Moody’s reading

Moody’s Investors Service has lowered the government’s local and foreign currency issuer and senior unsecured debt ratings by a notch – and the move has not sat well with our freshly repatriated finance minister. A veteran of the ministry for around a quarter century now, Senator Ishaq Dar has publicly insisted that the credit rating agency acted in undue haste. Dar may want to make allowance for the fact that the primary duty of a credit rating agency is towards global corporate finance, not creditors. And a rating action on which real world investment decisions ride can hardly be swift enough. On the other hand, Dar may have a point. Moody’s believes Pakistan’s institutions and governance strength have not materially changed. One could argue that they have, with the avowal by institutions to stay within their constitutional mandate.

Moody’s believes Pakistan’s fiscal or financial strength, including its debt profile; and its susceptibility to event risks have not materially changed. And yet it declares that the country’s economic fundamentals, including its economic strength, have materially decreased. Dar could argue a return of fiscal sanity is a major plus and must be factored in. There is no question that Dr Miftah Ismail’s clinical economic management was a far cry from the days of Asad Umar – and that it made a world of difference. And if the markets are anything to go by, Dar’s arrival has been an improvement. If the methodology Moody’s is using does not count that as an improvement, it may be due for an overhaul.

Dar’s view that Moody’s took precipitate action may be based on the fact that multilateral lenders are in high gear helping Pakistan in the wake of the flooding disaster. The World Bank has already announced $2 billion in assistance, and the ADB is scrambling to inject another $2.5 billion in the country’s economy for reconstruction in the wake of the floods. More than half of this assistance will flow into the Pakistani exchequer within this fiscal, including some this month. How, then, could Moody’s take the shock from the flooding disaster into account and leave out the activities (and finances) triggered by the disaster? Also, the drastic cut applied by Moody’s to Pakistan’s GDP growth forecast for the current fiscal year, pushing it to 0-1 per cent, is rather unkind. The World Bank – one of the UN system institutions that have been on the ground in Pakistan in the wake of the flooding disaster – has halved the country’s growth forecast and it was still 2 per cent, placing a question mark on the discrepancy of a percentage point between the two numbers.

Moody’s may have been spurred into action by the talk of Pakistan’s bilateral debt rescheduling that originated in a benevolent gesture by French President Emmanuel Macron, who graciously proposed to call a meeting of Pakistan’s lenders to discuss a reworking of Pakistan’s foreign debt. The problem is that the methodology used by Moody’s considers debt rescheduling as default – which is fair enough because why would you reschedule a debt if you could pay it off? However, Moody’s needs to realise that the purported rescheduling in this case was not on the creditor’s instance; and that tapping into climate finance is a legitimate avenue for creditors like Pakistan; and that a rescheduling at the lenders' instance, in view of a cataclysmic disaster hitting the creditor, must not be classified as default. In his response to Moody’s, Dar could be trying to counteract the negative signal sent to the markets. And, while he may have a case, he would do well to remember that all the bilateral financing he has lined up, all the export dollars he is eying, all the foreign direct investment he think he can attract, and nearly all the gains he hopes to reap from the depreciation of the rupee, are mere projections as of now. He should know well enough that in the hard-nosed world of finance, the bird in hand is the only bird that counts. And again: credit rating agencies are there to serve lenders, not creditors.