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Moody’s downgrades Pakistan as default risks deepen

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  • Moody’s says weak governance threat to policy execution.
  • Hopes expcted external financing to help cut default risks.
  • Says liquidity, external vulnerability risks continue to increase. 

SINGAPORE: Moody’s Investors Service Tuesday slashed Pakistan’s sovereign credit rating to ‘Caa3’ amid critical loan talks with the International Monetary Fund (IMF), arguing that the worsening liquidity situation was “significantly raising default risks.”

The cash-strapped nation has been in talks with the IMF to secure a $1 billion loan, which has been pending since late last year over policy issues. It is part of a stalled $6.5 billion bailout package, originally approved in 2019.

Moody’s has also reduced the rating for the senior unsecured MTN programme to (P)Caa3 from (P)Caa1. Concurrently, it has also changed the outlook to stable from negative.

“In particular, the country’s foreign exchange reserves have fallen to extremely low levels, far lower than necessary to cover its import needs and external debt obligations over the immediate and medium term,” said Moody’s in a statement.

Weak governance 

The rating agency said that although the government was implementing some tax measures to meet the conditions of the International Monetary Fund (IMF) programme and the disbursement of a loan tranche might help to cover the country’s immediate needs, weak governance and heightened social risks impede Pakistan’s ability to continually implement the range of policies that would secure large amounts of financing and decisively mitigate risks to the balance of payments.

Moody’s said that the stable outlook reflected its assessment that the pressures that Pakistan was facing were consistent with a Caa3 rating level, with broadly balanced risks.

Default risks to reduce

“Significant external financing becoming available in the very near term, such as through the disbursement of the next tranches under the current IMF programme and related financing, will reduce default risk potentially to a level consistent with a higher rating.”

“However, in the current extremely fragile balance of payments situation, disbursements may not be secured in time to avoid a default,” Moody’s statement added.

“Moreover, beyond the life of the current IMF programme that ends in June 2023, there is very limited visibility on Pakistan’s sources of financing for its sizeable external payments needs,” it added.

Moody’s said that the downgrade to Caa3 from Caa1 rating also applies to the backed foreign currency senior unsecured ratings for the Pakistan Global Sukuk Programme Co Ltd. The associated payment obligations are, in Moody’s view, direct obligations of the Government of Pakistan.

Rationale for downgrade

In its rationale for the downgrade to Caa3, Moody’s said that the government liquidity and external vulnerability risks have risen further since Moody’s last review in October 2022.

“Pakistan’s foreign exchange reserves have declined to a critically low level, sufficient to cover less than one month of imports. Amid delays in securing official sector funding, risks that Pakistan may not be able to source enough financing to meet its needs for the rest of fiscal 2023 (ending June 2023) have increased.”

“Beyond this fiscal year, liquidity and external vulnerability risks will continue to be elevated. At the same time, prospects of the country materially increasing its foreign exchange reserves are low,” it said.

External financial needs 

Overall, Moody’s estimates that Pakistan’s external financing needs for the rest of the fiscal year ending June 2023 to be around $11 billion, including the outstanding $7 billion external debt payments due. The remainder includes the current account deficit, taking into account a sharp narrowing as imports have contracted markedly.

Moody’s said that in order to meet its financing needs, Pakistan would need to secure financing from the IMF and other multilateral and bilateral partners.

Critical ninth IMF review 

“Moody’s assumes successful completion of the ninth review of the existing IMF programme, although this is not secured yet. This would in turn catalyse financing from other multilateral and bilateral partners.”

“At the same time, the government will also need to obtain the rollover of the $3 billion China SAFE deposits and secure $3.3 billion worth of refinancing from Chinese commercial banks for the rest of this fiscal year. Of this $3.3 billion, Pakistan has already received a deposit of $700 million from the China Development Bank on 24 February 2023,” it said.

Extremely fragile

The rating agency said that while this year’s external payments needs may be met, the liquidity and external position next year would remain extremely fragile.

“Pakistan’s financing options beyond June 2023 are highly uncertain. It is not clear that another IMF programme is under discussion and if it does happen, how long the negotiations would take and what conditions would be attached to it.”

“However, in the absence of an IMF programme, Pakistan is unlikely to unlock sufficient financing from multilateral and bilateral partners,” it said.

According to Moody’s, headline inflation is likely to rise further as energy prices increase in tandem with the removal of energy subsidies.

At the same time, reform measures to raise fiscal revenue are likely to remain key to unlocking further financing from the IMF, as they will help to alleviate debt sustainability risks, as per the agency.

Continued IMF engagement must

“Continued IMF engagement, including beyond the current programme, will likely help to support additional financing from other multilateral and bilateral partners, which can reduce default risk if this is achieved urgently and without further raising social pressures,” said Moody’s in its statement.

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ECC Convenes in Islamabad: Forum Sanctions Spa Agreement Between PSO and SOCAR Azerbaijan

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Pakistan State Oil and SOCAR Azerbaijan have signed a sale purchase agreement for the delivery of petroleum products, which has been approved by the Cabinet’s Economic Coordination Committee.

The Finance Minister Muhammad Aurangzeb chaired the ECC meeting in Islamabad, where the permission to this effect was granted.

The Ministry of Energy’s Circular Debt Management Plan for FY 2024–2025 was also authorized by the conference. Its goals are to improve financial sustainability and lower liabilities in the power industry.

The committee examined the situation with the increase in prices for chicken and pulses. In order to offer the general public with relief as soon as possible, it expressed worry about the situation and requested that the National Price Monitoring Committee keep an eye on it in cooperation with the Ministry of National Food Security and Research and the Provincial Administration.

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Pakistan has reduced its policy rate to an all-time high.

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There has been a significant decrease in the policy interest rate that Pakistan has implemented. The country’s central bank made the announcement on Monday that it will be lowering interest rates by 250 basis points, bringing them down to 15 percent. This was a record-breaking reduction in Pakistan’s policy rate, which was done with the intention of bolstering the economy, which had been struggling.

Following a significant decrease in Pakistan’s inflation rate, the central bank made this move. It was anticipated in a poll conducted by Reuters that policy rates would be reduced by 200 basis points. There was a forty percent increase in the country’s inflation rate in May 2023, however it has since decreased to seven point two percent in October. The Ministry of Finance anticipates that inflation will continue to decline, reaching a level of between 5.5 and 6.5 percent in the month of November.

Earlier, Pakistan had reduced the policy rate by 700 basis points over the course of four separate measures beginning in June of last year. The economy of Pakistan has been in a precarious situation for a considerable amount of time. The majority of economists are of the opinion that falling interest rates is essential in order to stimulate economic expansion.

By stating that the existing monetary policy will assist stabilize commodity prices and keep inflation between 5 and 7 percent, the State Bank of Pakistan expressed its support for a reduction in interest rates. In addition to contributing to the preservation of macroeconomic stability, it will also contribute to the achievement of economic growth on a sustainable basis.

Jameel Ahmad, the Governor of the Central Bank, informed analysts at a briefing that Pakistan’s bilateral partner countries have promised the International Monetary Fund (IMF) of continuing support for the duration of their current financial recovery program. This announcement was made in conjunction with the announcement of the policy rate decline.

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The stock market rises to all-time highs and crosses the 92,000-point mark.

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The primary index hit the crucial 92,000-point benchmark as the stock market soared to new all-time highs.

A significant increase was made by the hundred-index, which closed at 92,351 points after rising 414 points.

According to analysts, this increase is the result of a resurgence of investor confidence, which has been supported by strong mood in international markets and solid economic indications.

With predictions for more increase as market stability improves, the most recent surge highlights a robust recovery trend.

The market fell from previous record highs due to selling pressure, causing the Pakistan Stock Exchange to see a steep dip earlier today.

The benchmark 100-index ended the trading session down after originally rising 572 points to an all-time high of 92,514 points.

The market finished the day at 91,660 points, down 278 points, unable to hold the 92,000-point threshold after hitting spectacular highs.

Analysts point to investor profit-taking as a contributing factor in the decline, indicating a cautious attitude in the market following recent advances. The market is becoming more volatile, and investors are paying close attention to patterns.

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