Moody’s downgrades credit rating of Pakistan to ‘Caa1’

Moody’s Investors Service has downgraded Pakistan’s credit rating to ‘Caa1’ from ‘B3’ and maintained the outlook at negative due to increased government liquidity and external vulnerability risks.

Though Moody’s did not foresee Pakistan failing in arranging the required foreign financing as Islamabad remained under the International Monetary Fund’s (IMF) loan programme, it anticipated an increased reliance on multilateral and bilateral creditors instead of going to global financial markets to raise new debt.

“The Caa1 rating reflects Moody’s view that Pakistan will remain highly reliant on financing from multilateral partners and other official sector creditors to meet its debt payments, in the absence of access to market financing at affordable costs,” Moody’s said in an announcement.

“In particular, Moody’s expects that Pakistan’s IMF Extended Fund Facility (EFF) programme will remain in place and provide an avenue for financing from the IMF and other multilateral and bilateral partners in the near-term,” the announcement added.

Moody’s downgraded the Pakistan government’s local and foreign currency issuer and senior unsecured debt ratings to Caa1 from B3. It also downgraded the rating for the senior unsecured MTN programme to (P)Caa1 from (P)B3, while the outlook remained negative.

Giving its rational for the revised rating, Moody’s said that Pakistan’s economic outlook in the near- and medium-term had deteriorated sharply as a result of the floods, as the government’s preliminary estimates put the economic cost of the floods at about $30 billion.

The $30 billion estimate, amounting to 10% of the country’s gross domestic product (GDP), is far above the estimated economic cost of $10 billion during the 2010 floods, which had been the country’s worst flooding episode until this year.

Moody’s also projected Pakistan’s real GDP growth at 0-1% for the current fiscal year 2023, much lower than the pre-flood estimate of 3-4%. It said the floods would affect all sectors, but more acute impact was likely on the agriculture sector, which made up for about one-fourth of the national economy.

As the economy recovered from floods, Moody’s expected growth would pick up next year but stay below trend. The supply shock due to the floods would increase prices at a time when inflationary pressures had already been elevated.

The Pakistan government, however, strongly contradicted the Moody’s unilateral decision of downgrading its credit rating, saying that the rating agency verdict was based on incomplete information, Express Tribune reported.

Pakistan team held at least two meetings with Moody’s in the past 24 hours – till Thursday evening – to update the global rating agency on debt sustainability and pledges worth billions of dollars from global community to fight the flood devastation.

The rating action by Moody’s was strongly contested by the Finance Ministry, which said that it was carried out unilaterally and “without prior consultations and meetings with our teams from the Ministry of Finance and State Bank of Pakistan”.

After a regular stocktake of the economic and fiscal conditions, the ministry informed that the government policies over the last few months had helped in fiscal consolidation. “Government of Pakistan has adequate liquidity and financing arrangements to meet its external liabilities,” it said.

Despite going to the IMF program, economic experts termed the downgraded rating of Moody’s a worrying sign for the economy. On the other hand, the country’s foreign exchange reserves continue to decrease.

According to the SBP’s report, the foreign exchange reserves decreased by $17.31 million in the week ending September 30.

The SBP said that the domestic foreign exchange reserves stood at $13.58 billion on September 30. The SBP’s own reserves decreased by $10.61 million to $7.89 billion. The central bank said the deposits of commercial banks decreased by $6.7 million to $5.68 billion.

Economists said that despite Finance Minister Ishaq Dar bringing down the value of the dollar, he is not managing foreign exchange reserves and Moody’s downgrading Pakistan’s economy despite going into the IMF program is a disastrous situation for Pakistan’s economy.