Pakistan’s economy will see a 1.5 percent increase in the current fiscal year, predicted by Moody’s Investor Service on Wednesday, adding that Pakistani banks are stable, however, risks in the banking sector were increasing.
“Economic activity will remain below pre-outbreak levels, although the economy should return to modest 1.5pc growth in the fiscal year 2021,” according to Moody’s outlook for the Pakistani banking sector.
Pakistan has a significant portion of an unbanked population, which makes a strong case for its banking system to have a long-term credit growth potential, said Moody’s. The bank’s solid outlook is a reflection of its stable liquidity and funding, and it has the potential to grow even further.
“Despite a difficult environment, the government’s credit profile is stable due to ongoing reforms and increasing policy effectiveness — a positive for the banks given their outsized holdings of Pakistani government debt link their credit profiles to that of the government,” Moody’s Senior Vice President Constantinos Kypreos stated.
According to Moody’s prediction, slow economic recovery will affect loan quality, “with nonperforming loans (NPLs) expected to rise over the coming months from a sector-wide level of 9.9 percent of gross loans in September 2020.”
“Banks’ foreign operations, export-oriented industries and companies reliant on government payments and subsidies will be hit hardest, but loan repayment holidays and other government support measures should help contain some risks,” it said.
During 2020, banks’ profitability increased, however, that will be affected by higher loan-loss provision due to the challenging environment, lowered margins, and subdued business generation. Even so, Pakistan will return to 1.5 percent growth in the fiscal year 2021, and banks and government reforms will decrease the ongoing Covid-19 pandemic’s impact.
“We project a government deficit of 8% (compared to the government target of 7% of GDP) for 2021, with rising arrears and circular debt in the energy sector also affecting corporates’ repayment capabilities. Wide fiscal deficits, which will – to a large extent – be financed by local banks, may also take precedence over lending to the private sector. Lower consumer spending and business confidence will suppress lending growth and business opportunities.”
Kypreos further stated, “Deposit-based funding and good liquidity buffers also remain strengths, while the probability of government support in a crisis is high, even if its ability to do so is limited by fiscal challenges.”
Because the pandemic and its effects are still very much prevalent and the government has placed restrictions to curb its impact, the banking sector’s operating condition remains difficult and economic activity below at pre-outbreak levels, however, it will see some improvement nonetheless. “Government and central bank policy responses and structural reforms will soften the pandemic’s impact but not fully offset it. In this environment, we expect private-sector lending to grow modestly, by 5-7pc, over the calendar year,” the agency predicted.
As of September 2020, 70 percent of the total assets were made up of customer deposits, and the number will increase by 7 percent to 9 percent in 2021 owing to strong inward remittances and financial inclusion, predicted Moody’s. “Highly liquid assets comprising cash and bank placements account for around 13 percent of the banks’ total assets, while another 43 percent of assets are invested in government securities.”
Moody’s outlook maintained that it is highly probable that the government will support its banking sector if it is going through a rough patch. “The government remains willing to support troubled banks but its ability to do so is limited by fiscal challenges reflected in its B3 rating,” it concluded.
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