Moody’s upgrades Pakistan’s bond ratings to B3 with a stable outlook
Singapore, June 11, 2015 — Moody’s Investors Service has today upgraded Pakistan’s foreign currency issuer and senior unsecured bond ratings to B3 from Caa1, and assigned a stable outlook.
Key drivers for the rating action are expectations of:
1. Continued strengthening of the external payments position; and
2. Sustained progress in structural reforms under the government’s program with the IMF.
As progress on these fronts becomes firmly entrenched, risks of default are receding relative to other sovereigns in the Caa1-rated category that are facing heightened external vulnerabilities.
Concurrently, Moody’s has upgraded the rating assigned to the US dollar Trust Certificates issued by The Second Pakistan International Sukuk Company Limited to B3.
In today’s rating action, Moody’s has also changed Pakistan’s foreign-currency bond ceiling to B2 from B3, the foreign-currency deposit ceiling to Caa1 from Caa2, and the local-currency country risk ceiling to Ba3 from B1. The short-term country ceilings for foreign-currency bonds and deposits remain unchanged at Not-Prime (NP).
RATING UPGRADE TO B3 FROM Caa1
First Driver — A strengthening external liquidity position
Pakistan’s external liquidity position continues to strengthen. Net foreign reserves have climbed steadily, to $11.9 billion as of end-May 2015 from a low of $3.2 billion in January 2014.
Improvement in external liquidity has recently been bolstered by successful recent privatization offerings that have been met with strong investor appetite, in turn reinforced by Pakistan’s underlying growth potential and progress on structural reforms. Moody’s expects real GDP growth to rise to 4.7% year-on-year in the fiscal year ending June 2016, and further to a range of 5-6% in the following four years.
The China-Pakistan Economic Corridor with pledges worth $46 billion from Beijing, will also serve over time to accelerate growth by boosting investment in transportation links with China and addressing shortages in electrical power generation once implementation is underway.
Lower oil prices additionally relieve pressure on the current account of the balance of payments. However, a durable improvement in the external payments position will likely depend on sustained political stability and continuity in policy.
Second Driver – Implementation of reforms under the IMF program
Pakistan continues to make steady progress on structural reforms. In mid-May, the IMF issued a statement upon the conclusion of its staff mission, indicating that the seventh review under the Extended Fund Facility that it signed in March 2013 had been conducted successfully and would be reviewed by the IMF’s management board.
Cumulative financial assistance under the IMF’s 4.4 billion ($6.2 billion at current rates) special drawing rights program currently amount to $3.5 billion.
With the program now at its mid-point, we consider that the government has achieved significant traction in reforms . Continued commitment to the program would entail, amongst other goals, the government meeting deficit-reduction targets. Coupled with ongoing efforts to lengthen the maturity structure of Pakistan’s debt, this would contribute to a decline in large gross financing needs.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook represents our expectation of balanced upside and downside risks.
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. Deeply entrenched weaknesses in the power sector also act as a bottleneck to growth. While Pakistan’s government financing is mainly from domestic sources and system-wide external debt is declining as a percent to GDP, the level of external public debt poses a moderate degree of credit risk. In addition, political event risks remain relatively high in Pakistan despite recent stability.
RATIONALE FOR THE B3 RATING
Weak government finances, marked by elevated debt levels which will continue to exceed the median for B3-rated peers, are the primary constraint on Pakistan’s B3 government bond rating.
Economic growth, while in line with other B-rated sovereigns, is below potential, largely due to supply constraints that stem from a lack of structural reforms in the energy sector.
The passage of ongoing reforms indicates that government effectiveness is improving. Nonetheless, a fractious political environment presents risks to smooth policy making. Moody’s also sees an elevated vulnerability to geopolitical risks
WHAT COULD MOVE THE RATING UP/DOWN
Upward triggers to the rating would stem from sustained progress in structural reforms that would remove infrastructure impediments and supply-side bottlenecks. This would improve Pakistan’s investment environment and eventually aid a shift to a higher growth trajectory. A fundamental strengthening in the external liquidity position and meaningful reduction in the deficit and debt burden would also be credit positive.
Conversely, we would view a stalling of the ongoing IMF program or the withdrawal of other multilateral and bilateral support, a deterioration in the external payments position or a more unstable political environment to be credit negative.
GDP per capita (PPP basis, US$): 4,736 (2014 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 4.03% (2014 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Jun/Jun): 8.2% (2014 Actual)
Gen. Gov. Financial Balance/GDP: -5.5% (2014 Actual) (also known as Fiscal Balance, excluding grants)
Current Account Balance/GDP: -1.3% (2014 Actual) (also known as External Balance)
External debt/GDP: 26.1% (2014 Actual, overall, including publicly guaranteed debt and )
Level of economic development: Very Low level of economic resilience
On 09 June 2015, a rating committee was called to discuss the rating of the Pakistan, Government of. The main points raised during the discussion were: The issuer’s economic fundamentals, including its economic strength, have materially increased. The issuer’s governance and/or management, have materially increased. The issuer has become less susceptible to event risks.