Crude cargoes hit snags on Moody’s outlook action

KARACHI: An international trade credit insurer that provides financial safety net for exports and imports pulled back from covering a crude oil cargo booked by a local refinery after rating agency Moody’s downgraded Pakistan’s outlook to negative from stable, sources said on Friday.

Sources said a local refinery managed to secure a letter of credit (LC) confirmation from an international bank before Moody’s outlook action.

“However the industry is back to square one following Moody’s negative outlook,” a source said.

“LC confirmation is denied at the last moment to another local refinery’s crude cargo.”

A source said the insurer, an international bank, expressed its inability to extend credit confirmation, citing enhanced country risk and difficulties on Moody’s negative outlook.

“The downgrade has shattered the efforts of the government to convince international banks to extend credit letters for oil imports of the country.”

The international banks initially stopped confirming LCs for oil imports due to “high country risk”, resulting from political and economic turmoil.

The government last week took up the issue of non-confirmation of credit letters for oil imports by international banks when the oil sector sent an SOS for its intervention in the issue.

The government recently said it would mobilise the Ministry of Finance and the central bank to intervene and help the importers secure LCs for the import of petroleum products.

The oil sector in its SOS letter had said that the prevailing financial predicament had left the oil industry extremely vulnerable and fragile, which might break down the supply chain.

The refiners as well as the marketing companies and downstream sector seek immediate intervention from the government to avert the impending supply disruption.

For the import of crude oil from the global market, LCs are opened by the local banks. However international banks confirm the LCs of local partners to provide guarantee to the exporter. Under the guarantee, if a Pakistani bank defaults on a payment to an exporter, its international counterpart pays the amount.

According to a source, all the three local refineries were the most affected because of the non-confirmation of their LCs. As a result, their scheduled crude oil cargoes would not reach Pakistan, cutting down their refining operations.

They said Pakistan was already struggling hard to ensure a smooth supply of petroleum products in view of their rising global prices and government’s policy to keep the prices low through subsidies on petrol and diesel.