Fitch cuts Pakistan’s sovereign credit rating to ‘CCC+’ from ‘B-’

KARACHI: Global ratings agency Fitch cut Pakistan's sovereign credit rating on Friday by a notch to 'CCC+' from 'B-', citing further deterioration in the country's external liquidity and funding conditions and a drop in foreign exchange reserves.

Fitch does not assign outlooks to sovereigns with a rating of 'CCC+' or below.

"The downgrade reflects further deterioration in Pakistan's external liquidity and funding conditions, and the decline of foreign-exchange (FX) reserves," ratings agency said in a statement. "This is partly a result of widespread floods, which will undermine Pakistan's efforts to rein in twin fiscal and current account deficits."

The statement said the downgrade reflects Fitch view of increased risks of policies potentially undermining Pakistan's IMF programme and official financial support.

"The country's falling reserves reflect large, albeit, declining current account deficits (CADs), external debt servicing and earlier foreign currency interventions by the State Bank of Pakistan."

Fitch said the CAD reached $17 billion in the fiscal year to June 2022 (FY22), driven by soaring oil prices and higher non-oil imports on strong private consumption. "Fiscal tightening, higher interest rates and measures to limit energy consumption and imports underpin forecast for the CAD to narrow to $10 billion (2.7 percent of GDP) in FY23, despite the hit to export revenue and import needs after the recent floods." Lower imports and commodity prices helped to narrow the CAD in recent months, to about $300 million in September.

The ratings firm said Pakistan's external public debt maturities in FY23 are over $21 billion, mostly to bilateral and multilateral creditors, which mitigates rollover risks, and there are already agreements to roll over some of these.

The authorities estimate the flood damage at $10 billion-$30 billion, but reconstruction costs are likely to be lower, as is the impact on Pakistan's twin deficits.

"Pakistan recently received funding commitments of $2.5 billion from the World Bank and Asian Development Bank... although we understand that much of this is repurposed from ongoing programmes."

"It remains unclear to what degree the IMF will be able to relax Pakistan's programme targets, or augment Pakistan's access under the EFF." Fitch said Pakistan will continue to receive disbursements under its IMF programme, but risks to this have risen. "Fuel-price cuts from October 1, may not be compatible with commitments to the IMF."

"A quarterly electricity tariff adjustment due in October has yet to happen. The new finance minister has reaffirmed commitment to the programme, but prefers a strong exchange rate, and may revisit the SBP law that was amended in early 2022 to grant the SBP greater autonomy, as previously agreed with the IMF."

The statement said former prime minister Imran Khan, who was ousted in a no-confidence vote on April 10 continues to put political pressure on the government, organising protests across the country calling for early elections.

"Khan's PTI party won by-elections in the key Punjab province in July, defeating the incumbent PML-N, and PTI won more national and provincial seats in by-elections on 17 October. Regular elections are due in October 2023, creating the risk of policy slippage after the conclusion of the IMF programme due in June."

Fitch expects a narrowing of the fiscal deficit to 6.2 percent of GDP (about Rs5 trillion or $23 billion) in FY23, driven by some spending restraint and higher taxes.

"We expect debt/GDP to fall to 70 percent in FY23 and continue decreasing, helped by high inflation and a modest primary deficit. A low FX exposure at just over 3 percent of total debt limits the negative impact of currency depreciation on debt dynamics."

The agency forecasts GDP growth to decelerate to about 2 percent in FY23, from 6 percent in FY22, amid fiscal and monetary tightening, high imported inflation, a weak external demand outlook, and flood-related disruptions. "This is broadly in line with the government's forecast, down from its initial target of 5 percent and a 3.5 percent forecast in the IMF programme. The 2010-2011 floods contributed to Pakistan's weak recovery after the global financial crisis."