According to a source: The rating agency says Pakistan’s Rating sources of financing for its “sized external payments needs” are “very limited.”
As Pakistan’s Rating struggles to resurrect a long-suspended International Monetary Fund (IMF) loan Moody’s Investors Service downgraded its local and foreign currency issuer and senior unsecured debt rating to Caa3 from Caa1.
As part of a stalled bailout package of $6.5 billion, originally approved in 2019, Islamabad is negotiating with the Washington-based money lending institution for a $1.1 billion loan.
In addition, Moody’s lowered the senior unsecured MTN’s rating from (P) Caa1 to (P) Caa3. Also, it modified the outlook from negative to steady.
According to Moody’s, the country’s foreign exchange reserves have fallen to extremely low levels, far below what is required to cover its import needs and external debt obligations in the short and medium term.
Governance is weak
Despite some tax measures being implemented by the government to meet the requirements of the IMF program, and the disbursement of a loan tranche possibly covering the country’s immediate needs, the rating agency said. Pakistan’s ability to implement policies that secure large amounts of financing and decisively mitigate balance of payments risks is hindered by weak governance and high social risks.
The stable outlook reflected Moody’s assessment that Pakistan’s Rating is facing pressures consistent with a Caa3 rating level with broadly balanced risks.
Reduction of default risks
The provision of significant external financings such as the disbursement of the next tranches under the current IMF program and related financing may reduce default risk to a level comparable to a higher rating.
As a result of the current extremely fragile balance of payments situation, Moody cautions that disbursements may not be secured in time to avoid a default.
Furthermore, Pakistan’s sources of financing for its sizeable external payment needs are not clear beyond the expiration of the current IMF program in June 2023.
In addition to the downgrade to Caa3, Moody’s also downgraded the Pakistan Global Sukuk Programmed Co Ltd’s senior unsecured ratings backed in foreign currency to Caa3. Moody’s believes that the associated payment obligations are the Government of Pakistan’s direct obligations.
Downgrade rationale
According to Moody’s rationale for downgrading to Caa3, government liquidity, and external vulnerability risks have increased since its last review in October 2022.
A critical low level of Pakistan’s foreign exchange reserves enough to cover less than one month’s imports has been reached. Pakistan may not be able to secure sufficient financing for the remainder of fiscal 2023 (ending June 2023) owing to delays in securing official sector funding.
According to the reported liquidity and external vulnerability, risks will remain elevated beyond this fiscal year, while prospects of the country’s foreign exchange reserves materially increasing are low.
Needs for external financing
In addition to the outstanding $7 billion external debt payments due for the remainder of the fiscal year ending June 2023. Moody’s estimates Pakistan’s external financing needs will be around $11 billion. Taking into account a sharp contraction in imports, the remaining deficit includes the current account deficit.
Pakistan would have to obtain financing from the IMF and other multilateral and bilateral partners to meet its financing needs according to Moody’s.
IMF’s ninth review is critical
A successful ninth review of the existing IMF program would in turn catalyze financing from other multilateral and bilateral sources.
The government will also need to secure $3.3 billion worth of refinancing from Chinese commercial banks for the remainder of this fiscal year in order to roll over the $3 billion China SAFE deposits. Pakistan has already received $700 million from the China Development Bank of this $3.3 billion it said.
Fragile
Despite this year’s external payment needs to be met the liquidity and external position next year will remain extremely fragile.
The future of Pakistan’s financing options beyond June 2023 remains highly uncertain. It is unclear whether another IMF program is being discussed, and if so how long the negotiations would last and what conditions would be attached.
Pakistan, however, is unlikely to be able to secure sufficient financing from multilateral or bilateral partners without an IMF program.
With energy subsidies being removed, headline inflation is likely to rise further according to Moody’s.
Reform measures to increase fiscal revenue will also remain key to unlocking further financing from the IMF as they will help to reduce debt sustainability risks.
The IMF must continue to engage
It is likely that continued IMF engagement, beyond the current program, will support additional financing from other multilateral and bilateral partners, which would reduce default risk if it were achieved urgently and without raising social pressures further according to Moody’s.
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