April 01, 2021: Moody's Investors Service, (“Moody's”) has today assigned a foreign currency senior unsecured programme rating of (P)B3 to the Government of Pakistan's global medium-term noteprogramme, as well as B3 ratings to the senior unsecured, US dollar-denominated notes issued under the programme with maturities of 5, 10 and 30 years.
The payment obligations associated with the notes representing drawdowns from the programme are direct, unsecured obligations of the Government of Pakistan and rank pari passu with all its other unsecured and unsubordinated obligations. Pakistan intends to use the net proceeds from each issuance for general budgetary purposes.
The ratings mirror Pakistan's long-term issuer rating of B3.
Pakistan's B3 rating is underpinned by the country's robust long-term growth potential, a relatively large but low-income economy, and a stable banking sector. Ongoing reforms and institutional enhancements also raise policy credibility and effectiveness, although from a low base. Moody's expects economic activity in Pakistan to continue to rebound over the next two years as the country recovers from the coronavirus shock. Supply-side improvements, including through projects under the China-Pakistan Economic Corridor (CPEC), coupled with improvements in domestic security and trade policy, will also help spur long-term investments, with the potential to revitalise the economy's industrial base over time.
Balanced against these credit strengths are the government's narrow revenue base that weakens debt affordability, the country's still material structural constraints to economic and export competitiveness and still low, although rising, foreign exchange reserve adequacy, and long-term political risks. In particular, while revenue as a share of GDP grew in fiscal 2020 (ending June 2020), it remains low and continues to limit fiscal flexibility in the face of shocks and the ability of the government to reduce its debt burden. That said, Moody's expects fiscal reforms, including under the country's International Monetary Fund (IMF) programme and projects with other development partners, to mitigate risks related to debt sustainability and government liquidity.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Pakistan's ESG Credit Impact Score is highly negative (CIS-4), reflecting its high exposure to environmental and social risks, as well as its weak governance profile. Relatively weak institutions constrain the government's capacity to address ESG risks.
The exposure to environmental risk is highly negative (E-4 issuer profile score) because of Pakistan's vulnerability to climate change and the limited supply of clean, fresh and safe water. With varied climates across the nation, Pakistan is significantly exposed to extreme weather events, including tropical cyclones, drought, floods and extreme temperatures. In particular, the magnitude and dispersion of seasonal monsoon rainfall influence the agricultural sector growth and rural household consumption. The agricultural sector accounts for around 20% of GDP and exports, and nearly 40% of total employment. Overall, around 70% of the entire population live in rural areas. As a result, both droughts and floods can create economic, fiscal and social costs for the sovereign.
The influence of governance is highly negative (G-4 issuer profile score). International surveys of various indicators of governance, while showing some early signs of improvement, continue to point to weak rule of law and control of corruption, as well as limited government effectiveness. These weaknesses are balanced against a lengthening track record of effective checks and balances and judicial independence for the level of development in the country, and gradually increasing transparency and dialogue in policymaking.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Upward pressure on Pakistan's rating would develop if ongoing fiscal reforms were to expand the government's revenue base, raise debt affordability, and lower its debt burden beyond our current expectations. Further reduction in external vulnerability risks, including through higher levels of foreign exchange reserve adequacy and/or increased economic competitiveness that were to lift export prospects, would also put upward pressure on the rating.
Downward pressure on the rating would stem from renewed deterioration in Pakistan's external position, including through a significant widening of the current account deficit and erosion of foreign exchange reserve buffers, which would threaten the government's external repayment capacity and heighten liquidity risks. A continued rise in the government's debt burden, without prospects for stabilisation over the medium term, would also put downward pressure on the rating. A rising probability of private sector participation in the G20 Debt Service Suspension Initiative (DSSI) would likely point to a lower rating, commensurate with the potential losses to be incurred.
GDP per capita (PPP basis, US$): 5,204 (2019 Actual) (also known as Per Capita Income)
Real GDP growth (% change): -0.4% (2020 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 8.6% (2020 Actual)
Gen. Gov. Financial Balance/GDP: -8.0% (2020 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -1.1% (2020 Actual) (also known as External Balance)
External debt/GDP: 40.1% (2020 Actual)
Economic resiliency: ba2
Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.
On 08 March 2021, a rating committee was called to discuss assigning a provisional rating to the new Global Medium-Term Note programme of Pakistan's government. The main points raised during the discussion were: The terms and conditions of the Global Medium Term Note programme and the conclusion that notes issued under the programme would rank pari passu with other senior unsecured debt obligations of the Government of Pakistan.