Moody’s Investors Service (“Moody’s”) has lowered the local and foreign currency issuer and senior unsecured debt ratings of the government of Pakistan to Caa3 from Caa1.
Moody’s has also lowered the senior unsecured MTN programme rating from (P)Caa1 to (P)Caa3.
Simultaneously, Moody’s has altered the outlook from negative to stable.
Moody’s judgement that Pakistan’s increasingly weak liquidity and external situation significantly increase default risks to a level commensurate with a Caa3 rating led to the decision to lower the ratings.
In particular, the country’s foreign exchange reserves have plummeted to levels much below what is required to fulfil its immediate and medium-term import requirements and external debt commitments. Although the government is implementing some tax measures to meet the conditions of the IMF programme and a disbursement from the International Monetary Fund (IMF) may help to cover the country’s immediate needs, weak governance and heightened social risks hinder Pakistan’s ability to consistently implement the range of policies that would secure large amounts of financing and decisively mitigate balance of payments risks.
The stable outlook reflects Moody’s judgement that Pakistan’s difficulties are commensurate with a Caa3 credit level and broadly balanced risks. Substantial external finance becoming available in the very near future, such as through the payment of the subsequent tranches under the existing IMF programme and linked financing, would potentially lower default risk to a level commensurate with a higher rating.
With the current exceedingly precarious state of the balance of payments, disbursements may not be secured in time to prevent a default.
However, beyond the term of the current IMF programme, which expires in June 2023, the sources of financing for Pakistan’s substantial foreign payments demands are opaque.
The Pakistan Global Sukuk Programme Co Ltd’s backed foreign currency senior unsecured ratings have likewise been downgraded from Caa1 to Caa3. According to Moody’s, the associated payment commitments are direct responsibilities of the Government of Pakistan.
Moody’s has downgraded Pakistan’s local and foreign currency nation ceilings to Caa1 and Caa3, respectively, from B2 and Caa2, concurrently with today’s action.
The two-notch difference between the local currency ceiling and the sovereign rating is a result of the government’s relatively wide economic footprint, poor institutions, and relatively high political and external vulnerability risk.
The two-notch difference between the foreign currency ceiling and the local currency ceiling implies insufficient convertibility of the capital account and relatively weak policy efficacy. It also takes into consideration material risks associated with the imposition of transfer and convertibility limitations.