Pakistan's ratings downgraded to Caa1 after 7 years by Moody's

SINGAPORE: The Government of Pakistan's local and foreign currency issuer and senior unsecured debt ratings on Thursday were downgraded to Caa1 from B3 by Moody's Investors Service (Moody's) after seven years.

The credit-rating agency has also downgraded the rating for the senior unsecured Medium Term Note (MTN) programme to (P)Caa1 from (P)B3. Pakistan's outlook remains negative.

Commenting on this development, Alpha Beta Core CEO Khurram Schehzad said: “This is surprising that we are downgraded despite having the International Monetary Fund (IMF) support, which indicates the risks still persisting despite having IMF on our side.”

The bond credit rating service said decision to downgrade the ratings to Caa1 is driven by increased government liquidity and external vulnerability risks and higher debt sustainability risks, in the aftermath of devastating floods that hit the country since June 2022.

“The floods have exacerbated Pakistan's liquidity and external credit weaknesses and vastly increase social spending needs, while government revenue is severely hit,” a statement issued by the international body read.

The rating agency said that debt affordability, a long-standing credit weakness for Pakistan, “will remain extremely weak for the foreseeable future”.

'Pakistan will remain reliant on financing from partners'

“The Caa1 rating reflects Moody's view that Pakistan will remain highly reliant on financing from multilateral partners and other official sector creditors to meet its debt payments, in the absence of access to market financing at affordable costs,” it said.

“In particular, Moody's expects that Pakistan's IMF Extended Fund Facility (EFF) programme will remain in place and provide an avenue for financing from the IMF and other multilateral and bilateral partners in the near term.

Moody’s said the negative outlook captures risks around Pakistan's ability to secure required financing to fully meet its needs in the next few years.

“Elevated social and political risks compound the government's difficulty in implementing reforms, including revenue-raising measures, that would improve the country's fiscal position and alleviate liquidity stresses.

“The floods will also raise Pakistan's external financing needs, raising the risks of a balance of payments crisis. Pakistan's weak institutions and governance strength adds uncertainty around whether the country will maintain a credible policy path that supports further financing,” it said.

Is debt restructuring required?

According to the statement, the negative outlook also captures risks that, should a debt restructuring be needed, it may extend to private sector creditors.

It should be noted that the Caa1 rating also applies to the backed foreign currency senior unsecured ratings for the Third Pakistan International Sukuk Co Limited and the Pakistan Global Sukuk Programme Co Limited. The associated payment obligations are, in Moody's view, direct obligations of the Government of Pakistan.

Concurrent to today's action, Moody's lowered Pakistan's local and foreign currency country ceilings to B2 and Caa1 from B1 and B3.

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

“The gap reflects incomplete capital account convertibility and relatively weak policy effectiveness, which point to material transfer and convertibility risks notwithstanding moderate external debt,” Moody’s said.