Fitch Affirms Pakistan at 'B-'; Outlook Stable

June 14, 2019 (MLN): Fitch Ratings has affirmed Pakistan's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B-' with a Stable Outlook.

According to the press release issued by Fitch, Pakistan's ratings reflect challenging external finances and low reserve coverage, high public debt, and weak governance indicators.

‘Recent policy actions, including an agreement with IMF staff on a forthcoming programme, should ease external finance risks, but reserve levels will take time to rise and the programme will face significant implementation risks’ the report said.

Fitch forecasts the current account deficit to narrow to 3.0% of GDP in the fiscal year ending June 2020 (FY20) from a peak of 6.3% in FY18, largely through import compression.

It also expects external debt repayments to remain high over the medium term. In addition, repayments related to loans under the China-Pakistan Economic Corridor are set to pick up in the early 2020s.

The report further points out that the forthcoming 39-month Extended Fund Facility with the IMF of around USD6 billion, announced in a staff level agreement in early May, would reduce external financing pressures and facilitate the rebuilding of reserve buffers.

Fitch forecasts reserves to begin rising during FY20 on the back of the improved access to external financing. The SBP's move to devalue the exchange rate since late-2017 will also support the rebuilding of reserves.

It expects the general government fiscal deficit to remain high at 7.1% in FY20.

Fitch estimates that general government debt to GDP will rise to 77.4% by end-FY19, from 71.7% a year earlier. The substantial rise in the debt ratio reflects the impact of rupee depreciation on external debt and the wider fiscal deficit.

It expects government borrowing from the SBP to cease as part of the IMF programme. Inflation is set to remain high at 9% on the back of past rupee depreciation and tax and energy tariff increases.

“Pakistan's rating is constrained by structural weaknesses in its development and governance indicators. Its per capita GDP of USD 1,566 is well below the USD 3,489 median of 'B' rated peers. Governance quality is also low as its World Bank governance indicator score is in the 23rd percentile, compared with the 'B' median's 38th percentile” the report said.

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