May 14, 2020: Moody's Investors Service, (Moody's) has placed Pakistan's local and foreign currency long-term issuer and senior unsecured B3 ratings under review for downgrade.
According to the official report issued in this regard, the decision to place the ratings under review for downgrade reflects Moody's expectation that the government will request for bilateral official sector debt service relief under the recently announced G20 initiative.
Suspension of debt service obligations to official creditors would be unlikely to have rating implications; indeed such relief would increase the fiscal resources available to the government for essential health and social spending due to the coronavirus outbreak. However, the G20 has called on private sector creditors to participate in the initiative on comparable terms.
Consistent with Moody's approach globally, the review period will allow the rating agency to assess whether Pakistan's participation in the initiative would likely entail default on private sector debt, notwithstanding the intended voluntary nature of private sector participation and the fact that the country has not, to Moody's knowledge, indicated an interest in extending the debt service relief request to the private sector; and, if so, whether any losses expected to arise from that participation would be consistent with a lower rating.
The rapid spread of the coronavirus, sharp deterioration in the global economic outlook, and a significant reduction in risk appetite are creating a severe economic and financial shock. For Pakistan, the current shock transmits mainly through a sharp slowdown in economic activity, lower tax revenue as economic activity slows, and higher government financing needs relative to pre-coronavirus levels.
Concurrently, Moody's has also placed the B3 foreign currency senior unsecured ratings for The Third Pakistan International Sukuk Co Ltd under review for downgrade. The associated payment obligations are, in Moody's view, direct obligations of the Government of Pakistan.
WHAT COULD CHANGE THE RATING DOWN?
The rating would likely be downgraded should Moody's conclude that participation in the G20 debt service relief initiative would probably entail default on private sector debt and that losses experienced would likely exceed the threshold consistent with a B3 rating.
Downward pressure on the rating would also stem from a renewed and material 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.