Karachi, October 07, 2022 (PPI-OT): Moody’s downgrades Pakistan’s ratings

Moody’s Investors Service (“Moody’s”) has downgraded Pakistan’s rating by one notch to Caa1, maintaining outlook at Negative. The downgrade is reasoned by aftershocks of the catastrophic floods the country witnessed this year to escalate. risk of government liquidity in consideration of scheduled debt obligations of the country.

The agency has also revised down macro estimates for Pakistan in light of floods situation, where it expects FY23 CPI to average between 25% – 30%, while GDP growth to report at 0% – 1%.

Significant external financing and improving fiscal position are among key upsides that may upgrade Pakistan’s ratings. Having said that, Moody’s explains a Negative outlook indicates unlikely upgrade in the near term.

Moody’s downgrades Pakistan to Caa1 with Negative outlook

Moody’s Investors Service (Moody’s) has downgraded Pakistan’s rating by one notch to Caa1, maintaining outlook at Negative. As the ongoing slowdown in economic activity is expected to negatively impact Pakistan’s tax collection this year, the downgrade is reasoned by aftershocks of the catastrophic floods the country witnessed this year to escalate risk of government liquidity in consideration to scheduled debt obligations of the country.

This is expected to lead to increase in dependence on multilateral partners as capital markets financing may not be an option for Pakistan amid prevailing record-high yields. This, however, does not change the agency’s view regarding IMF’s ongoing program with Pakistan, which could in fact play a role in securing financing from multilateral and bilateral partners.

Floods situation supplements dampened outlook

Losses in floods, that the government has quantified at US$30bn in its initial estimates (~10% of GDP), are anticipated to worsen Pakistan’s fiscal position with dent on tax collection and higher expenditures. Moreover, spill over effects are also expected to be reflected in higher inflation readings.

Higher food imports this year, post destruction of agri output, is expected to outweigh declining consumption demand, leading to expanding trade deficit. Moody’s expects the floods situation to increase external financing needs as well. The agency has revised down macro estimates for Pakistan in light of floods situation, while support from increase in remittances has not been ruled out.

What can lead to an upgrade

Moody’s also mentioned the role of political risk in the current scenario, where increase in political noise may delay reform implementations regarding improvement in Pakistan’s fiscal position. Significant external financing that would support country’s foreign exchange reserves and execution of revenue-raising measures that would improve capacity to pay interest costs are among key upsides that may upgrade Pakistan’s ratings, as per Moody’s. Having said that, Moody’s explains that a Negative outlook indicates unlikely upgrade in ratings in the near term.