Pakistan’s B3 rating reflects strengthening growth, progress on structural reforms
Moody’s Investors Service says Pakistan’s B3 issuer rating balances strengthening growth and progress on structural reforms against a relatively high government debt burden and political risks.
Moody’s conclusions are contained in its just-released Credit Analysis “Government of Pakistan — B3 Stable,” which looks at the country’s credit profile in terms of Economic Strength (assessed as “Moderate”); Institutional Strength (“Very Low “); Fiscal Strength (“Very Low (-)”); and Susceptibility to Event Risk (“High”).
These represent the four main analytic factors in Moody’s Sovereign Bond Ratings Methodology. The analysis constitutes an annual update to investors and is not a rating action.
Moody’s assessment of Pakistan’s “Moderate” economic strength encompasses the sovereign’s very low per capita incomes and the large size of its economy.
Economic output, previously anemic, has picked up in recent years and is now rising at a relatively healthy pace. GDP growth has edged up to an average of 4.1 per cent year-on-year since FY2014, from 3.4 per cent between FY2010-13. The implementation of the China-Pakistan Economic Corridor (CPEC) will likely support the activity further, and in concert with energy sector reforms will improve the operating environment for investment.
Moody’s assessment of institutional strength as “Very Low” reflects Pakistan’s weak but improving rankings on governance survey indices, specifically the World Bank’s Worldwide Governance Indicators. It also takes into account the central bank’s management of inflation and monetary policy, and progress on reforms under the ongoing IMF programme.
Moody’s “Very Low (-)” assessment of Pakistan’s fiscal strength reflects the country’s moderately large debt burden and weak revenue base, which lower debt affordability relative to peers. The share of foreign currency debt to total general government debt has considerably declined in the last five years. But such borrowing still comprises about a third of total public debt, leaving government finances exposed in the event of exchange rate depreciation or financial market volatility.
Moody’s assessment of Pakistan’s vulnerability to event risks as “High” is driven by political risks, both domestic and geopolitical.
The government’s relatively large annual borrowing needs, in particular owing to large rollover requirements, are also a constraint. However, recent efforts to lengthen the maturities of domestic debt will likely contain these risks in the future.
At the same time, modest external financing needs limit external vulnerability risks.