Af­ter Moody’s, S&P up­grades Pak­istan’s credit rat­ings

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Stan­dard and Poor’s (S&P) Rat­ings Ser­vices on Mon­day re­vised pro­jec­tions for Pak­istan’s av­er­age real Gross Do­mes­tic Prod­uct (GDP) growth for 2015 to 2017 to 4.6 per cent from 3.8 per cent and also upped its out­look on Pak­istan’s long-term ‘B-’ credit rat­ing to ‘pos­i­tive’ from ‘sta­ble’.

The per-capita GDP was es­ti­mated to in­crease 4.3pc to about $1,460 this year, from 5.4pc in 2014. S&P af­firmed Pak­istan’s ‘B-’ long-term and ‘B’ short-term sovereign credit rat­ings.

S&P at­tributes the largely pos­i­tive pro­jec­tions to di­ver­si­fi­ca­tion in in­come gen­er­a­tion, the gov­ern­ment’s ef­forts to­wards fis­cal con­sol­i­da­tion, im­prove­ment in ex­ter­nal fi­nanc­ing con­di­tions and per­for­mance, and stronger cap­i­tal in­flows and remit­tances.

Lower oil prices have also con­trib­uted to­wards bol­ster­ing busi­ness con­fi­dence and in­vest­ment ex­pen­di­ture.

GDP per capita:

GDP per capita is ex­pected to av­er­age 2.6pc over the pe­riod 2015-2019 due to greater con­fi­dence in the agri­cul­ture and con­struc­tion sec­tors, and in Pak­istan’s trad­ing part­ners.


In­fla­tion is ex­pected to av­er­age 4.8pc over the pe­riod 2015-2019. Year on Year Con­sumer Price In­dex in­fla­tion fol­lowed a down­ward trend start­ing Oc­to­ber 2014, and con­tin­ues to decline in 2015 ac­cord­ing to data in the State Bank of Pak­istan In­fla­tion Mon­i­tor.

In­fla­tion slowed to 2.1pc in April 2015 from 2.5pc in the pre­ced­ing month due to lower fuel and food prices ─ the low­est level since 2003.

Gov­ern­ment deficit:

The gen­eral gov­ern­ment deficit for 2015 is es­ti­mated at 4.5pc of the GDP com­pared to a pre­vi­ous fore­cast of 5.5pc. The favourable pro­jec­tions have been at­trib­uted to im­proved col­lec­tions and tight­ened ex­pen­di­ture mainly in line with In­ter­na­tional Mon­e­tary Fund re­forms.

Greater fis­cal con­sol­i­da­tion of 1pc of the GDP is ex­pected over 2015-2016 through ex­pan­sion of the tax base, re­duc­tion of tax con­ces­sions, greater com­pli­ance, and re­duc­tion of gov­ern­ment ex­pen­di­ture on sub­si­dies and public sec­tor salaries.

The av­er­age fis­cal deficit fore­casted for the pe­riod 2016-2019 is 3.5pc, while the net gen­eral gov­ern­ment debt bur­den is pro­jected to fall to 50.5pc of the GDP by 2019 from 57pc in 2015 as the deficit de­creases. In­ter­est ex­pen­di­ture is ex­pected to fall to 25.5pc of gov­ern­ment rev­enue in 2019, from 30.6pc in 2015.

Ex­ter­nal per­for­mance:

The decline in the cur­rent ac­count deficit to 1.2pc of the GDP in 2014 is partly re­flec­tive of lower oil prices, and is ex­pected to av­er­age 2pc over 2015-2019.

As of March 2015, for­eign ex­change re­serves ─ in­clud­ing pro­ceeds from pri­vati­sa­tion and donor dis­burse­ments ─ in­creased to $11.6 bil­lion from an av­er­age of $6b in 2012-2013. Nar­row net ex­ter­nal debt is es­ti­mated to av­er­age 73.4pc over 20152019, and the coun­try’s ex­ter­nal debt bur­den is ex­pected to re­main mod­er­ate, as is ex­ter­nal liq­uid­ity ─ at 106.8pc ─ over the same pe­riod.

The im­prove­ment in Pak­istan’s ex­ter­nal debt dy­nam­ics has eased ac­cess to mar­kets and fund­ing costs for the gov­ern­ment, but th­ese could be neg­a­tively im­pacted through volatil­ity in global fi­nan­cial mar­kets, in­creas­ing oil prices, and a weaker out­look for key trad­ing part­ners.

Although Pak­istan’s ex­ter­nal per­for­mance in­di­ca­tors sta­bilised fur­ther in 2014, they have a pre­dom­i­nantly neu­tral im­pact on cred­it­wor­thi­ness.

Bank­ing sec­tor:

The bank­ing sys­tem’s high prof­itabil­ity and its strong cap­i­tal­i­sa­tion con­trib­ute to its sound­ness. The SBP has a long record of keep­ing in­fla­tion at low lev­els and util­is­ing mar­ket-based in­stru­ments to reg­u­late pol­icy.

Ac­cord­ing to S&P, a more di­ver­si­fied fi­nan­cial and cap­i­tal mar­ket would im­prove credit met­rics and trans­mit pol­icy more ef­fec­tively.

The sec­tor is still de­vel­op­ing risk as­sess­ment and pru­den­tial mea­sures, which poses a risk to the bank­ing sys­tem.

Risk fac­tors:

The S&P anal­y­sis re­vealed that Pak­istan’s in­ter­nal and ex­ter­nal se­cu­rity risks con­tinue threat­en­ing gov­ern­men­tal and in­sti­tu­tional ef­fec­tive­ness. The ma­te­rial risk of do­mes­tic con­flict and so­cial up­heaval con­tinue to chal­lenge pol­icy re­sponses.

Limited trans­parency and gov­er­nance, cor­rup­tion, nepo­tism and lack of ad­e­quate data un­der­mine the ef­fec­tive­ness and sta­bil­ity of Pak­istan’s pol­i­cy­mak­ing and po­lit­i­cal in­sti­tu­tions.

Low in­come, weak mon­e­tary pol­icy frame­work and un­der­de­vel­oped in­fra­struc­ture ─ par­tic­u­larly in the en­ergy sec­tor ─ and ser­vices have neg­a­tively in­flu­enced fis­cal per­for­mance.

Ex­port mar­ket un­cer­tainty and a weak busi­ness cli­mate pose a risk to the growth out­look for Pak­istan’s econ­omy.

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