WASHINGTON/NEW YORK: Standard and Poor’s, one of the world’s big three credit-rating agencies, on Tuesday revised Pakistan’s average real GDP growth projection for 2015-17 to 4.6 per cent from 3.8pc. It also revised the country’s long-term ‘B minus’ credit rating to positive from stable.

“Pakistan has made significant progress in stabilising its economic, fiscal, and external performance. Financing conditions have also eased considerably,” said a statement issued by the agency’s US headquarters.

“We are, therefore, revising the outlook on the long-term ratings on Pakistan to positive from stable. We are also affirming our ‘B minus’ long-term and ‘B’ short-term sovereign credit ratings on Pakistan,” the statement said.

Pakistan’s GDP per capita is expected to rise by 4.3pc to about $1,460 this year, from 5.4pc in 2014, the agency said. “We have revised our 2015-17 average real GDP growth projections for Pakistan to 4.6pc, from 3.8pc previously.”

S&P noted that strong capital inflows and remittances, and lower oil prices, which support business confidence and investment spending, had strengthened the Pakistani economy.

The agency also projected growth of GDP per capita over 2015-19 to average 2.6pc, which, it said, reflected the sound outlooks for the agriculture and construction sectors, and Pakistan’s trading partners.

The agency noted that inflation also had declined and projected it to average 4.8pc during 2015-19.

The agency said that its positive outlook reflects its view of Pakistan’s improved economic growth prospects, “which we expect to further improve its budgetary position.”

The credit-rating agency noted that the Pakistan government was making significant progress in fiscal consolidation, and the country’s external financing conditions and external performance also continued to improve.

But S&P warned that the “ratings (also) reflect vulnerabilities in Pakistan’s institutional and governance effectiveness that are partly associated with the country’s security risks.”

Other rating constraints, identified in the report, include Pakistan’s low income, weak monetary policy framework, and shortfalls in infrastructure and services that have historically been negative to its fiscal performance.

But “these factors are offset by gains in Pakistan’s economic, fiscal, and external performance, which benefits from the strong financial and technical support of donors”, the report added.

The report, however, noted that Pakistan’s government continued to face significant domestic and external security risks.

“We observe that policy responses continue to be challenged by a material risk of domestic conflict and social upheaval.

“Impaired transparency and governance, nepotism, corruption, and material data gaps further undermine the effectiveness, stability, and predictability of Pakistan’s policy making and political institutions.”

The report also highlighted a major redeeming factor in the Pakistani economy, which “generates low income but it’s relatively diversified”.

The agency identified uncertain conditions in export markets, a weak business climate and inadequate infrastructure (mainly in energy) as the main factors that add downside risks to its growth outlook for the Pakistani economy.

S&P acknowledges that Pakistan’s fiscal performance has “exceeded our expectations” for 2014, with the general government deficit now estimated at 4.5pc of GDP in 2015, compared with its earlier forecast of 5.5pc.

“The outperformance reflects a combination of improved collections and restrained expenditure, largely in line with the reforms under the International Monetary Fund programme,” the agency said.

It projected further fiscal consolidation (of an estimated 1pc of GDP over 2015-2016) from broadening the tax base, reducing tax concessions, and improving compliance, while addressing expenditure-side rigidities.

“We forecast Pakistan’s fiscal deficits to average 3.5pc of GDP over 2016-2019, and the net general government debt burden to fall to 50.5pc of GDP by 2019 (from 57pc in 2015) as the deficit shrinks,” said the report.

In line with the falling debt stock and cost of borrowing, the rating agency projected Pakistan’s interest costs to approach 25.5pc of general government revenues in 2019, from an estimated 30.6pc in 2015.

It noted that Pakistan’s external performance indicators stabilised further in 2014 and had a broadly neutral impact on its creditworthiness.

“We estimate the current account deficit declined to 1.2pc of GDP in 2014, partly reflecting lower oil prices, and we expect it to average about 2pc over 2015-2019,” said the report.

It noted that Pakistan’s foreign exchange reserves rose further to $11.6 billion as of March 2015 from an average of $6 billion in 2012-13. That figure also reflects donor disbursements and privatisation proceeds.

S&P said it expects Pakistan’s external debt burden to remain moderate, with narrow net external debt and financial sector external assets to current account receipts (CARs) averaging 73.4pc over 2015-2019.

It observed that the country’s external liquidity will also remain a moderate 106.8pc on average over the period.

“We do not envisage a marked deterioration in Pakistan’s external financing from a shift in foreign direct investments or portfolio equity investments, or from a reduction in disbursements from donors,” the report said.

It noted that recent improvements in Pakistan’s external debt dynamics had eased the government’s market access and funding costs. “However, this could reverse with a weaker outlook for key trading partners, higher oil prices, or elevated volatility in global financial markets.”

S&P also noted that Pakistan’s banking system remained sound, reflecting its high profitability and strong capitalisation. But a moderate nonperforming loan ratio at 13pc as of September 2014, and the industry’s still-developing risk assessment and prudential measures continued to pose risks, it added.

But the rating agency pointed out that the State Bank of Pakistan’s ability to support sustainable economic growth, while attenuating economic or financial shocks, remained “broadly neutral.” This was because of its limited independence and historical role in funding fiscal deficits.

The agency noted that the SBP had a lengthening record in keeping inflation low, and in the use of market-based instruments to conduct policy.

“In our opinion, a deeper and more diversified financial and capital market would boost the effectiveness of policy transmission and improve credit metrics,” the report said.

S&P said that its positive outlook reflects its expectations of Pakistan’s improved economic growth prospects, fiscal and external performance, and the supportive relationship of external donors over the next 12 months.

It said that it may raise its ratings on Pakistan if the following factors occur together with receding security risks and an improved business environment: GDP growth continues to improve, exceeding S&P’s revised forecast of 4.6pc over 2015-17; or general government debt declines faster than its projection due to fiscal outperformance; or gains in Pakistan’s external performance continue to support the accumulation of reserves.

Published in Dawn, May 6th, 2015

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