SINGAPORE: Moody’s Investors Service says that Pakistan’s Caa1 government bond rating with a negative outlook reflects the country’s very low institutional and fiscal strength, its weakened external position and large government financing needs.
Moody’s views were outlined in its just-released Credit Analysis on the Government of Pakistan.
The report elaborates on Pakistan’s credit profile in terms of Economic Strength, Institutional Strength, Fiscal Strength and Susceptibility to Event Risk, which are the four main analytic factors in Moody’s Sovereign Bond Rating Methodology.
Moody’s notes in recent months, Pakistan has made progress under the Extended Fund Facility (EFF) agreement, which it signed with the International Monetary Fund (IMF) in July 2013. Under the agreement, Pakistan envisages implementing reforms in the energy sector, improving tax administration, and privatizing some of its public enterprises. A successful completion of the challenging program of reform would address constraints on economic growth and reduce fiscal imbalances, thus improving the sovereign’s credit profile.
IMF program disbursements, coupled with a recent sovereign bond issuance and the receipt of grants have also helped to reverse the decline in official foreign-exchange reserves, bolstering thinned external buffers and reducing to some degree vulnerability to a sudden stop in capital inflows.
In the near term, large fiscal imbalances and debt structure weaknesses, coupled with a narrow tax base and heavy reliance on the banking system for deficit financing will likely remain credit constraints.
Apart from the successful implementation of structural policy reforms, other key triggers for an upward revision in the rating include improvements in domestic and regional political stability and a sustained build-up in external liquidity.
A combination of factors would prompt a further downgrade. These factors include a substantial worsening of the domestic political environment and significant further deterioration in the policy framework and investor confidence. A relapse in which official foreign-exchange reserves decline again would be credit negative as it would materially increase the probability of default.