Moody's upgrades Pakistan's ratings to 'Caa2' on improved economic outlook

Taking into account the recent improvement in macroeconomic conditions, global credit rating agency Moody's Ratings on Wednesday upgraded Pakistan's local and foreign currency issuer and senior unsecured debt ratings to Caa2 from Caa3.

“We have also upgraded the rating for the senior unsecured MTN programme to (P)Caa2 from (P)Caa3. Concurrently, the outlook for the Government of Pakistan has changed to positive from stable,” the rating agency said in a statement.

The upgrade to Caa2 reflects Pakistan's improving macroeconomic conditions and moderately better government liquidity and external positions, from very weak levels.

Accordingly, Pakistan's default risk has reduced to a level consistent with a Caa2 rating, as per Moody’s. “There is now greater certainty on Pakistan's sources of external financing, following the sovereign's staff-level agreement with the IMF on 12 July 2024 for a 37-month Extended Fund Facility (EFF) of $7 billion.”

Moreover, the rating agency expected the IMF Executive Board to approve the Pakistan loan deal in the next few weeks.

Pakistan's foreign exchange reserves have about doubled since June 2023, although they remain below what is required to meet its external financing needs, it said.

According to Moody's, the country remains reliant on timely financing from official partners to fully meet its external debt obligations.

The agency however warned that the "Caa2 rating continues to reflect Pakistan's very weak debt affordability, which drives high debt sustainability risk".

"We expect interest payments to continue absorbing about half of government revenue over the two to three years," Moody's said, adding, "The Caa2 rating also incorporates the country's weak governance and high political uncertainty."

The report also highlights the fact the positive outlook reflects a balance of risks skewed to the upside, while it captures the possibility that the government is able to further lower its liquidity and external vulnerability risks, and achieve a better fiscal position than "we currently expect, supported by the IMF programme."

The IMF has recently released its Executive Board's meeting schedule up to September 4, 2024, but Pakistan is not on the agenda, according to sources.

Despite this, the government remains optimistic that the country will secure approval for a $7 billion bailout package from the IMF next month, sources privy to the matters told Geo News. Pakistan and the IMF reached an agreement on the 37-month loan programme in July.

Moody's emphasised that sustained reform implementation, including revenue-raising measures, could increase the government revenue base and improve the country's debt affordability.

A record of completing IMF reviews promptly would also allow Pakistan to continually unlock financing from official partners, sufficient to meet its external debt obligations and support further rebuilding of its foreign exchange reserves, the agency added.

It said that the upgrade to Caa2 from Caa3 rating also applied to the backed foreign currency senior unsecured ratings for The Pakistan Global Sukuk Programme Co Ltd.

The associated payment obligations were, in their view, direct obligations of the Government of Pakistan, it said adding, that the outlook for The Pakistan Global Sukuk Programme Co Ltd was positive.

"Concurrent to today's action, we have also raised Pakistan's local and foreign currency country ceilings to B3 and Caa2 from Caa1 and Caa3, respectively."

Moody's explained that the two-notch gap between the local currency ceiling and sovereign rating was driven by the government's relatively large footprint in the economy, weak institutions, and high political and external vulnerability risk.

The two-notch gap between the foreign currency ceiling and the local currency ceiling reflects incomplete capital account convertibility and relatively weak policy effectiveness, according to the agency.