Moody's downgrades Pakistan's credit rating to Caa3 with a stable outlook

February 28, 2023 (MLN): Moody's Investors Service has downgraded Pakistan's credit rating to Caa3 from Caa1, citing the country's fragile liquidity and external position, which it says raises default risks to a level consistent with a Caa3 rating.

The rating agency says Pakistan's foreign exchange reserves have fallen to extremely low levels, making it difficult for the country to cover its import needs and external debt obligations in the short- to medium term.

While the government is implementing some tax measures to meet the conditions of the IMF programme, weak governance and heightened social risks impede Pakistan's ability to implement policies to secure large amounts of financing and mitigate risks to the balance of payments.

The downgrade applies to Pakistan's local and foreign currency issuer and senior unsecured debt ratings, as well as its senior unsecured MTN programme.

However, the stable outlook reflects Moody's assessment that the pressures Pakistan faces are consistent with a Caa3 rating level, with broadly balanced risks.

The agency notes that significant external financing becoming available in the very near term, such as through the disbursement of the next tranches under the current IMF programme and related financing, could reduce default risk potentially to a level consistent with a higher rating.

Concurrent with today's action, Moody's has also lowered Pakistan's local and foreign currency country ceilings to Caa1 and Caa3 from B2 and Caa1, respectively.

The rating agency says the two-notch gap between the local currency ceiling and sovereign rating is driven by the government's relatively large footprint in the economy, weak institutions, and relatively high political and external vulnerability risk.

The two-notch gap between the foreign currency ceiling and the local currency ceiling reflects incomplete capital account convertibility and relatively weak policy effectiveness, as well as material risks of transfer and convertibility restrictions being imposed.

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