After Moody’s and Fitch Ratings downgraded Pakistan, S&P Global has also changed the country’s long-term outlook from stable to negative on deteriorating external position because of higher commodity prices, currency depreciation and tighter global financial conditions.
In addition, the agency also declared its “B-” long-term and “B” short-term sovereign credit ratings on Pakistan, as well as “B-” long-term issue rating on Pakistan’s senior unsecured notes and the sukuk trust certificates.
According to S&P Ratings, the negative outlook reflects rising risks to Pakistan’s external liquidity situation over the next 12 months in an increasingly challenging economic environment.
The agency stated, “We may lower our ratings if Pakistan’s external indicators continue to deteriorate to the extent that the government’s commitments appear to be unsustainable in the long term. Downward pressure on the ratings would emerge if financial support from bilateral and multilateral partners quickly erodes, or usable foreign exchange reserves fall further to levels indicating distress in servicing Pakistan’s external debt obligations.”
The S&P Global also indicated that if Pakistan’s external position stabilizes and improves from present levels, the outlook may be revised to stable. A sustained increase in usable foreign exchange reserves could be evidence of progress.
Higher commodity prices, tighter global financial conditions and depreciating rupee led to the downgrading in the outlook of country to negative. Pakistan’s government has significant foreign debts and liquidity demands, as well as a large general government fiscal deficit and debt stock. Although the impact of these more challenging macroeconomic conditions has been offset to some extent by various government reform initiatives undertaken in recent years, still the likelihood of further deterioration in key indices, notably external liquidity is at rise.
According to the report, Pakistan’s economy is still recovering from a slowdown caused by the pandemic. Domestic demand is recovering, but it is now confronted with a new obstacle in the shape of escalating inflation, particularly for staple products. Prevailing pricing trends, such as higher prices for edible oils, fuel, electricity, and cereals, are expected to slow the rate of private consumption growth in the current fiscal year, which ends in June 2023.
On the positive side, Pakistan has made progress in executing economic and fiscal reforms under the IMF’s Extended Fund Facility (EFF) and recently reached a staff-level agreement. The agreement underlines the government’s increased commitments to fiscal consolidation in its fiscal 2023 budget in recent weeks.
However, downgrading of Pakistan’s outlook from stable to negative by Moody’s and Fitch has already affected the value of currency as well as stock exchange. Consequences of the latest ratings by S&P Global are also not going to be in country’s goodwill.