• Warns slippages in reform implementation can lead to delay in or withdrawal of financing support from official partners
• With improved rating, Islamabad can now secure loans from foreign banks on more affordable terms

ISLAMABAD: In a positive development, international rating agency Moody’s on Wednesday upgraded Pakis­tan’s credit rating by one notch, from Caa3 to Caa2, and revised its outlook from stable to positive, citing improving macroeconomic conditions, including liquidity and external position, which have moved from very weak levels.

The US-based rating agency, one of the top three, had downgraded Pakistan’s rating to Caa3 from Caa1 in February last year, following the suspension of the IMF programme.

The improved rating could now help Pakistan secure foreign loans from international commercial banks and bonds on more affordable terms, as banks had been demanding high interest rates due to the country’s poor credit rating and the delay in signing the IMF programme.

Moody’s expects Pakistan to meet its financing needs with support from official partners, although uncertainty persists regarding the government’s ability to maintain and implement reforms sustainably.

“The coalition government formed after elections held in February 2024 may not have sufficiently strong electoral mandate to continually implement revenue-raising measures without stoking social tensions,” it said, adding that slippages in reform implementation or results could lead to delays in or withdrawal of financing support from official partners.

In a statement issued from Singapore, the rating firm said it “upgraded the Government of Pakistan’s local and foreign currency issuer and senior unsecured debt ratings to Caa2 from Caa3”, adding that it also upgraded the rating for the senior unsecured medium-term note (MTN) programme to (P) Caa2 from (P) Caa3.

“Concurrently, the outlook for Government of Pakistan is changed to positive from stable,” Moody’s said, observing that Pakistan’s default risk had reduced to a level consistent with a Caa2 rating. “There is now greater certainty on Pakistan’s sources of external financing, following the sovereign’s staff-level agreement with the IMF” on July 12, 2024 for a 37-month Extended Fund Facility of $7 billion.

Moody’s anticipates the IMF board to approve the EFF over the next few weeks, and Pakistan’s foreign exchange reserves to have nearly doubled since June 2023, although they still fall short of the level needed to cover its external financing requirements. The agency said its earlier concerns over very high risks of a balance-of-payments crisis materialising had diminished, although risks remained elevated as Pakistan continued to rely on timely and sufficient disbursement of financing from official partners. “The country remains reliant on timely financing from official partners to fully meet its external debt obligations.”

In recent weeks, the government has been making efforts to secure confirmations of about $12bn in financing rollovers from China, Saudi Arabia, and the UAE, although these countries have yet to confirm the rollovers to the IMF. The IMF programme is expected to support Pakistan in accessing additional financing from other multilateral and bilateral partners.

At the same time, Moody’s explained that Pakistan’s Caa2 rating continued to reflect its “very weak debt affordability, which drives high debt sustainability risk” as it forecast interest payments to continue absorbing about half of government revenue over the two to three years. “The Caa2 rating also incorporates the country’s weak governance and high political uncertainty,” it added.

The rating agency said Pakistan’s positive outlook reflected a balance of risks skewed to the upside. It captures the possibility that the government is able to further lower its liquidity and external vulnerability risks, and achieve a better fiscal position than currently expected, supported by the IMF programme.

Sustained reform implementation, including revenue-raising measures, can increase the government revenue base and improve Pakistan’s debt affordability. A record of completing IMF reviews on a timely manner would also allow Pakistan to continually unlock financing from official partners, sufficient to meet its external debt obligations and support further rebuilding of its foreign exchange reserves.

The rating upgrade from Caa3 to Caa2 also extends to the backed foreign currency senior unsecured ratings for Pakistan Global Sukuk Programme Company Ltd, as the associated payment obligations are direct obligations of the government. The outlook for the Sukuk Company has also been revised to positive.

As a result, Moody’s also raised Pakistan’s local and foreign currency country ceilings to B3 and Caa2 from Caa1 and Caa3. The two-notch gap between the local currency ceiling and sovereign rating is driven by the government’s relatively large footprint in the economy and weak institutions. The gap between the foreign currency ceiling and the local currency ceiling reflects incomplete capital account convertibility and relatively weak policy effectiveness. It also takes into account material risks of transfer and convertibility restrictions being imposed, the agency explained.

Published in Dawn, August 29th, 2024