Pakistan credit rating downgraded to CAA1 after 7 years by Moody’s

According to the agency, Pakistan credit rating has long been inadequate.

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SINGAPORE: After seven years, Moody’s Investors Service (Moody’s) reduced the senior unsecured debt and issuer ratings for the Government of Pakistan from B3 to Caa1 on Thursday.

The senior unsecured Medium Term Note (MTN) program’s rating has also been reduced by the credit-rating agency, moving from (P)B3 to (P)Caa1. The future for Pakistan is still bleak.

Alpha Beta Core CEO Khurram Shehzad commented on this situation: “It is strange that we are downgraded despite the International Monetary Fund’s (IMF) backing, which demonstrates the dangers still exist despite the IMF being on our side.”

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In the wake of the terrible floods that have struck the nation since June 2022, the bond credit rating service stated that the decision to lower the ratings to Caa1 is motivated by greater government liquidity, external vulnerability risks, and higher debt sustainability risks.

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According to a statement from the international organisation, “The floods have worsened Pakistan’s liquidity and external credit problems and greatly increased social spending needs, while government revenue is badly damaged.”

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The rating agency predicted that Pakistan’s long-standing credit weakness, its ability to pay its debts, “would remain extremely weak for the foreseeable future.”

Pakistan will continue to be financially dependent on its allies.

“The Caa1 grade reflects Moody’s opinion that Pakistan will remain significantly dependent on financing from multilateral partners and other public sector creditors to satisfy its debt payments, in the absence of access to market financing at reasonable costs,” it said.

“Moody expects in particular that Pakistan’s IMF Extended Fund Facility (EFF) programme would continue to operate and offer a pathway for funding from the IMF and other multilateral and bilateral partners in the short future.

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According to Moody, Pakistan has concerns about its capacity to obtain the necessary financing to adequately meet its needs in the coming years.

“Elevated social and political risks exacerbate the government’s challenges in implementing reforms, including revenue-raising measures that would strengthen the nation’s fiscal position and lessen liquidity stresses.

The report stated that Pakistan’s inadequate institutions and governance add to the uncertainty around whether the nation would continue on a viable policy course that supports more financing.

Is renegotiating debt necessary?

The statement claims that the pessimistic forecast also accounts for the possibility of debt restructuring affecting creditors in the private sector.

It should be noted that the Caa1 rating also applies to the Pakistan Global Sukuk Programme Co Limited’s and the Third Pakistan International Sukuk Co Limited’s senior unsecured foreign currency ratings.

According to Moody, the related payment obligations are the Government of Pakistan’s direct liabilities.

Moody decreased Pakistan’s local and foreign currency nation ceilings from B1 and B3 to B2 and Caa1 concurrently with today’s action.

It was emphasised that the two-notch difference between the sovereign rating and local currency ceiling is caused by the government’s comparatively wide economic footprint, its inadequate institutional framework, and the comparatively high political and external vulnerability risk.

The disparity, according to Moody’s, “reflects imperfect capital account convertibility and relatively weak policy effectiveness, which suggest substantial transfer and convertibility risks notwithstanding moderate external debt.”

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