Tag: default risk

  • Moody’s cautions on Pakistan’s fiscal challenges despite recent stability

    Moody’s cautions on Pakistan’s fiscal challenges despite recent stability

    Moody’s Investors Service, a global credit rating agency, stated on Tuesday that Pakistan’s credit rating could see an upgrade if the government successfully reduces liquidity and external vulnerability risks.

    Despite this potential, Moody’s maintained Pakistan’s credit rating at ‘Caa3’ for long-term issuer rating with a stable outlook in its periodic review.

    The credit profile of Pakistan reflects significant liquidity and external vulnerability risks, attributed to low foreign exchange reserves insufficient to meet high external financing needs in the near to medium term, according to Moody’s.

    The agency also highlighted the country’s very weak fiscal strength and elevated political risks as constraints on its credit profile.

    Moody’s expressed uncertainty regarding the new government’s ability to swiftly negotiate a new International Monetary Fund (IMF) programme after the ongoing programme concludes in April.

    While acknowledging Pakistan’s large economy and moderate growth potential, the agency emphasized the nation’s high liquidity and external vulnerability risks, despite economic stability maintained by the caretaker government and recent reforms.

    The agency recognised the government’s efforts to unlock financing from the IMF and other partners, resulting in a modest accumulation of foreign exchange reserves.

    However, it cautioned that, despite meeting external debt obligations for the fiscal year ending June 2024, there is limited visibility on sources of financing to address high external financing needs post-the current IMF stand-by arrangement.

    Moody’s rationale for the stable outlook at the Caa3 rating level is based on the assessment that pressures on Pakistan align with this rating, with broadly balanced risks.

    The agency suggested that continued IMF engagement beyond the current programme could attract additional financing from other partners, reducing default risk.

    Nonetheless, it emphasised the substantial external financing required and low reserve position, indicating potential default risks with funding delays.

    Moody’s indicated that an upgrade in Pakistan’s rating could occur with a substantial and sustained reduction in liquidity and external vulnerability risks, coupled with increased foreign exchange reserves and fiscal consolidation.

    Conversely, a downgrade might be likely if Pakistan defaults on debt obligations with significant losses to creditors.

    The agency expressed uncertainty regarding the new government’s ability to negotiate a new IMF programme swiftly after the ongoing one expires in April, citing high political risks following the controversial general elections held on February 8, 2024.

    Moody’s warned that without a new programme, Pakistan’s ability to secure loans from other partners would be severely constrained.

  • Political instability, IMF loan conditions threaten Pakistan’s economic growth

    Political instability, IMF loan conditions threaten Pakistan’s economic growth

    In January, Pakistan experienced a boost in economic activity, thanks to the financial aid provided by the International Monetary Fund (IMF), as reported by Bloomberg Economics Tracker.

    However, there are three key developments that may impact future economic conditions.

    Firstly, the aftermath of the inconclusive February 8 election has resulted in persistent political instability, presenting a potential obstacle to new investments.

    Secondly, there is a likelihood of more stringent conditions associated with additional IMF loans. Lastly, there is an increasing probability that the State Bank of Pakistan will delay rate cuts.

    Despite the challenges, January saw a positive trend with a 0.9 per cent increase in economic activity compared to December, breaking a four-month contraction streak.

    The injection of IMF loans and eased trade restrictions contributed to this improvement, enabling increased purchases of essential import supplies.

    Looking ahead, the unresolved election outcome may prolong political uncertainty, affecting potential investments.

    The recent hike in gas prices on February 15 will likely drive inflation higher, further reducing the chances of a March rate cut.

    Considering these developments, Bloomberg Economics is considering revising its growth outlook.

    While Bloomberg currently predicts 2.1 per cent GDP growth through June 2024 (up from a 0.2 per cent contraction in the previous fiscal year), the consensus estimate is 2.5 per cent, and the IMF forecasts 2 per cent.

    It’s essential to note that the Bloomberg Economics monthly tracker assesses inflation-adjusted indicators of activity.

  • Pakistan could default after June as country fails to meet some IMF conditions

    Pakistan could default after June as country fails to meet some IMF conditions

    Pakistan is in the midst of a balance of payment crisis, and the stakes are high. Without the financial aid of the International Monetary Fund (IMF), the country faces the prospect of defaulting on its external payment obligations.

    Unfortunately, reports say that the IMF is not convinced by the assurances given to them by Pakistan’s friendly countries.

    Officials of the finance ministry, speaking anonymously, have confirmed that Pakistan has fulfilled several conditions set by the lender for the revival of the loan facility, and the staff-level agreement on the ninth review was supposed to be signed by February 9.

    However, the delay in the IMF programme could have severe repercussions. The budget planning, which is expected to be tabled in the second week of June, is likely to be affected.

    Moody’s Investor Service has warned that Pakistan may default if it does not receive a bailout from the IMF as its financing options beyond June are uncertain.

    While Pakistan is expected to meet its external payments until the end of this fiscal year in June, its reserves are weak and without IMF support, it could default.

    Pakistan is struggling to restart a stalled $6.5 billion bailout programme from the IMF due to the government’s failure to meet some loan conditions, and political tensions ahead of elections are adding to the risk of a delay in the loan.

    An engagement with the IMF beyond June would support additional financing from other multilateral and bilateral partners, which could reduce default risk. Pakistan’s foreign-exchange reserves remain very low, standing at $4.5 billion, and sufficient to cover only about one month of imports.

    S&P Global Ratings estimates that Pakistan’s gross external financing needs as a proportion of current-account receipts plus usable reserves will rise to 139.5 per cent in fiscal year 2024 from 133 per cent in 2023.

    S&P analysts believe that an IMF programme would be a foundation for important fiscal policy reforms and that an agreement on the current review cycle could instill more confidence for other bilateral and multilateral lenders to Pakistan.

  • China approves rollover of $2 billion SAFE deposits for Pakistan

    China approves rollover of $2 billion SAFE deposits for Pakistan

    China has given approval for the rollover of $2 billion State Administration of Foreign Exchange (SAFE) deposits for a year. Pakistan’s Finance Minister, Ishaq Dar, confirmed, stating that the rollover was a requirement of the International Monetary Fund (IMF).

    The IMF had requested the rollover of Chinese SAFE deposits to fulfill external financing needs and move towards a staff-level agreement. The agreement involves filling nine tables under the Memorandum of Economic and Financial Policies (MEFP), including a table related to the Net International Reserves (NIR) as an indicative target.

    This target cannot be met without incorporating the external financing needs of the program period until the end of June 2023. The IMF has asked Pakistan to bridge the gap of $6 billion to ensure its credibility and avoid default. This condition was put forth largely because representatives of Gulf countries on the Executive Board had made commitments before the approval of the seventh and eighth reviews for providing financial assistance to Islamabad in various forms.

    Now, the IMF is seeking the support of Saudi Arabia, the UAE, and Qatar to help Pakistan’s struggling economy. The Fund has warned Islamabad that its credibility would be at stake if the staff-level agreement is finalised, and Pakistan fails to materialize its commitment from the bilateral partners, which could lead to default.

    The IMF is investigating why Pakistan’s bilateral partners are not fulfilling their earlier commitments. China is the only country that has come forward to rescue Islamabad by fulfilling its commitments on the re-financing of its commercial loans as well as the rollover of its SAFE deposits.