November 19, 2024 (MLN): Moody’s Investors Services (Moody’s) has warned that meeting the conditionality of new multilateral financing can prove difficult and increase social risks, and said that interest costs in Pakistan will account for close to 40% of total spending in 2025, up from around a quarter in 2021.
Pakistan recently agreed a new $7 billion IMF programme to alleviate liquidity pressures. However, financing from concessional lenders often cannot fully replace sovereigns' maturing debt, Moody's said.
"While we assume that global food prices will remain much lower than in recent years, low-rated frontier markets like Pakistan in APAC are most vulnerable to food security crises," it added.
Some countries have worked to improve food security since 2022. Sri Lanka, for example, introduced initiatives to support food production and distribution. But such measures are unlikely to fully offset the credit implications for the most vulnerable sovereigns, it noted.
Local currency financing needs will also be sizeable for many sovereigns, with gross domestic financing needs of more than 10% of GDP in Pakistan and Zambia (Caa2 stable), even after default.
Local and foreign currency liquidity risks will therefore remain a key driver of defaults.
Although monetary policy will gradually loosen in 2025, governments will still refinance at historically higher rates.
Government debt affordability in emerging and frontier markets will remain weaker than before the pandemic, particularly in Pakistan.
