Moody’s Investors Service has downgraded the Government of Pakistan’s local and foreign currency issuer and senior unsecured debt ratings to Caa1 from B3. It has also downgraded the rating for the senior unsecured MTN programme to (P)Caa1 from (P)B3. The outlook remains negative.
The decision to downgrade the ratings to Caa1 is driven by increased government liquidity and external vulnerability risks and higher debt sustainability risks, in the aftermath of devastating floods that hit the country since June 2022.
The floods have exacerbated Pakistan’s liquidity and external credit weaknesses and vastly increase social spending needs, while government revenue is severely hit. Debt affordability, a long-standing credit weakness for Pakistan, will remain extremely weak for the foreseeable future.
The Caa1 rating reflects Moody’s view that Pakistan will remain highly reliant on financing from multilateral partners and other official sector creditors to meet its debt payments, in the absence of access to market financing at affordable costs.
In particular, Moody’s expects that Pakistan’s IMF Extended Fund Facility (EFF) program will remain in place and provide an avenue for financing from the IMF and other multilateral and bilateral partners in the near term.
The negative outlook captures risks around Pakistan’s ability to secure the required financing to fully meet its needs in the next few years. Elevated social and political risks compound the government’s difficulty in implementing reforms, including revenue-raising measures that would improve the country’s fiscal position and alleviate liquidity stresses.
The floods will also raise Pakistan’s external financing needs, raising the risks of a balance of payments crisis. Pakistan’s weak institutions and governance strength adds uncertainty around whether the country will maintain a credible policy path that supports further financing. The negative outlook also captures risks that, should a debt restructuring be needed, it may extend to private sector creditors, added the credit rating agency.
The Caa1 rating also applies to the backed foreign currency senior unsecured ratings for The Third Pakistan International Sukuk Co Ltd and The Pakistan Global Sukuk Programme Co Ltd. The associated payment obligations are, in Moody’s view, direct obligations of the Government of Pakistan.
Concurrent to today’s action, Moody’s has lowered Pakistan’s local and foreign currency country ceilings to B2 and Caa1 from B1 and B3, respectively. The two-notch gap between the local currency ceiling and sovereign rating is driven by the government’s relatively large footprint in the economy, weak institutions, and relatively high political and external vulnerability risk.
The two-notch gap between the foreign currency ceiling and the local currency ceiling reflects incomplete capital account convertibility and relatively weak policy effectiveness, which point to material transfer and convertibility risks notwithstanding moderate external debt.
