Fitch Affirms Pakistan at 'B-'; Outlook Stable

January 13, 2020 (MLN): Fitch Ratings has affirmed Pakistan's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B-' with a Stable Outlook.

The 'B-' rating reflects a challenging external position characterised by a high external financing requirement and low reserves, weak public finances including large fiscal deficits and a high government debt-to-GDP ratio, and weak governance indicators. Progress is being made towards strengthening external finances and positive steps have been made on the fiscal front, but considerable risks remain.

External vulnerabilities have been reduced over the past year as a result of policy actions by the authorities and financing unlocked through an IMF programme, which have narrowed the current account deficit and supported a modest rebuilding of reserves. Still, external finances remain fragile with relatively low foreign-exchange reserves in the context of an elevated external debt repayment schedule and subdued export performance. Pakistan's liquidity ratio is 111.4%, much weaker than the historic 'B' median of 161.2%.

Fitch forecasts a further narrowing of the current account deficit to 2.1% of GDP in the year ending June 2020 (FY20) and 1.9% in FY21, from 4.9% in the last fiscal year. Import compression remains the predominant driver of the narrowing deficit, facilitated by a depreciation of the rupee against the US dollar of around 30% since December 2017 and tighter monetary conditions. Exports are forecast to grow modestly from a low base.

The State Bank of Pakistan's (SBP) adoption of a more flexible exchange rate last May and capital inflows are also supporting a rebuilding of foreign-exchange reserves. Fitch expects gross liquid foreign-exchange reserves rise to around USD11.5 billion by FYE20, from USD7.2 billion at FYE19. The SBP has also reduced its net forward position by over USD3 billion since June, contributing to a considerable improvement in its net foreign-exchange reserves, although these remain negative. We expect continued adherence to the new exchange rate regime to help rebuild foreign-exchange reserves and improve external resilience.

Access to external financing has improved after the approval of a USD6 billion, 39-month Extended Fund Facility (EFF) by the IMF board in July 2019. According to the IMF, this has potentially unlocked about USD38 billion in financing from multilateral (including from the IMF) and bilateral sources over the programme period. It may also facilitate financing from offshore capital markets. The EFF is on track, with the first review completed in December. However, implementation risks remain high in Fitch's view, particularly given the politically challenging nature of the authorities' reform agenda.