ISLAMABAD: Moody’s Investors Service has assigned a provisional rating of (P)B3 to Pakistan’s announced global bond offering while keeping the outlook stable.

“Pakistan’s B3 issuer rating reflects moderate economic strength with a supply-constrained economy that has been resistant to structural change,” the ratings agency said in a statement issued on Friday. “Although the scale of the economy is relatively large, globally, Pakistan’s per-capita income level is relatively very low.”

It said the implementation of the China-Pakistan Economic Corridor (CPEC) will help bolster growth through investment in transportation and power generation infrastructure.

The ratings agency added that the government has gained significant traction on reforms under the International Monetary Fund’s programme, key goals of which include deficit reduction, resolving constraints in the energy sector, and the privatisation of several state-owned enterprises.

However, it observed that other factors that drive Pakistan’s sovereign credit rating are its very low fiscal strength and high susceptibility to event risk.

“Key fiscal and external credit metrics are weak intrinsically and relative to ratings peers. These methodological factors are compounded by the country’s narrow tax base, low savings and shallow capital markets — all of which hinder stable domestic financing of sizable budget deficits,” the statement said. “However, the government is striving to lengthen the maturity of debt which will reduce gross financing needs.”

It said the government debt rollover risk is also reduced by sizeable recourse to domestic bank lending and, to some degree, by a debt structure which consists of long-tenor credits from multilateral and official bilateral creditors.

The challenging operating environment, susceptibility to economic risks and political shocks, coupled with a high concentration to the sovereign, links the health of the banking system very closely to that of the government. Banks are well managed but remain vulnerable to cyclical economic risks and to political shocks.

The stable outlook represents its expectation of balanced upside and downside risks, Moody’s said, adding that upward pressures stem from support from multilateral and bilateral lenders, which bolster an improving foreign reserve position and ongoing reform progress.

“Despite positive ongoing developments, rating constraints which would put downward pressures stem from Pakistan’s very low fiscal strength, due to its high debt levels and weak debt affordability in light of a narrow revenue base,” it added.

The ratings agency identified Pakistan’s “deeply entrenched weaknesses in the power sector” as a bottleneck to growth.

Published in Dawn, September 19th, 2015

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