Fitch, a major ratings agency, downgraded Pakistan’s sovereign credit rating on Friday, dropping it from “B-” to “CCC+” due to deteriorating external liquidity and funding conditions as well as a decline in foreign exchange reserves.
The decrease occurs three months after Fitch downgraded the country’s outlook from “stable” to “negative” and reduced the ranking to B-.
Typically, sovereigns with ratings of “CCC+” or lower are not given outlooks by Fitch.
The country’s economy, already in disarray due to a growing current account deficit, inflation above 20%, and steep depreciation of the rupee, has been further undermined by recent catastrophic floods in Pakistan.
The floods, which have killed over 1,700 people and damaged the economy by more than $30 billion, would jeopardize Pakistan’s efforts to reduce its twin budget and current account deficits, according to the agency.
On the policy front, Fitch stated that while it still presumed Pakistan will continue to receive payments under its IMF program, risks to this had increased.
Up to $2.5 billion has been pledged by the Asian Development Bank (ADB) to Pakistan, of which $1.5 billion would be provided by next week as part of the Balochistan Rural Development and Community Empowerment initiative.
Moody’s Investor Service downgraded Pakistan’s sovereign credit rating earlier this month from B3 to Caa1, citing higher government liquidity and external vulnerability risks in the wake of the devastation caused by the floods.
The New York-based rating agency stated that “the outlook remains negative,” noting that the floods have exacerbated Pakistan’s liquidity and external credit problems and significantly raised the country’s social spending demands, while severely hurting government revenue.
For the foreseeable future, Pakistan’s credit situation will continue to be very weak due to its long-standing issue with debt affordability. According to the agency, the downgrade has pushed the nation into the C-category after seven years, or in March 2015.
Ishaq Dar, the finance minister, thought there was “no cause for concern.”
A day after Moody’s downgraded the company, he threatened to respond in a “befitting” manner at a meeting with agency representatives the following week if the agency did not overturn the downgrade.
“They (Moody’s representatives) need to meet me. In an interview with the media in Islamabad, he had remarked, “I told them if you don’t [reverse] this, I will give you a befitting reaction in our meeting next week.
Dar asserted that he had met with representatives of the agency and advised them that they “should not have done it.”
The finance minister had stated that Pakistan should have been notified before the downgrade and that there was “no cause for concern” given rating agency Fitch had similarly downgraded the United Kingdom earlier this week.
These rating firms’ primary focus is on bonds. In April 2014, we offered $500 million in bonds, and demand was 14 times greater than supply.
“We have already responded. I’ve also had positions with multinational organizations. He agreed that it was impossible for them (Moody’s) to reverse [the downgrade], but he insisted that he would still respond to the agency in a “befitting manner.”
The downgrade by Moody’s was also disputed by the government, which claimed that it was made “unilaterally without prior consultations and meetings with teams from the Ministry of Finance and State Bank of Pakistan.”