Pakistan retains Moody’s B3 rating with stable outlook

KARACHI: Pakistan has averted the potential risk of rating downgrade by Moody’s Investor Service that now bets on a lower probability of the country default on foreign debts from private sector creditors amid the coronavirus shock.

Moody’s on Saturday confirmed the country’s B3 local and foreign currency issuer and senior unsecured debt ratings with a stable outlook. Concurrently, it also confirmed the B3 foreign currency senior unsecured ratings for The Third Pakistan International Sukuk Co Ltd. However, it warned of the decision review if country's participation in the G20 debt service suspension initiative (DSSI) raises the risk that private sector creditors would incur losses.

“Should the probability of default and losses to private sector creditors increase as implementation of DSSI for Pakistan becomes clearer, Moody’s would reflect any related changes in risks to private creditors in further rating announcements,” Moody’s said in a statement. The decision was made after a review initiated to mull downgrade as Pakistan’s debt accumulation accelerated amid coronavirus shutdown and the authorities were presumed to seek debt suspension from private sector creditors. Pakistan has to pay $12.7 billion on account of foreign debt repayments in the current fiscal year of 2020/21.

Pakistan got a $1.8 billion worth of debt payment moratorium from member countries of G20 as a support to cope up with economic fallouts of the COVID-19. Since commercial creditors also agreed to suspend debt payments in parallel with the Club, ratings agencies warned that the moratorium would be considered a default and hence having downgrade risks.

“While Moody’s continues to believe that the ongoing implementation of DSSI poses risks to private creditors, the decision to conclude the review and confirm the rating reflects Moody’s assessment that, at this stage, for Pakistan, those risks are adequately reflected in the current B3 rating,” said the ratings agency. “… a number of elements suggest that the probability of broad ranging private sector involvement has diminished.”

Though Moody’s reiterated skepticism over things turning out as they appear, it cited Pakistani government assertion to avoid private sector participation and recent debt payments as the core of the rating action.

Moody’s considered lockdown related to pandemic as downside risks to Pakistan’s economy and that “would in turn intensify the government’s fiscal challenges.”

“…strong support from development partners including for external financing, coupled with effective macroeconomic policies started ahead of the crisis, contain external vulnerability and liquidity risks,” it said however. \Moody’s expects Pakistan's economic growth to be positive in fiscal 2021 from a recession in fiscal 2020, but still low at around 1-2 percent.

“While Pakistan's economy is relatively closed with low reliance on exports, movement restrictions due to coronavirus will keep economic activity below the pre-outbreak levels for some time,” it said. “Risks to the economy and government finances are to the downside, particularly if more stringent measures are implemented to curb the spread of the virus domestically.”

The slow economic recovery will in turn weigh on government revenue, keeping the fiscal deficit wide at around 8-8.5 percent of GDP in fiscal 2021 under Moody's projections, at similar levels compared to fiscal 2020, and leaving the government's debt burden high at around 90 percent of GDP by the end of fiscal 2021. ­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.