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- Downgrade reflects further deterioration in external liquidity and funding conditions.
- Partly a result of floods that will undermine Pakistan’s efforts to rein in twin deficits.
- Company does not typically assign outlooks to sovereign nations with a rating of ‘CCC+’ or below.
As the country’s wobbly economy continues to face headwinds from all sides, Fitch Ratings, on Friday, slashed Pakistan’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘CCC+’ from ‘B-‘, which analysts say does not bode well for the country recovering from super floods.
According to its statement, the company does not typically assign outlooks to sovereign nations with a rating of ‘CCC+’ or below.
The agency flagged worsening liquidity and policy risks as the main reasons that led to a downgrade.
“The downgrade reflects further deterioration in Pakistan’s external liquidity and funding conditions, and the decline of foreign exchange reserves,” Fitch Ratings said.
“This is partly a result of widespread floods, which will undermine Pakistan’s efforts to rein in twin fiscal and current account deficits.”
The down-rating “also reflects our view of increased risks of policies potentially undermining Pakistan’s International Monetary Fund (IMF) programme and official financial support.”
On foreign exchange reserves, it said the State Bank of Pakistan (SBP) had about $7.6 billion till October 14, which can cover about a month of current external payments.
It also noted that forex reserves had tumbled from over $20 billion at the end of August 2021.
“Falling reserves reflect large, albeit, declining current account deficits (CADs), external debt servicing and earlier foreign exchange interventions by the SBP,” he said.
Before stabilising in the week of October 14, reserves had been falling every week since the disbursement of $1.2 billion from the IMF in the week of September 2, upon the completion of the seventh and eighth reviews of Pakistan’s Extended Fund Facility (EFF), the rating agency said.
It also noted that the current account deficit reached $17 billion (4.6% of GDP) in the fiscal year that ended in June 2022 (FY22), driven by soaring oil prices and higher non-oil imports on strong private consumption.
Fiscal tightening, higher interest rates and measures to limit energy consumption and imports underpin our forecast for the CAD to narrow to $10 billion (2.7% of GDP) in FY23, despite the hit to export revenue and import needs after the recent floods.
“Lower imports and commodity prices helped to narrow the CAD in recent months, to about $300 million in September,” Fitch said.
Pakistan’s external public debt maturities in FY23 are over $21 billion, mostly to bilateral and multilateral creditors, which mitigates rollover risks, and there are already agreements to roll over some of these.
Quoting authorities, Fitch placed estimated flood damage at $10 billion-30 billion, but reconstruction costs are likely to be lower, as is the impact on Pakistan’s twin deficits.
“Pakistan recently received funding commitments of $2.5 billion from the World Bank and Asian Development Bank, although we understand that much of this is repurposed from ongoing programmes,” the statement cited. “It remains unclear to what degree the IMF will be able to relax Pakistan’s programme targets, or augment Pakistan’s access under the extended fund facility (EFF).”
“We assume Pakistan will continue to receive disbursements under its IMF programme, but risks to this have risen,” it said.
Fuel price cuts from October 1 may not be compatible with commitments to the IMF, it feared, adding that a quarterly electricity tariff adjustment due in October is also yet to happen.
The new finance minister has re-affirmed commitment to the programme, but prefers a strong exchange rate, and may revisit the SBP law that was amended in early 2022 to grant the SBP greater autonomy, as previously agreed with the IMF, Fitch said.
Earlier during the month, Moody’s Investors Service (Moody’s) downgraded the government of Pakistan’s local and foreign currency issuer and senior unsecured debt ratings to ‘Caa1’ from ‘B3’.
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