Moody’s upgrades Pakistan’s outlook to ‘stable’

SINGAPORE: American credit rating agency Moody’s has upgraded Pakistan’s outlook from “under review for downgrade” to “stable” and maintained the country’s “B3” rating, the agency said in its latest report.

In May, Moody’s had placed Pakistan’s B3 rating under review for downgrade due to the expectation that country would request bilateral debt service relief under the G20’s Debt Service Suspension Initiative (DSSI) during the coronavirus outbreak.

In its report released on Saturday, the stable outlook “reflects Moody’s view that the pressures Pakistan faces in the wake of the coronavirus shock and prospects for its credit metrics, in general, are likely to remain consistent with the current rating level”, it said.

Reacting to the report, the Ministry of Finance said it was “an affirmation of the government’s sound fiscal and financial policies in these times of unprecedented hardship and uncertainty”.

Minister for Industries and Production Hammad Azhar said Moody’s confirmation of Pakistan’s B3 rating with a stable outlook “during pandemic is [an] encouraging sign”.

“Pakistan’s rating was downgraded to B3 negative in June 2018 based on data/policies of PML-N’S term. In December 2019, after economic stabilisation by PTI government, rating was upgraded to B3 stable,” Azhar added.

Moody’s said while it saw downside risks to Pakistan’s economy because of movement and activity restrictions related to the pandemic, which 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”.

Moody’s also noted the Pakistani government’s commitment to the International Monetary Fund’s (IMF) Extended Fund Facility (EFF), which it expects will cover its external financing needs over the next 12-18 months and provide an anchor for ongoing fiscal reforms.

The credit agency also added it expects the country’s economic growth to be positive in fiscal 2021 (ending June 2021) from a recession in fiscal 2020, but still low at around 1-2 per cent.

“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 noted.

It added that the slow economic recovery will in turn weigh on government revenue, “Keeping the fiscal deficit wide at around 8-8.5 per cent 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 per cent of GDP by the end of fiscal 2021.”

“Even in downside economic and fiscal scenarios, Moody’s expects Pakistan to cover its external financing needs with continued significant financial support from its development partners, including the commitment to rollover most bilateral loans that come due, independent of how DSSI is implemented,” it said. The agency said it also expects the government’s ongoing engagement with development partners on fiscal reforms, such as through the IMF EFF and other programmes with the Asian Development Bank and World Bank, to contribute to a “modest widening of the revenue base once the crisis passes”, improving debt affordability and containing fiscal risks over the next few years.