Fitch Ratings lowered Pakistan’s outlook from stable to negative on Tuesday, citing the country’s notable deterioration in external liquidity and financing conditions since the beginning of 2022.
The credit rating agency affirmed Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) at ‘B-‘.
It stated, “Pakistan’s ‘B-‘ rating reflects recurring external vulnerability, a narrow fiscal revenue base and low governance indicator scores compared with the ‘B’ median.”
Fitch noted a number of other considerations in its decision to lower the ratings outlook.
Although International Monetary Fund (IMF) board approved Staff-level agreement but there are substantial risks to its execution and sustained access to financing after the program’s expiration in June 2023 amid tough economic and political environment.
It added that renewed political volatility could undermine the authorities’ fiscal and external adjustment, as happened in early 2022 and 2018, particularly in the current environment of slowing growth and high inflation.
The agency highlighted, “Former Prime Minister Imran Khan, who was ousted in a no-confidence vote on 10 April, has called on the government to hold early elections and has been organizing large-scale protests in cities around the country. The new government is supported by a disparate coalition of parties with only a slim majority in parliament.”
Moreover, regular elections are due in October 2023, creating the risk of policy slippage after the conclusion of the IMF program.
Fitch also pointed out that limited external funding and large current account deficits (CADs) have drained foreign exchange (FX) reserves, as the State Bank of Pakistan (SBP) has used reserves to slow currency depreciation. Liquid net FX reserves at the SBP declined to about USD10 billion or just over one month of current external payments by June 2022, down from about USD16 billion a year earlier
The agency estimated Pakistan’s current account deficit (CAD) to reach $17 billion (4.6% of GDP) in fiscal year ended June 2022 (FY22), driven by soaring global oil prices and a rise in non-oil imports boosted by strong private consumption.
Read more: Pakistan is at risk of default: Bloomberg
However, fiscal tightening, higher interest rates, measures to limit energy consumption and imports could result in narrowing CAD to USD10 billion (2.6% of GDP) in FY23.
Public debt maturities in FY23 are about USD21 billion. Maturities of about USD9 billion are to bilateral creditors (chiefly Saudi Arabia and China), which should be fairly easy to roll over with an IMF program in place.
Moreover, consumer price inflation averaged 12.2% in FY22 but accelerated to 21.3% year-on-year (6.3% month-on-month) in June on hikes to petrol and electricity prices. The SBP forecast inflation of 18%-20% in FY23, as it raised its policy rate by 125bp to 15% at its most recent action on 7 July. SBP’s latest action took cumulative rate hikes to 800bp in this latest tightening cycle.
It stated that preliminary estimates show real GDP growth of 6% for FY22, up from 5.7% in FY21, mostly driven by private consumption, as in FY21, while net exports continued to weigh on growth.
It said, “In our view, this largely reflected a loosening of fiscal policy in FY22, as well as a fairly loose monetary policy despite significant tightening throughout the year (ex-post real policy rates on average negative in FY22).”
“We forecast slower growth of 3.5% in FY23 amid fiscal and monetary tightening, high imported inflation, and a weaker external demand outlook, all of which will also hit household and business confidence,” the entity stated.
It also mentioned that Pakistan has an ESG Relevance Score (RS) of ‘5’ for both political stability and rights and for the rule of law, institutional and regulatory quality, and control of corruption. It added, “these scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model (SRM). Pakistan has a low WBGI ranking at the lower 22nd percentile.”
Talking to a private news channel after the change in outlook, the PTI leader said that Moody is also hinting at changing Pakistan’s rating. “The PML-N-led government has destroyed the economy of the country,” he added.