February 4, 2019 (MLN): Standard and Poor’s (S&P) has lowered Pakistan’s long term sovereign rating from ‘B’ to ‘B-‘ with weaker prospects for external and fiscal recovery. The outlook for the long-term rating is stable. Meanwhile, they affirmed their short-term sovereign rating at ‘B’.
According to a press release on the occasion, S&P explained that Pakistan's economic outlook, as well as its external position has deteriorated well beyond their previous expectations. With the weaker economic settings, and limited progress in addressing fiscal imbalances following elections in mid-2018, they believe prospects for a rapid recovery in fiscal and external settings are now diminished.
The stable outlook reflects S&P’s expectations that Pakistan will secure sufficient funding to meet its external obligations in the next one to two years and that neither external nor fiscal metrics will deteriorate well beyond their current projections.
S&P has also lowered the long-term issue rating on senior unsecured debt and sukuk trust certificates to 'B-' from 'B'.
Giving further insight on Pakistan’s external obligations, S&P adds that while Pakistan has secured financial aid from bilateral partners to address its immediate external financing needs, ‘we believe that fiscal and external imbalances will remain elevated.’
They believe that the government's protracted negotiations with the International Monetary Fund (IMF) suggest that any resulting reforms, whether under the program or otherwise, will be less expedient than previously anticipated.
In S&P’s opinion, the second mini-budget presented in January should be marginally supportive of the economy, but is unlikely to have a significant impact on fiscal imbalances.
“The ratings on Pakistan remain constrained by a narrow tax base and domestic and external security risks, which continue to be high,” adds the document.
As S&P predicted worse key metrics for 2019, it backed its forecast with facts including Pakistan's very low income level which remains a rating weakness, slower than anticipated progress on development of economic and fiscal reforms, inadequate infrastructure and security risks which continue to act as structural impediments to foreign direct investment and sustainable economic growth and considerable external and fiscal pressure following a significant rise in both the general government fiscal and current account deficits in the fiscal year ended June 2018.
Apart from this, S&P estimates Pakistan's GDP per capita at just over US$1,500 in 2018, which is in the bottom 10% of all sovereigns rated by S&P Global Ratings.
“Our weaker growth projections mainly reflect the diminishing stimulatory impact of the investments associated with the CPEC, negative fiscal impulse as the government looks to rein in its deficit, and declining economic sentiment,” reads the press release.
Elaborating further, they said that although CPEC energy projects such as coal, solar, hydroelectric, liquefied natural gas, and power transmission will be supportive toward economic activity over the long run, this effect is unlikely to sufficiently offset the loss in momentum in the economy during this period of acute fiscal and external stress.
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