Pakistan Needs Reforms to Resolve Fiscal & External Imbalances: Moody’s

The implementations of reforms that address both fiscal and external imbalances remain key to supporting the sovereign credit profiles of Pakistan, says Moody’s Investors Service.

Moody’s, in its latest report, “Sovereigns — Global, 2019 outlook still stable, but slowing growth signals increasingly diverging prospects”, states that the implementation of reforms that address both fiscal and external imbalances are the key to support the sovereign credit profiles of Turkey, Argentina, Pakistan (B3 negative), Sri Lanka and Zambia.

The report further states that looking at the size and composition of the balance of payments and foreign exchange reserves; Moody’s views Pakistan as the emerging and frontier market sovereign that is most vulnerable to currency depreciation.

Each issuer’s vulnerability will depend on the structure and composition of its debt. Some are more exposed to currency shocks; others to interest rate shocks. Looking at the size and composition of the balance of payments and foreign exchange reserves, we view Argentina, Turkey, Ghana (B3 stable), Mongolia, Pakistan, Sri Lanka and Zambia as the emerging and frontier market sovereigns that are most vulnerable to currency depreciation.

Meanwhile, rising funding costs will weigh most heavily on the credit profiles of sovereigns with relatively high debt burdens, weak debt affordability and smaller fiscal buffers.

The outlook for sovereign creditworthiness in 2019 is stable, balancing the global economy’s continued but slowing growth momentum against rising uncertainty over longer-term economic and financial stability, says Moody’s.

Although a number of risks could affect credit conditions over the next 12 to 18 months, three-quarters of the 138 sovereigns, that Moody’s rates currently, have a stable outlook and 15 hold a positive outlook. Nineteen sovereigns have a negative outlook, compared to 22 a year ago.

High debt, falling growth and rising rates expose sovereigns to the risk of shocks that undermine debt affordability and sustainability. A number of emerging and frontier markets are particularly exposed to tightening global financial conditions and rising US trade protectionism.

Around the world, the longer-run credit trajectory for sovereigns will depend on the success of reform efforts that address these vulnerabilities.