Moody’s Assigns B3 Rating to Pakistan’s US Dollar-Denominated Sukuk Offering

Moody’s Investors Service (“Moody’s”) has today assigned a B3-backed senior unsecured rating to the proposed US dollar-denominated trust certificates (Sukuk) issuance by the Government of Pakistan.

The rating was assigned after the Sukuk denomination request through The Pakistan Global Sukuk Programme Company Limited (“the Company”), a special purpose vehicle, which is wholly-owned by the Government of Pakistan and whose debt and trust certificate issuances are, in Moody’s view, ultimately the obligation of the Government of Pakistan.

The assigned rating to the Sukuk mirrors the Government of Pakistan’s current issuer rating. According to the terms and conditions available to Moody’s, the trust certificates will constitute direct, unconditional, and unsubordinated obligations of the Government of Pakistan. In Moody’s opinion, the payment obligations represented by the securities to be issued by the Company rank pari passu with all of the Government of Pakistan’s current and future senior unsecured external debt.

Proceeds from the Sukuk issuance will be used by the Company to purchase assets from the National Highway Authority. The amounts subsequently received by the Government of Pakistan in consideration for the transaction will be used for general budgetary purposes.

Factors that could lead to an upgrade or downgrade of the rating

Upward pressure on Pakistan’s rating would develop if ongoing fiscal reforms were to expand the government’s revenue base, raise debt affordability, and lower its debt burden beyond our current expectations. A structural reduction in external vulnerability risks, including through higher levels of foreign exchange reserve adequacy that were sustainable and/or increased economic competitiveness that was to lift export prospects, would also put upward pressure on the rating.

Downward pressure on the rating would stem from renewed deterioration in Pakistan’s external position, including through a significant widening of the current account deficit and erosion of foreign exchange reserve buffers, which would threaten the government’s external repayment capacity and heighten liquidity risks.

A continued rise in the government’s debt burden, without prospects for stabilization over the medium term, would also put downward pressure on the rating. In addition, participation in official sector debt relief programs that raised the probability of private sector participation would likely point to a lower rating, commensurate with the potential losses to be incurred.

On the flip side, Fitch Ratings has assigned Pakistan’s proposed US-dollar sovereign global Sukuk certificates, which will be issued through The Pakistan Global Sukuk Programme Company Limited, a ‘B-‘ rating.

The Pakistan Global Sukuk Programme Company Limited is a legal entity in Pakistan and is the issuer and trustee of the Sukuk, incorporated primarily for the purpose of participating in the Sukuk transaction. It is wholly owned by Pakistan.

The rating is sensitive to any changes in Pakistan’s Long-Term Foreign-Currency Issuer Default Rating (IDR), which Fitch affirmed at ‘B-‘ with a Stable Outlook in May 2021.