Pakistan will continue to register large fiscal deficits in 2021 and beyond, says Moody’s Investor Services (Moody’s).
Moody’s, in its latest report “Sovereigns – Global, G-20 debt service freeze supports liquidity, high debt level challenges will intensify”, stated that reducing fiscal deficits will take time. The economic downturn will significantly constrain government tax receipts, while health and social spending pressures will persist, constraining debt-service capacity.
We expect that some countries such as the Maldives, Kenya, Mongolia, Pakistan, Sri Lanka will continue to register large fiscal deficits in 2021 and beyond.
Moody’s further stated that pressures from local-currency depreciation are a key risk for governments with high foreign-currency-denominated debt. The balance of payment pressure as highlighted in the first part of this report also raises the risk of sharp depreciation.
The G-20 debt suspension initiative is unlikely to ease the significant credit challenges that the coronavirus pandemic has amplified in some frontier market sovereigns, particularly in Africa.
By lowering debt-service payments at a time when government resources are limited and access to market financing is considerably constrained, the initiative will help to ease short-term liquidity pressures.
However, debt-service relief won’t have a significant impact on medium-term debt trends that have worsened during the crisis. Bilateral relief would only cover a fraction of the increased external funding gap resulting from the shock, Moody’s stated.
The size of the potential liquidity relief offered by this initiative varies between sovereigns, in proportion to their level of debt owed to official creditors. Each eligible sovereign’s decision to seek debt forbearance is likely to be in part a function of the immediate need for liquidity relief and the magnitude of potential relief on offer.
We estimate that Angola, Vietnam, Pakistan (B3 RUR-), Bangladesh (Ba3 stable), Sri Lanka (B2 RUR-), and Kenya have the highest debt-service payments to official creditors as a share of GDP, at between 1% and 4%.
It further stated that participation of the private sector in liquidity relief could have negative credit and rating implications as this could constitute an event of default under our definition. The willingness and capacity of sovereigns to secure liquidity relief from official creditors without involving private creditors is, therefore, a key credit consideration.
Moody’s recently initiated a review for downgrade following the Government of Ethiopia’s explicit commitment (in the context of its application for IMF support) to seek debt-service relief from bilateral creditors under the auspices of the G-20 initiative. A similar action was taken on the credit rating of Pakistan.
Those reviews will allow Moody’s to determine if receiving relief under the G-20 initiative will indeed be implemented without private sector participation – an outcome which could lead to the ratings being confirmed at their current level – and, if not, whether any losses expected to arise from that participation would be consistent with a lower rating, Moody’s added.