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Moody’s warns Pakistan of rating downgrade on private sector debt default


May 15, 2020

KARACHI: Credit rating agency Moody’s is carrying out a review for its Pakistan’s B3 rating, suggesting on Thursday a potential downgrade if the economy defaults on its private sector debt obligations in the wake of coronavirus.

Moody’s said it placed the country’s local and foreign currency long-term issuer and senior unsecured B3 ratings under review for downgrade.

Though the review need stemmed from an expected bilateral debt service relief from G20 creditors, “suspension of debt service obligations to official creditors would be unlikely to have rating implications,” it said. “Indeed such relief would increase the fiscal resources available to the government for essential health and social spending due to the coronavirus outbreak.”

What matters most is if Pakistan extends the debt service relief request to the private sector and “whether any losses expected to arise from that participation would be consistent with a lower rating.”

The country is expected to get $1.8 billion worth of debt relief from the G20 group and that accounts for less than two percent of its foreign debts.

There is no binding on commercial lenders, but the G20 called on private sector creditors to participate in the initiative on comparable terms.

“The rating would likely be confirmed at its current level should Moody's conclude that participation in bilateral official sector debt service relief would unlikely entail default on private sector debt or, if it would, that any losses experienced would likely be minimal,” Moody’s said, without mentioning the review timeline. “Upon conclusion of the review, and under a scenario of no or minimal loss for private sector creditors, expectations that government financing, debt sustainability, and external vulnerability risks are contained would likely be consistent with a stable outlook at B3.”

Pakistan once defaulted on a bond payment of $1.6 billion in 1998, according to a Moody’s document.

Importantly, the rating committee that reviewed Pakistan’s performance on Monday (May 11) noted no material changes in economic fundamentals, financial strength, including debt profile, and its susceptibility to event risks has not materially changed.

Moody’s also placed the B3 foreign currency senior unsecured ratings for The Third Pakistan International Sukuk Co Limited under review for downgrade. Pakistan’s Ba3 local currency bond and deposit ceilings remain unchanged. The B2 foreign currency bond ceiling and the Caa1 foreign currency deposit ceiling are also unchanged. The short-term foreign currency bond and deposit ceilings remain unchanged at Not-Prime. These ceilings act as a cap on the ratings that can be assigned to the obligations of other entities domiciled in the country.

Moody’s expected Pakistan’s economy to contract to by around 1 percent in the current fiscal year of 2019/20 and to grow to 2-3 percent in the next fiscal year.

“The Pakistani economy is relatively closed, with low reliance on exports and private capital inflows and limited trade linkages,” it said. “However, the coronavirus outbreak presents a significant shock to the domestic economy in part due to the measures aimed at restricting the movement of people to prevent the spread of the virus.”

The rating agency said the coronavirus shock raises fiscal challenges and delays the government’s fiscal consolidation and debt reduction efforts.

“Ongoing and significant financial and technical support from development partners, as well as the effective use of monetary policy, mitigates the impact of the shock on the sovereign’s liquidity and external positions.”

Moody’s expected the fiscal deficit to be close to 10 percent of GDP and debt burden to reach around 85-90 percent of GDP in fiscal 2020. Current account deficit is forecast to be relatively narrow, around 2 percent of GDP in the current and the next fiscal year.

“The government’s commitment to fiscal reforms, including under its 2019-22 International Monetary Fund program, provides a crucial anchor for the continued expansion of its revenue base when economic activity gradually normalises.”

Moody’s said Pakistan is significantly exposed to extreme weather events, including tropical cyclones, drought, floods and extreme temperatures that can create economic, fiscal and social costs for the country where agricultural sector accounts for around 20 percent of GDP and exports, and nearly 40 percent of total employment.