December 13, 2018: Moody's Investors Service says that the credit profile of Pakistan (B3 negative) reflects the sovereign's high external vulnerability, weak debt affordability, and very low global competitiveness.
Significant external pressures driven by wider current-account deficits have reduced foreign-currency reserves, which are unlikely to be replenished in the near term unless capital inflows increase substantially.
While Pakistan's public external debt repayments are modest, low reserve adequacy threatens the ability of the government to finance the balance of payments deficit and roll over external debt at affordable costs.
Moody's conclusions are included in its just-released annual credit analysis “Government of Pakistan — B3 negative”. This analysis elaborates on Pakistan's credit profile in terms of economic strength, moderate (+); institutional strength, very low (+); fiscal strength, very low (-); and susceptibility to event risk, high, which are the four main analytic factors in Moody's Sovereign Bond Rating Methodology.
Moody's assessment of Pakistan's susceptibility to event risk is driven by external vulnerability risk. Current-account deficits will remain wider relative to 2013-16 levels, with near-term prospects for a marked and sustained reversal unlikely unless goods imports contract sharply.
Absent significant capital inflows, the coverage of foreign-exchange reserves for goods and services imports will remain below two months, below the minimum adequacy level of three months recommended by the International Monetary Fund.
Moody's expects real GDP growth in Pakistan to slow to 4.3-4.7% in fiscal 2019 (ending June 2019) and fiscal 2020 from 5.8% in fiscal 2018 in part due to policy measures taken to address the external imbalance.
The government's narrow revenue base restricts fiscal flexibility and weighs on debt affordability, while its debt burden has increased in recent years.
At around 72% of GDP as of the end of fiscal 2018, the government's debt stock is higher than the 58% median for B-rated sovereigns, and Moody's expects the burden to rise further and peak at around 76% of GDP in fiscal 2020 — in part because of currency depreciation — before gradually declining as the twin deficits gradually narrow.
The moderate but rising level of external government debt also exposes the country's finances to sharp currency depreciations.
Nevertheless, longer-term economic prospects remain robust, in part because of improvements in power supply, infrastructure and national security that have raised the country's growth prospects and hence business confidence.
In particular, infrastructure investments and the significant increase in power supply, including through projects under the China-Pakistan Economic Corridor (CPEC), which are already helping with growth, will address some of Pakistan's long-term economic constraints and strengthen its growth potential.
Further institutional reforms planned by the new government, if effectively implemented, will also bolster institutional strength, which has increased in recent years with greater central bank autonomy and monetary policy effectiveness.
However, the reforms will be challenging for any government to navigate because of the country's large bureaucracy and complex federal-provincial politics and administrative arrangements.