Moody's changes Pak­istan's out­look to sta­ble from neg­a­tive

The Pak Banker - - FRONT PAGE - Staff Report

Moody's In­vestors Ser­vice has changed Pak­istan's out­look from neg­a­tive to sta­ble af­firm­ing the Pak­istan's lo­cal and for­eign cur­rency long-term is­suer and se­nior un­se­cured debt rat­ings at B3.

The change in out­look to sta­ble is driven by Moody's ex­pec­ta­tions that the bal­ance of pay­ments dy­nam­ics will con­tinue to im­prove, sup­ported by pol­icy ad­just­ments and cur­rency flex­i­bil­ity, Moodys, one of the top three world rat­ing agen­cies said in a re­search pub­li­ca­tion.

"The rat­ing af­fir­ma­tion re­flects Pak­istan's rel­a­tively large econ­omy and ro­bust long-term growth po­ten­tial, cou­pled with on­go­ing in­sti­tu­tional en­hance­ments that raise pol­icy cred­i­bil­ity and ef­fec­tive­ness, al­beit from a low start­ing point," Moodys said ad­ding that such de­vel­op­ments re­duce ex­ter­nal vul­ner­a­bil­ity risks, although for­eign ex­change re­serve buf­fers re­main low and will take time to re­build.

More­over, while fis­cal strength has weak­ened with higher debt lev­els largely as a re­sult of cur­rency de­pre­ci­a­tion, on­go­ing fis­cal re­forms, in­clud­ing through the coun­try's In­ter­na­tional Mone­tary Fund (IMF) pro­gramme, will mit­i­gate risks re­lated to debt sus­tain­abil­ity and gov­ern­ment liq­uid­ity.

These credit strengths are bal­anced against struc­tural con­straints to eco­nomic and ex­port com­pet­i­tive­ness, the gov­ern­ment's low rev­enue gen­er­a­tion ca­pac­ity that weak­ens debt af­ford­abil­ity, fis­cal strength that will re­main weak over the fore­see­able fu­ture, as well as po­lit­i­cal and still-ma­te­rial ex­ter­nal vul­ner­a­bil­ity risks.

Con­cur­rently, Moody's has af­firmed the B3 for­eign cur­rency se­nior un­se­cured rat­ings for The Se­cond Pak­istan Int'l Sukuk Co. Ltd. and The Third Pak­istan In­ter­na­tional Sukuk Co Ltd. The associated pay­ment obli­ga­tions are, in Moody's view, di­rect obli­ga­tions of the Gov­ern­ment of Pak­istan.

Pak­istan's Ba3 lo­cal cur­rency bond and de­posit ceil­ings re­main un­changed. The B2 for­eign cur­rency bond ceil­ing and the Caa1 for­eign cur­rency de­posit ceil­ing are also un­changed. The short-term for­eign cur­rency bond and de­posit ceil­ings re­main un­changed at Not Prime. These ceil­ings act as a cap on the rat­ings that can be as­signed to the obli­ga­tions of other en­ti­ties domi­ciled in the coun­try.

Nar­row­ing cur­rent ac­count deficits, in com­bi­na­tion with en­hance­ments to the pol­icy frame­work in­clud­ing cur­rency flex­i­bil­ity, lower ex­ter­nal vul­ner­a­bil­ity risks in Pak­istan. How­ever, for­eign ex­change re­serve ad­e­quacy will take time to re­build.

Moody's ex­pects Pak­istan's cur­rent ac­count deficit to con­tinue nar­row­ing in the cur­rent and next fis­cal year (end­ing June of each year), av­er­ag­ing around 2.2% of GDP, from more than 6% in fis­cal 2018 (the year end­ing June 2018) and around 5% in fis­cal 2019.

Un­der Moody's base­line assumption­s, sub­dued im­port growth will likely re­main the main driver of nar­row­ing cur­rent ac­count deficits. In par­tic­u­lar, the on­go­ing com­ple­tion of power projects will re­duce cap­i­tal goods im­ports, while oil im­ports will re­main struc­turally lower given the grad­ual tran­si­tion in power gen­er­a­tion away from diesel to coal, nat­u­ral gas and hy­dropower.

Cur­rently tight mone­tary con­di­tions and im­port tar­iffs on nonessen­tial goods will also weigh on 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.

Moody's ex­pects ex­ports to grad­u­ally pick up on the back of the real ex­change rate de­pre­ci­a­tion over the past 18 months, also con­tribut­ing to nar­rower cur­rent ac­count deficits. The gov­ern­ment is fo­cus­ing on rais­ing the coun­try's trade com­pet­i­tive­ness and has re­cently rolled out a Na­tional Tar­iff Pol­icy aimed at in­cen­tivis­ing pro­duc­tion for ex­ports or im­port sub­sti­tu­tion. If ef­fec­tive, the pol­icy, cou­pled with im­prove­ments in the terms of trade, will al­low ex­ports to grow more ro­bustly. The sub­stan­tial in­crease in power gen­er­a­tion ca­pac­ity over the past few years and im­prove­ments in do­mes­tic se­cu­rity have largely ad­dressed two sig­nif­i­cant sup­ply-side con­straints and fur­ther sup­port ex­port-re­lated in­vest­ment and pro­duc­tion.

Moody's ex­pects pol­icy en­hance­ments, in­clud­ing strength­ened cen­tral bank in­de­pen­dence and the com­mit­ment to cur­rency flex­i­bil­ity, to sup­port the re­duc­tion in ex­ter­nal vul­ner­a­bil­ity risks. In par­tic­u­lar, the gov­ern­ment is plan­ning to in­tro­duce a new State Bank of Pak­istan (SBP) Act to for­bid cen­tral bank fi­nanc­ing of gov­ern­ment debt and clar­ify SBP's pri­mary ob­jec­tive of price sta­bil­ity. The cen­tral bank has al­ready stopped pur­chases of gov­ern­ment debt in prac­tice since the start of fis­cal 2020. At the same time, it has strongly ad­hered to its com­mit­ment to a float­ing ex­change rate regime since May 2019. These en­hance­ments to the pol­icy frame­work will foster con­fi­dence in the Pak­istani ru­pee, while the use of the ex­change rate as a shock ab­sorber in­creases pol­icy buf­fers.

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