In a significant development for Pakistan’s economic landscape, Moody’s upgraded the Pakistan ratings to Caa2 from Caa3.This upgrade to Caa2 comes in recognition of the recent improvements in macroeconomic conditions, which have positively influenced the government’s liquidity and external positions.
Moody’s also upgraded the rating for the senior unsecured Medium-Term Note (MTN) programme to (P)Caa2 from (P)Caa3, highlighting a shift in the outlook for the Government of Pakistan from stable to positive. The agency’s statement emphasized that the Caa2 rating reflects a reduced default risk for Pakistan, aligning with the country’s improving macroeconomic fundamentals.
The enhanced rating is largely attributed to greater certainty regarding Pakistan’s external financing sources. This comes after the sovereign reached a staff-level agreement with the International Monetary Fund (IMF) on July 12, 2024, for a $7 billion Extended Fund Facility (EFF) over a 37-month period. Furthermore, the IMF Executive Board is anticipated to approve this loan deal in the coming weeks, bolstering the nation’s economic stability.
Pakistan’s foreign exchange reserves have seen substantial growth, nearly doubling since June 2023. However, they still fall short of meeting the country’s external financing needs, making timely financing from official partners essential for fulfilling external debt obligations. Despite the positive upgrade to Caa2, Moody’s cautioned that the rating continues to reflect Pakistan’s very weak debt affordability, which poses a high risk to debt sustainability. Interest payments are projected to consume about half of the government’s revenue in the next two to three years.
Additionally, the report highlights the challenges posed by weak governance and high political uncertainty, which continue to weigh on the country’s credit profile. Nevertheless, the positive outlook suggests a potential for Pakistan to further mitigate liquidity and external vulnerability risks, ultimately achieving a stronger fiscal position, particularly with the support of the IMF programme.
The IMF has recently updated its Executive Board meeting schedule through September 4, 2024, though Pakistan is currently not listed on the agenda. However, the government remains optimistic about securing approval for the $7 billion bailout package next month, as confirmed by sources close to the negotiations.
Moody’s reiterated that the upgrade to Caa2 is indicative of the need for sustained reform implementation, including measures to enhance revenue collection. Such reforms could significantly bolster the government’s revenue base and improve Pakistan’s debt affordability. Successful completion of IMF reviews would also enable Pakistan to unlock continuous financing from official partners, facilitating the rebuilding of foreign exchange reserves.
In conjunction with the rating upgrade, Moody’s raised Pakistan’s local and foreign currency country ceilings to B3 and Caa2 from Caa1 and Caa3, respectively. The agency attributed the two-notch gap between the local currency ceiling and sovereign rating to the government’s substantial economic footprint, alongside weak institutions and heightened political and external vulnerability risks. The distinction between the foreign currency ceiling and local currency ceiling underscores the challenges posed by incomplete capital account convertibility and relatively weak policy effectiveness.
As Pakistan navigates through these economic reforms, the upgrade to Caa2 signifies a crucial step toward stability and recovery, providing a more favorable outlook for investors and stakeholders alike.
