Moody's lifts Pak's outlook to stable from negative
Int’l rating agency expects CAD to continue narrowing in current and next fiscal year; Report foresees Pakistan’s GDP growth to slow to 2.9 per cent in FY2020 from 3.3per cent in last year; States political risks remain material despite govt’s working relationship with military and judiciary
ISLAMABAD: As a sign of improving economy, Moody’s Investors Services have upgraded the country’s outlook from ‘negative’ to ‘stable’, reaffirming the country’s rating of B3, the agency announced on Monday.
Moody’s had downgraded Pakistan’s ratings outlook to negative last year in June, citing heightened external vulnerability risk due to depleting foreign exchange reserves.
Although Moody’s overall statement indicates that Pakistan is much on track of International Monetary Fund’s (IMF) guidelines, the rating agency also highlighted the risks identified by IMF and the Financial Action Task Force (FATF).
The agency said that while the fiscal strength has weakened with higher debt levels largely as a result of currency depreciation, ongoing fiscal reforms, anchored by the IMF programme, will mitigate risks related to debt sustainability and government liquidity. The reforms would also mitigate debt sustainability and government liquidity risks.
While appreciating the steps taken for widening the tax net, the agency claimed that the support from IMF and World Bank will raise effectiveness of the revenue measures. However, Moody’s estimates that the revenue growth targets set by the IMF programme are challenging to achieve in full in a subdued economic growth environment. In particular, Moody’s expects Pakistan’s GDP growth to slow to 2.9 per cent in FY2020 from 3.3 per cent last fiscal year, given tight financial conditions that continue to weigh on domestic demand, before rising to 3.5 per cent in FY2021.
As per Moody’s, the IMF programme, which commenced in July 2019, targets higher foreign exchange reserve levels and has unlocked significant external funding from multilateral partners including Asian Development Bank (ADB) and World Bank. Nevertheless, unless the government can effectively mobilise private sector resources, foreign exchange reserves are unlikely to increase substantially from current levels.
Regarding debt, the agency expects, government’s public debt to slowly decline over the next few years to around 75-76 per cent of GDP by 2023, which is still a high debt burden, from a peak of around 82-83 per cent of GDP currently. In addition to the gradual decline in the debt burden, the government has already reprofiled a substantial portion of domestic debt from short-term treasury bills into longer-term floating rate bonds. This will reduce gross borrowing requirements to around 25 per cent of GDP in FY2020, from nearly 40 per cent in the last fiscal year. The government is aiming to lengthen domestic maturities further and reduce its reliance on treasury bills and floating rate debt. Moody’s expects that banks and other domestic institutional investors will retain a strong appetite for government securities. Lower gross borrowing requirements and exposure to floating rate liabilities sustained over time will reduce the government’s exposure to liquidity and interest rate risks that are currently very high.
It expects that the completion of power projects will reduce capital goods imports, while oil imports will remain structurally lower given the slow transition in power generation away from diesel to coal, natural gas and hydropower. Tight monetary conditions and import tariffs on nonessential goods will also impact broader import demand for some time, although Moody’s sees the possibility of monetary conditions easing when inflation gradually declines towards the end of the current fiscal year.