Rising reserves may boost Pakistan’s rating: brokerage report

KARACHI: Pakistan’s credit ratings are expected to improve further due to rising foreign exchange reserves, aiding future bond issuance in global capital markets, a brokerage report said on Saturday.

Due to significant improvements in the external account, a steep decline in inflation, and a reduction in interest rates, the nation’s economy is steadily stabilising. Two rating agencies have already upgraded Pakistan’s rating by one notch, as a first indication of external stability, citing the country’s improving macroeconomic conditions supported by the new International Monetary Fund’s $7 billion loan programme. Pakistan’s long-term issuer rating was raised by one notch to CCC+ by Fitch in July, and then to Caa2 by Moody’s in August.

“We expect Pakistan rating to further improve going forward on the back of rising FX reserves, resultantly opening doors for issuance of long-term instruments in international capital markets in the next few years,” the brokerage house Topline Securities said in a detailed report.

This optimism comes at a time when key assumptions that were used to finalise the $7 billion deal with the IMF go awry within a month of its approval. According to official statistics, three of the four main underlying assumptions for achieving the nearly Rs13 trillion tax target -- the rate of economic growth, inflation, large-scale manufacturing, and imports -- had already proven incorrect by the end of the first quarter of the current fiscal year.

The Topline report stated that manageable external financing requirements are helping build up forex reserves. As of October 25, Pakistan’s central bank’s reserves amounted to $11.15 billion, which is sufficient to fund more than two months of imports. It is anticipated that the reserves will increase from $4.4 billion in June 2023 to $13 billion by June 2025. The successful conclusion of the previous IMF-supported standby arrangement and the start of a new Extended Fund Facility programme, which is anticipated to open further funding from bilateral and multilateral sources, are the reasons for the expected rise in reserves.

On the sidelines of the IMF/World Bank autumn meetings in Washington last month, Finance Minister Muhammad Aurangzeb said that the nation’s foreign exchange reserves should reach $13 billion by the end of March. This would aid in commercial lending and potentially improve the country’s credit rating, Reuters reported.

Aurangzeb also disclosed that Pakistan is currently in discussions with the Asian Infrastructure Investment Bank regarding a credit enhancement for a planned Panda bond. It is aiming an initial issuance of $200-250 million by the end of June.

According to the report, the current account deficit (CAD) is shrinking as a result of robust remittances and contained imports. It anticipates that CAD for FY25 will drop to $1.3 billion, or 0.3 per cent of GDP, from an average of $5.6 billion, or 1.7 per cent of GDP, in FY20-24.

“Pakistan external repayments (net of rollover and refinances) are expected at $10 billion for FY25, as per the Governor State Bank’s comment in one of the analyst briefing,” the report said.

“With current account deficit expectations of $1.3 billion for FY25, the gross financing requirement (net of rollover/refinances) is expected at $11.3 billion, a manageable amount in our view. As per the IMF document, Pakistan’s gross external financing requirement is at 9 9-year low of $18.8 billion, it added.

The report expects inflation during FY25 to average 7-8 per cent after recording 23.4 per cent in FY24. The sharper decline in the inflation rate is attributed to the higher base effect, faster disinflation in the food segment, and negative fuel cost adjustments in September and October.

“As a result, we expect the policy rate to come down to 12.5-13.5 per cent by June 2025 from the current level of 17.5 per cent and peak of 22.5 per cent in June.”

The report forecasts real GDP growth to be around 2.5-3 per cent in FY25 despite muted growth in agriculture amidst a weak cotton and wheat crop outlook. Growth is likely to be led by services sector on the back of the gradual resumption of economic activities.

Rupee to trade 277-282 per dollar by end-June

The rupee is expected to stay stable in the fiscal year 2025 supported by improved external account and higher financial inflows.

“The Pakistan rupee (PKR) on the back of external account stability and higher inflows has appreciated 2.6 per cent in FY24 and 0.3 per cent in FY25TD against the US dollar. We expect PKR/USD of 277-282 by June 2025 and Rs295-300 by June 2026,” said the Topline report.

The rupee traded in a narrow range against the dollar in the interbank market this week. closed at 277.68 to the dollar on Monday, and after losing value, it ended the day at 277.85 on Thursday. On Friday, though, the rupee bounced back from its losses and finished at 277.7.