Cash-strapped Pakistan suffers a downgrade in debt rating from Moody’s

Moody’s Investors Service said it has downgraded the Pakistan government’s local and foreign currency issuer and senior unsecured debt ratings to ‘Caa3’ from Caa1.

The decision to downgrade the ratings is driven by Moody’s assessment that Pakistan’s “increasingly fragile liquidity” and external position significantly “raises default risks” to a level consistent with a Caa3 rating, the ratings agency said in a release.

Moody’s added that it has also downgraded the rating for the senior unsecured MTN programme to (P)Caa3 from (P)Caa1.

The agency further noted that it has changed the country’s outlook to “stable from negative”.

Pakistan’s foreign exchange reserves have fallen to “extremely low levels”, far lower than necessary to cover its imports needs and external debt obligations over the immediate and medium term, Moody’s.

Although the government is implementing some tax measures to meet the conditions of the International Monetary Fund (IMF) programme and a disbursement by the IMF may help to cover the country’s immediate needs, “weak governance and heightened social risks impede Pakistan’s ability to continually implement the range of policies that would secure large amounts of financing”, it added.

The stable outlook, as assigned to the country, reflects Moody’s assessment that the pressures that Pakistan faces are consistent with a Caa3 rating level, with broadly balanced risks.

“Significant external financing becoming available in the very near term, such as through the disbursement of the next tranches under the current IMF programme and related financing, would reduce default risk potentially to a level consistent with a higher rating,” it said.

However, in the current “extremely fragile” balance of payments situation, disbursements may not be secured in time to avoid a default, Moody’s noted.

“Moreover, beyond the life of the current IMF programme that ends in June 2023, there is very limited visibility on Pakistan’s sources of financing for its sizeable external payments needs,” it further said.

Pakistan’s foreign exchange reserves have dipped to around $2.9 billion, as per the data shared by the State Bank of Pakistan earlier this month. The forex reserves of the country have been sliding continuously for the past 13 months. It stood at $18 billion at the start of 2022.