Moody's rat­ing

The Pak Banker - - FRONT PAGE -

Amidst dif­fi­cult eco­nomic con­di­tions, Moody's Investors Ser­vice has down­graded the out­look on Pak­istan's rat­ing to negative from sta­ble and af­firmed the 'B3' lo­cal and for­eign cur­rency long-term is­suer and se­nior un­se­cured debt ratings. Ac­cord­ing to the agency, the de­ci­sion to change the out­look to negative is caused by Pak­istan's height­ened ex­ter­nal vul­ner­a­bil­ity risk. For­eign ex­change re­serves have fallen to low lev­els and with­out sig­nif­i­cant cap­i­tal in­flows will not be re­plen­ished over the next 1218 months. Low re­serve ad­e­quacy threat­ens con­tin­ued ac­cess to ex­ter­nal fi­nanc­ing at mod­er­ate costs, in turn po­ten­tially rais­ing govern­ment liq­uid­ity risks. It may be added here that a rat­ing is Moody's opin­ion of the credit qual­ity of in­di­vid­ual obli­ga­tions or of an is­suer's gen­eral cred­it­wor­thi­ness. Investors use ratings to help price the credit risk of fixed-in­come se­cu­ri­ties they may buy or sell.

Need­less to say, the de­vel­op­ment comes as a blow to us be­cause we are fac­ing dif­fi­cul­ties in tam­ing a bulging im­port bill that is eat­ing away at the coun­try's for­eign ex­change re­serves. From al­most $ 19.46 bil­lion held by the State Bank of Pak­istan in Oc­to­ber 2016, for­eign ex­change re­serves dropped 48.3% to $ 10.07 bil­lion on June 8, 2018. The de­cline comes at a time when the im­port bill peaked to a record high of $ 5.8 bil­lion in May, in­creas­ing the al­ready swelling trade and cur­rent ac­count deficits. The frag­ile ex­ter­nal ac­count po­si­tion has al­ready forced the SBP to let go off the Pak­istani ru­pee that has now weak­ened over 15% in the last seven months af­ter three sep­a­rate rounds of de­val­u­a­tion. Moody's ac­knowl­edged Pak­istan's ro­bust growth po­ten­tial, but pointed out that these strengths bal­ance the coun­try's frag­ile ex­ter­nal pay­ments po­si­tion as well as the "very weak" govern­ment debt af­ford­abil­ity.

The de­ci­sion to af­firm the B3 rat­ing re­flects Pak­istan's ro­bust growth po­ten­tial, sup­ported by on­go­ing im­prove­ments in en­ergy sup­ply and phys­i­cal in­fra­struc­ture, which are likely to raise eco­nomic com­pet­i­tive­ness over time.These credit strengths bal­ance Pak­istan's frag­ile ex­ter­nal pay­ments po­si­tion and very weak govern­ment debt af­ford­abil­ity ow­ing to low rev­enue gen­er­a­tion ca­pac­ity.The ratings agency also ex­pects Pak­istan's ex­ter­nal ac­count to re­main un­der sig­nif­i­cant pres­sure. The cov­er­age by for­eign ex­change re­serves of im­ports will likely fall fur­ther from al­ready low lev­els, while cov­er­age of ex­ter­nal debt pay­ments due will weaken from cur­rently ad­e­quate lev­els.In turn, higher for­eign cur­rency bor­row­ing needs, in com­bi­na­tion with the low lev­els of for­eign ex­change buf­fers, risks weigh­ing on the abil­ity of the govern­ment to ac­cess ex­ter­nal fi­nanc­ing at mod­er­ate costs.

As ex­perts have pointed out, con­tin­ued growth in im­ports - driven by de­mand for cap­i­tal goods un­der CPEC, higher fuel prices and ro­bust house­hold con­sump­tion - will pre­vent a sig­nif­i­cant nar­row­ing of the cur­rent ac­count deficit. Al­though ex­ports have picked up since the start of 2018, grow­ing around 10-15% year-on-year in US dol­lar terms, they only amount to half the level of goods im­ports.Un­less cap­i­tal in­flows in­crease sig­nif­i­cantly, Moody's does not ex­pect of­fi­cial for­eign ex­change re­serves to re­plen­ish from their cur­rent low lev­els. Un­der base­line pro­jec­tion, the im­port cover of re­serves will likely fall to around 1.7-1.8 months over the next fis­cal year, be­low the ad­e­quacy level of three months gen­er­ally rec­om­mended by the In­ter­na­tional Mon­e­tary Fund.

Sig­nif­i­cantly, Moody's ex­pects the govern­ment's tax amnesty scheme, which ex­pires in June 2018, to have a mod­est im­pact of around $2-3 bil­lion in for­eign ex­change in­flows.Se­condly, the cov­er­age by for­eign ex­change re­serves of ex­ter­nal debt pay­ments due is weak­en­ing, point­ing to fur­ther ex­ter­nal vul­ner­a­bil­ity. With a sig­nif­i­cant rise in eq­uity in­flows un­likely, Moody's projects that Pak­istan's ex­ter­nal fi­nanc­ing gap will be be met by in­creased for­eign cur­rency bor­row­ing.The out­look would likely be changed to sta­ble if ex­ter­nal vul­ner­a­bil­ity risks de­creased ma­te­ri­ally and durably, in­clud­ing through pol­icy ad­just­ments that strengthen the ex­ter­nal pay­ments po­si­tion.

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