to remain high at nine percent on the back of past rupee depreciation and tax and energy tariff increases.

Fitch expected fiscal deficit to remain high at 7.1 percent in the next fiscal year.

“Meeting revenue targets in the context of sluggish growth could prove challenging, but the government is likely to lower expenditure relative to the budget to meet the primary deficit target,” it said.

“Fiscal performance at the provincial level is also a downside risk to the outlook and improved fiscal coordination with the provinces is important to consolidation efforts.”

Fitch estimated that debt to GDP would rise to 77.4 percent by end of the last fiscal year, from 71.7 percent a year earlier. “The substantial rise in the debt ratio reflects the impact of rupee depreciation on external debt and the wider fiscal deficit.”

Fitch said the government is highly reliant on direct borrowing from the State Bank of Pakistan (SBP), as domestic banks lacked appetite for government debt in the context of rapidly rising interest rates.

Fitch forecast the debt-to-GDP ratio would remain high at 77 percent by end of FY2020. “The accumulation of losses in public-sector enterprises, particularly the energy sector’s circular debt – inter-company arrears – of about 3 percent of GDP, poses a contingent liability for the government.”

Fitch expects government borrowing from the SBP to cease as part of the IMF program. The ratings agency said public finances are a weakness for Pakistan’s credit profile and continued to deteriorate in FY2019.

“We estimate the general government deficit widened to 7.3 percent of GDP in FY19 primarily due to a significant underperformance of revenues,” it said. “Slow economic growth and one-off tax relief measures, which are set to expire, kept revenue growth essentially flat. Expenditure continued to increase, but at a slower pace than in FY18.”

Fitch said expenditure would rise on higher interest payments and the government plans to support social and development spending to offset the negative effects of macroeconomic adjustment.