Moody’s upgrades Pak bond rating

islamabad
Moody’s Investors Service has revised the outlook on Pakistan’s foreign currency government bond rating to positive from stable on basis of strengthening external liquidity position, continued efforts toward fiscal consolidation, and government’s steady progress in achieving structural reforms under the IMF programme.
Moody’s has affirmed the government’s issuer rating and senior unsecured rating at Caa1. The Caa1 rating is also affirmed for US dollar Trust Certificates issued by The Second Pakistan International Sukuk Company Limited.
Moody’s Investors Service, which is a leading provider of credit ratings, research and risk analysis, has stated three drivers for changing the rating to positive from stable including a stronger external liquidity position, efforts towards fiscal consolidation and progress in achieving structural reforms and quantitative targets under the IMF programme.
According to the Moody’s note, net foreign reserves with the State Bank of Pakistan climbed to $11.2 billion as of 13 March 2015, from $3.2 billion at the end of January 2014. The cushion provided by foreign reserves coupled with dwindling external debt repayments to the IMF has reduced external vulnerabilities. This has in large part resulted from a lower current account deficit, which was easily financed by the issuance of a Eurobond in April 2014, a Sukuk issuance in December, continued disbursements under the IMF programme and privatisation proceeds.
The narrowing of the current account deficit to 1.2pc of GDP in the fiscal year ended June 2014 (FY2014) from 2.1pc in FY2012 was largely due to the steady uptick in workers’ remittances and receipt of anti-terrorism Coalition Support Funds from the US. We estimate that the current account will narrow further in fiscal 2015 to 0.8pc of GDP, on account of the fall in oil prices.
Although wide fiscal deficits and high debt levels remain a credit constraint, Pakistan has made progress towards fiscal consolidation. In FY2014, the government was able to bring the deficit down to 5.5pc of GDP (excluding grants), from 8.2pc the previous year. The government is targeting a further shrinkage in the deficit, to 4.9pc of GDP in FY2015. Although the pace of deficit reduction may be less marked than the budget forecasts suggest, we expect the authorities will continue along the path of fiscal consolidation.
The government has relied on the banking system for deficit financing, but such borrowing is gradually declining as privatisation proceeds, and the Eurobond and Sukuk issuances, have helped it to diversify funding. Moreover, the maturity of domestic public debt is lengthening as the government substitutes shorter-term treasury bills with Pakistan Investment Bonds that carry a longer tenure. This will reduce roll-over risks and volatility in debt issuance prices.
Under its programme with the IMF, Pakistan has also made steady progress on structural reforms. As of December 2014, it had cleared five programme reviews, receiving $3.2 billion in financial assistance under the SDR 4.39 billion ($6.1 billion at current exchange rates) programme that it signed in September 2013. In early February this year, the IMF issued a statement upon the conclusion of its Staff Mission, indicating that the sixth review had been conducted successfully and was being reviewed by the IMF’s Management Board.
Reform measures stipulated under the programme primarily focus on fiscal consolidation, debt management, and addressing structural constraints in the energy sector. Authorities are striving to meet the remaining structural benchmarks scheduled for the year ahead. These include the passage of legislation to enhance independence of the central bank, steps to improve monetary transmission and debt management, and privatisation and strategic stake sales of state-owned enterprises.
Although Pakistan’s international liquidity buffer has been replenished and balance of payments pressures have subsided, an incipient recovery in investor confidence has not yet significantly boosted direct investment inflows. In addition, most of the build-up in official reserves has come from external borrowings, including drawdowns from Pakistan’s IMF programme. Moreover, Pakistan’s economic recovery faces structural challenges, and reform measures have not completely taken hold.
While a positive outlook suggests a diminution of the probability of default, the Caa1 rating reflects Pakistan’s structurally large fiscal imbalances, high debt servicing costs, dependence on foreign creditors and substantial refinancing needs. It also incorporates implementation risk associated with economic reform and a high susceptibility to event risk — both on the political front and in terms of economic vulnerabilities that could arise, primarily from Pakistan’s reliance on bilateral and multilateral support.