From stable to positive–Pak bond clambers


Strengthening of external liquidity position, continued efforts toward fiscal consolidation and steady progress in achieving IMF-agreed structural reforms responsible for Moody’s rating promotion

Moody’s Investors Service has revised the outlook on Pakistan’s foreign currency government bond rating to positive from stable.

According to Moody’s Investors Service, the rating was affirmed at ‘Caa1′ and Moody’s has affirmed the government’s issuer rating and senior unsecured rating at Caa1.

The Caa1 rating was also affirmed for US dollar Trust Certificates issued by the Second Pakistan International Sukuk Company Limited.

Moody’s decision to revise the outlook on Pakistan’s foreign currency rating was based on strengthening of external liquidity position, continued efforts toward fiscal consolidation and government’s steady progress in achieving structural reforms under the IMF programme, it added.

The Moody further said that net foreign reserves with the State Bank of Pakistan climbed to $11.2 billion as of March 13, from $3.2 billion at the end of January 2014.

The cushion provided by foreign reserves coupled with dwindling external debt repayments to the IMF has reduced external vulnerabilities.

This has in large part resulted from a lower current account deficit, which was easily financed by the issuance of a Eurobond in April 2014, a Sukuk issuance in December, continued disbursements under the IMF programme and privatization proceeds.

The narrowing of the current account deficit to 1.2 percent of GDP in the fiscal year ended June 2014 (FY2014) from 2.1 percent in FY 2012 was largely due to the steady uptick in workers’ remittances and receipt of anti-terrorism Coalition Support Funds from the US.

“We estimate that the current account will narrow further in fiscal 2015 to 0.8 percent of GDP, on account of the fall in Oil prices,” Moody’s said, adding that although wide fiscal deficits and high debt levels remain a credit constraint, Pakistan has made progress towards fiscal consolidation.

In FY 2014, the government was able to bring the deficit down to 5.5 percent of GDP (excluding grants), from 8.2 percent the previous year.

The government was targeting a further shrinkage in the deficit, to 4.9 percent of GDP in FY 2015.

Although the pace of deficit reduction may be less marked than the budget forecasts suggest, we expect the authorities will continue along the path of fiscal consolidation.

The government has relied on the banking system for deficit financing, but such borrowing is gradually declining as privatization proceeds, and the Eurobond and Sukuk issuances, have helped it to diversify funding.