Moody's upgrades Pakistan's rating to ‘Caa2’

August 28, 2024 (MLN): Moody's Investors Service has upgraded Pakistan's long-term issuer rating from "Caa3" to "Caa2" with a positive outlook.

This upgrade follows Fitch Ratings' decision in July to raise the country's credit rating from "CCC" to "CCC+".

Moody's said that this upgrade reflects Pakistan's improved macroeconomic conditions and moderately better government external positions from very weak levels.

Accordingly, Pakistan's default risk has been reduced to a level consistent with a Caa2 rating.

There is now greater certainty on Pakistan's sources of external financing, following the sovereign's staff-level agreement with the IMF on 12 July 2024 for a 37- month Extended Fund Facility (EFF) of $7 billion.

The agency expects the IMF Board to approve the EFF in the next few weeks.

Pakistan's foreign exchange reserves have about doubled since June 2023, although they remain below what is required to meet its external financing needs.

The country remains reliant on timely financing from official partners to fully meet its external debt obligations.

Pakistan's Caa2 rating continues to reflect Pakistan's very weak debt affordability, which drives high debt sustainability risk. We expect interest payments to continue absorbing about half of government revenue over the two to three years.

The Caa2 rating also incorporates the country's weak governance and high political uncertainty.

The positive outlook reflects a balance of risks skewed to the upside.

It captures the possibility that the government is able to further lower its government liquidity and external vulnerability risks, and achieve a better fiscal position than we currently expect, supported by the IMF program.

Sustained reform implementation, including revenue-raising measures, can increase the government revenue base and improve Pakistan's debt affordability, said Moody's.

A record of completing IMF reviews on a timely manner would also allow Pakistan to continually unlock financing from official partners, sufficient to meet its external debt obligations and support further rebuilding of its foreign exchange reserves.

The upgrade to Caa2 from Caa3 rating also applies to the backed foreign currency senior unsecured ratings for The Pakistan Global Sukuk Programme Co Ltd. The associated payment obligations are, in its view, direct obligations of the Government of Pakistan.

The outlook for The Pakistan Global Sukuk Programme Co Ltd is positive.

Concurrent with today's action, Moody's has also raised Pakistan's local and foreign currency country ceilings to B3 and Caa2 from Caa1 and Caa3, respectively.

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 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.

It also takes into account material risks of transfer and convertibility restrictions being imposed.

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