Tag: Fitch Ratings

  • Moody’s upgrades Pakistan’s credit rating to Caa2, citing improved economic stability

    Moody’s upgrades Pakistan’s credit rating to Caa2, citing improved economic stability

    Moody’s Investors Service has upgraded Pakistan’s long-term issuer rating from “Caa3” to “Caa2” with a stable outlook, reflecting a moderate improvement in the country’s macroeconomic conditions and external financial position.

    This decision follows a similar move by Fitch Ratings in July, which upgraded Pakistan’s credit rating from “CCC” to “CCC+.”

    Moody’s stated that the upgrade is a result of reduced default risks, which are now more consistent with a Caa2 rating.

    This improvement is partly due to greater certainty in Pakistan’s external financing, bolstered by the sovereign’s staff-level agreement with the International Monetary Fund (IMF) on 12 July 2024, for a 37-month Extended Fund Facility (EFF) worth $7 billion. The IMF Board is expected to approve the EFF in the coming weeks.

    Pakistan’s foreign exchange reserves have nearly doubled since June 2023, although they remain below the levels required to meet its external financing needs. The country continues to rely on timely support from official partners to fully meet its external debt obligations.

    Despite the upgrade, Pakistan’s Caa2 rating still reflects very weak debt affordability, which poses a significant risk to debt sustainability. Moody’s expects interest payments to consume about half of the government’s revenue over the next two to three years. The rating also takes into account the country’s weak governance and high political uncertainty.

    The stable outlook indicates a balance of risks, with potential for further improvement if the government can reduce its liquidity and external vulnerability risks and achieve better fiscal outcomes, supported by the IMF programme.

    Sustained implementation of reforms, particularly those aimed at increasing government revenue, could enhance debt affordability. Timely completion of IMF reviews would enable Pakistan to secure continued financing from official partners, essential for meeting external debt obligations and rebuilding foreign exchange reserves.

    The upgrade to Caa2 from Caa3 also applies to the backed foreign currency senior unsecured ratings for The Pakistan Global Sukuk Programme Co Ltd, which Moody’s views as direct obligations of the Government of Pakistan. The outlook for The Pakistan Global Sukuk Programme Co Ltd is positive.

    Additionally, Moody’s has raised Pakistan’s local and foreign currency country ceilings to B3 and Caa2 from B3 and Caa1, respectively.

    The two-notch gap between the local currency ceiling and the sovereign rating is due to the government’s significant role in the economy, weak institutions, and high political and external vulnerability risks.

    The two-notch gap between the foreign currency ceiling and the local currency ceiling reflects limited capital account convertibility and relatively weak policy effectiveness.

  • Pakistan’s ambitious FY25 Budget could secure IMF deal, says Fitch

    Pakistan’s ambitious FY25 Budget could secure IMF deal, says Fitch

    On Tuesday, Fitch Ratings characterised Pakistan’s budget for the fiscal year 2024-25 as “ambitious,” noting that it enhances the likelihood of securing a deal with the International Monetary Fund (IMF).

    While Fitch acknowledged the uncertainty in meeting the fiscal targets, it highlighted that even partial implementation of the budget would likely narrow the fiscal deficit, thereby reducing external pressures, albeit at a potential cost to economic growth.

    “The FY25 budget draft, released on June 13, is the first presented by Prime Minister Shehbaz Sharif’s coalition government. It projects a headline deficit of 5.9 per cent of GDP and a 2.0 per cent primary surplus, compared to the FY24 estimates of 7.4 per cent and 0.4 per cent respectively, through wide-ranging tax increases and significant fiscal efforts at the provincial level. The budget includes a notable increase in developmental spending and forecasts growth to accelerate to 3.6 per cent in FY25, up from 2.4 per cent in FY24,” Fitch stated in its commentary.

    Pakistan’s Finance Minister Muhammad Aurangzeb unveiled the budget last week, targeting a modest 3.6 per cent growth for the upcoming fiscal year. The budget, with a total outlay of Rs18.9 trillion, represents a 30 per cent increase compared to the FY24 budget. Gross revenue receipts are expected to be Rs17.8 trillion, with the Federal Board of Revenue (FBR) taxes projected at Rs12.97 trillion, nearly 38 per cent higher than the previous fiscal year.

    With this ambitious tax target, Islamabad aims to secure the IMF’s approval for a larger and longer-term bailout.

    Fitch Ratings warned that these plans could face significant resistance within parliament from both coalition partners and opposition parties, as well as from broader society. This follows the close outcome of the February elections, which resulted in a weaker-than-expected mandate for the Pakistan Muslim League-Nawaz (PML-N).

    “Our updated fiscal forecasts assume partial implementation and project a primary surplus of 0.8 per cent, factoring in shortfalls in revenue generation and an overshoot in current spending, partly offset by under-execution in development spending,” Fitch added.

    “We believe tight policy settings may depress growth more than the government expects, reducing our growth forecast to 3.0 per cent for FY25, from 3.5 per cent, despite some improvements in short-term economic indicators. Nonetheless, the FY24 primary deficit is in line with the target, and the authorities have implemented unpopular subsidy reforms over the past year, supporting fiscal credibility.”

    Fitch noted Pakistan’s historically poor track record in sustaining reforms, but acknowledged that the lack of viable alternatives has bolstered support for tough policy decisions in the near term.

    Pakistan completed its nine-month IMF Stand-By Arrangement in April, and in May, the IMF reported “significant progress” towards agreeing on a new Extended Fund Facility (EFF).

    “Government debt is expected to decline to 68 per cent of GDP by the end of FY24 due to high inflation and deflator effects, which offset soaring domestic interest costs. We anticipate inflation and interest costs to decline in tandem, with economic growth and primary surpluses gradually reducing the government debt-to-GDP ratio. The State Bank of Pakistan cut policy rates for the first time in five years on June 10 by 150 basis points to 20.5 per cent. We now forecast FY25 inflation at 12 per cent, and the end-of-year policy rate at 16 per cent,” Fitch detailed.

    Despite stable debt dynamics, Fitch identified external liquidity and funding as Pakistan’s primary credit challenges.

    “We believe a new IMF deal will be agreed upon, underpinning other external funding. However, maintaining the stringent policy settings necessary to keep external financing needs in check and comply with a new EFF could become increasingly challenging,” Fitch stated.

    Pakistan’s external position has improved since February’s election, with the current account deficit on track to narrow to 0.3 per cent of GDP (just USD1 billion) in FY24, down from 1.0 per cent in FY23. This improvement is attributed to subdued domestic demand compressing imports, exchange rate reforms attracting remittance inflows back to the official banking system, and strong agricultural exports.

    Gross reserves, including gold, now stand at USD15.1 billion, covering over two months of external payments, up from USD9.6 billion at the end of FY23.

    “However, Pakistan’s projected funding needs still exceed reserves, at approximately USD20 billion per year in FY24–FY25, including maturing bilateral debt that we expect will continue to be rolled over. This leaves Pakistan vulnerable to external funding conditions and policy missteps,” Fitch concluded.

    Pakistan’s ‘CCC’ rating, reaffirmed in December 2023, reflects the high external funding risks amid substantial medium-term financing requirements.

  • Pakistan’s credit rating maintained by Fitch at ‘CCC’ amidst financing challenges

    Pakistan’s credit rating maintained by Fitch at ‘CCC’ amidst financing challenges

    Fitch Ratings, a US-based credit rating agency, has maintained Pakistan’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘CCC,’ according to a statement released on Wednesday.

    The ‘CCC’ rating indicates significant external funding risks due to elevated medium-term financing requirements, notwithstanding some stabilisation and Pakistan’s commendable performance on its current standby arrangement (SBA) with the International Monetary Fund (IMF), as explained by Fitch.

    While anticipating scheduled elections in February and prompt negotiation for a subsequent IMF programme after the SBA concludes in March 2024, Fitch cautioned about potential delays and uncertainties regarding Pakistan’s ability to achieve this.

    Fitch emphasised the potential vulnerability of recent reforms and the prospect of renewed political volatility in the wake of the upcoming elections. Regarding the ongoing IMF programme, Fitch expressed confidence in the unproblematic approval of the recent staff-level agreement (SLA) by the IMF board.

    Fitch’s assessment highlighted the positive outcomes of the programme review, including sustained fiscal consolidation, energy price reforms despite public backlash, and strides towards adopting a more market-driven exchange rate regime.

    However, Fitch also pointed out risks associated with policy implementation, citing a historical pattern of parties across the political spectrum in Pakistan failing to implement or reversing reforms agreed upon with the IMF.

  • Fitch and Moody’s: IMF loan provides temporary relief for Pakistan, but risks remain

    Fitch and Moody’s: IMF loan provides temporary relief for Pakistan, but risks remain

    Fitch Ratings and Moody’s Investors Service issued warnings on Monday regarding Pakistan’s financial sustainability, despite the recent acquisition of a much-needed $3 billion lifeline from the International Monetary Fund (IMF).

    Last week, Pakistan signed a short-term (nine-month) loan programme worth $3 billion with the IMF, as the previous $7 billion programme was prematurely ending on the same day.

    The objective of the new loan programme is to provide the necessary foreign exchange to reopen imports, support listed companies in gradually resuming partially closed production, and stimulate economic activities within the country.

    Additionally, this programme serves as a signal to other donor agencies and friendly nations, which had pledged $9 billion at a Geneva meeting in January 2023, to extend new financing to Islamabad.

    However, the two global rating agencies caution that risks persist for Pakistan’s economy, particularly as the government faces a daunting $25 billion debt repayment challenge in the upcoming year starting in July.

    Krisjanis Krustins, Fitch’s Director of Sovereigns for APAC, emphasised that Pakistan will require significant additional financing beyond IMF disbursements to meet its debt obligations and support an economic recovery.

    While the IMF likely sought and received assurances for such financing, there remains a risk that it could prove insufficient, especially if current account deficits widen again.

    In order to secure the initial agreement with the IMF, Pakistan had to implement measures such as tax increases, spending cuts, and raising its primary interest rate to a historical peak.

    Although the markets responded positively to this initial agreement, leading to a significant surge in stocks and improved performance of dollar bonds, it still awaits approval from the IMF Executive Board.

    Moody’s analyst Grace Lim, based in Singapore, expressed doubts about Pakistan’s ability to secure the full $3 billion IMF financing during the stand-by period of the loan programme. Lim stated that it remains uncertain whether the Pakistani government will be able to secure the complete amount.

    Furthermore, she highlighted that the government’s commitment to implementing ongoing reforms will be tested as the country approaches elections scheduled for October 2023.

    It is worth noting that Pakistan had previously obtained a $1.1 billion loan in August, which was subsequently halted due to Islamabad’s failure to comply with certain stipulated conditions.

    According to Moody’s, the towering $25 billion debt repayment comprises both principal and interest, amounting to nearly seven times Pakistan’s foreign exchange reserves.

    Lim further added that only after the elections will it become clear whether the country will be able to enter into another IMF programme.

    Until a new programme is agreed upon, Pakistan’s ability to secure loans from other bilateral and multilateral partners in the long term will be severely limited, she cautioned.