Outlook remains negative for Pakistan’s banking system
ISLAMABAD: Moody's expects that higher inflation will likely lead to rising lending rates, which, together with the weakened economy, will challenge borrowers' payment capacity, contributing to further asset-quality deterioration for banks. Heavy flooding in Pakistan during August 2010 caused a humanitarian disaster and precipitated deteriorating macroeconomic conditions, severely weakening the banks' operating environment.
The negative outlook for Pakistan's banking system reflects the challenging operat- ing environment that has highlighted the limited depth and diversification of the country's banking system, with increasing susceptibility to event risk at the B3-rated sovereign level, says Moody's Investors Service in its new Banking System Outlook on Pakistan. The outlook expresses Moody's expectations for the fundamental credit conditions in the country's banking system over the next 12-18 months. Heavy flooding in Pakistan during August 2010 caused a humanitarian disaster and precipitated deteriorating macroeconomic conditions, severely weakening the banks' operating environment. The direct impact on rated Pakistani banks has been modest, as the floods plagued largely unbanked, rural areas. However, Moody's expects weaker economic growth and higher inflation in the short term, as the floods have led to food shortages, rising commodity prices and a renewed recourse of the government to deficit monetisation. "These adverse developments create a difficult operating environment for banks, which is a key driver of our negative system outlook. -PB News