August 08, 2020: Moody's Investors Service ("Moody's") has today confirmed the Government of Pakistan's B3 local and foreign currency issuer and senior unsecured debt ratings with a stable outlook.
Concurrently, Moody's has also confirmed the B3 foreign currency senior unsecured ratings for The Third Pakistan International Sukuk Co Ltd. The associated payment obligations are, in Moody's view, direct obligations of the Government of Pakistan.
This concludes the review for downgrade initiated on 14 May 2020.
The review for downgrade reflected Moody's assessment that the country's participation in the G20 Debt Service Suspension Initiative (DSSI) raised the risk that private sector creditors would incur losses. In the last few weeks, Moody's has considered the evidence of implementation of DSSI for a range of rated sovereigns, and statements by G20 officials.
While Moody's continues to believe that the ongoing implementation of DSSI poses risks to private creditors, the decision to conclude the review and confirm the rating reflects Moody's assessment that, at this stage, for Pakistan, those risks are adequately reflected in the current B3 rating. It remains unclear what influence is being applied to Pakistan and to other participating sovereigns to treat private creditors in a comparable manner to official sector creditors. However, a number of elements suggest that the probability of broad-ranging private sector involvement has diminished. These include the apparent absence of progress in discussions about how private sector involvement ('PSI') would be effected in DSSI in general; indications by the G20 that PSI would require the support of the borrowing government; the government of Pakistan's continued assertion that PSI is not contemplated; and evidence of some debt payments being made to private sector creditors under a DSSI regime.
The risks that remain relate to the possibility that, in particular cases DSSI is implemented with private sector creditors also being drawn in to provide debt service relief and incurring losses in doing so. Should the probability of default and losses to private sector creditors increase as implementation of DSSI for Pakistan becomes clearer, Moody's would reflect any related changes in risks to private creditors in further rating announcements.
The stable outlook reflects Moody's view that the pressures Pakistan faces in the wake of the coronavirus shock and prospects for its credit metrics in general are likely to remain consistent with the current rating level. In particular, while Moody's sees downside risks to Pakistan's economy because of movement and activity restrictions related to the pandemic, which would in turn intensify the government's fiscal challenges, strong support from development partners including for external financing, coupled with effective macroeconomic policies started ahead of the crisis, contain external vulnerability and liquidity risks.
Pakistan's Ba3 local currency bond and deposit ceilings remain unchanged. The B2 foreign currency bond ceiling and the Caa1 foreign currency deposit ceiling are also unchanged. The short-term foreign currency bond and deposit ceilings remain unchanged at Not-Prime. These ceilings act as a cap on the ratings that can be assigned to the obligations of other entities domiciled in the country.
RATIONALE FOR CONFIRMING THE B3 RATING
Moody's initiated a review for downgrade for Pakistan's ratings following the country's participation in DSSI to reflect the potential for private sector losses given the call in the G20's 15 April term sheet for private creditors to participate in debt service relief on comparable terms to official creditors. The review for downgrade reflected the tension evident between Pakistan's stated intention not to seek relief from private sector debt service obligations, and the clearly-stated view of the key sponsors of the DSSI, specifically the IMF and World Bank, that private creditors should participate in the DSSI on comparable terms. Private sector losses incurred as part of the DSSI would likely constitute a default under Moody's definition.
There remains considerable uncertainty regarding the treatment of private sector creditors of the sovereigns which choose to participate in DSSI, including Pakistan. Recent statements by the Institute of International Finance (IIF) suggest that some DSSI participants have had informal discussions with private sector creditors regarding deferral of interest.
However, the risk of broad-ranging involvement of private sector creditors in many or most DSSI cases appears to have diminished. There has not been any material progress in clarifying where and how private sector creditors would be asked to provide debt service relief. While the most recent communiqué issued by the G20 Finance Ministers and Central Bank Governors on 18 July reiterated that sponsors "strongly encourage private creditors to participate in the DSSI on comparable terms" the clarifying language "when requested by eligible countries" seems to acknowledge the need for support from the borrower for that to happen. Participating governments including Pakistan have continued to assert that they do not wish to engage with private sector creditors. And a number of DSSI-participating governments have continued to make interest and coupon payments to private creditors as they fall due.
The risks that prompted the initiation of the review for downgrade for Pakistan have not disappeared and there has been limited additional clarification since the initial DSSI terms were announced. However, the risks have become more specific to each DSSI implementation case and at this stage, Moody's assesses the probability that private sector creditors of Pakistan incur losses through DSSI to be captured in the B3 rating. Should the probability of losses to private sector creditors increase as implementation of DSSI for Pakistan becomes clearer, Moody's would reflect any related changes in risks to private creditors in further rating announcements.
RATIONALE FOR THE STABLE OUTLOOK
The coronavirus pandemic is weighing on economic activity in Pakistan, resulting in lower tax revenue, a wider fiscal deficit, and a higher debt burden for the government. While continued spread of the virus poses downside risks to the economy and government finances, financial and technical support from development partners mitigates external vulnerability and liquidity risks. The government's commitment to its current International Monetary Fund (IMF) Extended Fund Facility (EFF) continues to unlock a large financial envelope that Moody's expects will cover its external financing needs over the next 12-18 months, and provides an anchor for ongoing fiscal reforms. Effective macroeconomic policies lower interest payments, supporting debt affordability, and provide policy buffers.
Moody's expects Pakistan's economic growth to be positive in fiscal 2021 (ending June 2021) from a recession in fiscal 2020, but still low at around 1-2%. While Pakistan's economy is relatively closed with low reliance on exports, movement restrictions due to coronavirus will keep economic activity below the pre-outbreak levels for some time.
The slow economic recovery will in turn weigh on government revenue, keeping the fiscal deficit wide at around 8-8.5% of GDP in fiscal 2021 under Moody's projections, at similar levels compared to fiscal 2020, and leaving the government's debt burden high at around 90% of GDP by the end of fiscal 2021.
Risks to the economy and government finances are to the downside, particularly if more stringent measures are implemented to curb the spread of the virus domestically.
However, even in downside economic and fiscal scenarios, Moody's expects Pakistan to cover its external financing needs with continued significant financial support from its development partners, including the commitment to rollover most bilateral loans that come due, independent of how DSSI is implemented. Moody's also expects the government's ongoing engagement with development partners on fiscal reforms, such as through the IMF EFF and other programmes with the Asian Development Bank and World Bank, to contribute to a modest widening of the revenue base, once the crisis passes, improving debt affordability and containing fiscal risks over the next few years.
Meanwhile, external financing needs have declined relative to fiscal 2018-19 because of a narrower current account deficit, which occurred as a result of the macroeconomic adjustments over the past two years and continues to be supported by effective policies including currency flexibility. Moody's projects the current account deficit to be around 2% of GDP in fiscal 2021, after 1.1% in fiscal 2020, substantially narrower than the average of around 5.5% over fiscal 2018-19.
Stability in the balance of payments will, in turn, allow the State Bank of Pakistan, the central bank, to keep monetary policy accommodative as inflation declines. This keeps a lid on borrowing costs for the government domestically and lends further support to debt affordability.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Environmental considerations are significant to Pakistan's credit profile because it is vulnerable to climate change risk. Pakistan is significantly exposed to extreme weather events, including tropical cyclones, drought, floods and extreme temperatures. In particular, the magnitude and dispersion of seasonal monsoon rainfall influence agricultural sector growth and rural household consumption. The agricultural sector directly accounts for around 20% of GDP and exports, and nearly 40% of total employment. As a result, both droughts and floods can create economic, fiscal and social costs for the sovereign.
Social considerations are material to Pakistan's credit profile. Access to quality healthcare, education and utilities such as electricity and water remains limited, especially in rural areas, although the government is addressing these issues as a key priority through its "Ehsaas" programme that is aimed at reducing poverty and inequality, strengthening social safety nets and promoting human capital development. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. For Pakistan, the epidemic exposes the challenge to the government in enhancing healthcare and public services provision.
Governance considerations are significant to Pakistan's credit profile. International surveys of various indicators of governance, while showing some early signs of improvement, point to weak rule of law and control of corruption, as well as limited government effectiveness. These weaknesses are balanced against a lengthening track record of effective checks and balances and judicial independence for the level of development in the country.
Moody's Press Release
August 07, 2020: The US economy regained 1.8 million jobs in July, a solid but unremarkable result that comes as President Donald Trump prepares for a difficult re-election bid, but economists warn challenges to the pandemic recovery are growing.
As COVID-19 cases spiked in several states in recent weeks, new restrictions to contain the virus forced some businesses to shut their doors again, while many have already closed permanently, raising concerns the labor market could take a turn for the worse.
Trump's economic team has also not been able to narrow the gap with Democratic leaders in Congress over a new emergency spending bill to renew aid that has supported consumer spending in the past three months.
The unemployment rate fell to 10.2 percent last month from 11.1 percent in June, according to the critical government report, still slightly worse than the nadir of the global financial crisis in October 2009.
However, the Labor Department said some workers continue to be misclassified in the survey. Without that, the jobless rate would have been a full point higher than reported.
"Great Jobs Numbers!" Trump tweeted
And though White House economic advisor Larry Kudlow continues to express confidence in a rapid "V-shaped recovery," most economists say it will take until next year to return employment to pre-pandemic levels, and only in the unlikely case of the July pace being sustained.
The July employment gain marked a sharp slowdown from the increases of 4.8 million in June and 2.7 million in May, and means less than half the 22 million payroll jobs lost during the pandemic have been regained.
"This is far from normal, as another 13 million jobs are needed just to get us back to pre-pandemic employment levels," said Lawrence Yun, chief economist of the National Association of Realtors, who noted virus cases are rising faster in states that reopened, "Illustrating the tough tradeoffs in the decision between livelihood versus lives."
- 'Slow and prolonged' -
Trump's Democratic challenger Joe Biden seized on the high numbers of jobless shown in the report to attack the president.
"While I am grateful for the people who got their jobs back, my heart goes out to the more than 16 million Americans still out of work. The truth is it didn't have to be this bad, but Donald Trump failed to act," Biden tweeted.
A third of private jobs gains were due to bars and restaurants reopening, according to the report.
Government and healthcare also saw strong hiring, but public jobs like teachers may have been inflated by the fact many were laid off earlier than usual because of the school closures in March. And with many schools hesitant to reopen, those jobs could greatly decrease in August.
There are just two more reports before the November elections, leaving little time for Trump to show the kind of improvement that will cement his bid for a second term in the White House.
"Recovery in jobs to pre-pandemic levels will likely be slow and prolonged, one that will restrain the pace of recovery," Rubeela Farooqi of High Frequency Economics said in an analysis of the data.
The number of people on temporary layoff in July decreased by 1.3 million, but there were nearly three million workers who lost their jobs permanently, according to the latest data.
Meanwhile, 8.4 million people were working part-time not by choice but out of necessity, a group known as involuntary part-time workers.
After days of intense negotiations, the White House and Democratic leaders remain far apart on a new spending plan, and the administration is steadfastly refusing to agree to provide further aid to state and local governments.
Another key source of contention is the $600 in additional weekly federal payments to the unemployed, which expired at the end of July. Republicans claim the money offers an incentive for workers to stay home rather than return to their jobs, but economists say research disproves that.
Democratic House Speaker Nancy Pelosi and Senator Chuck Schumer said the boost the CARES aid package approved in late March is "losing steam and more investments are still urgently needed to protect the lives and livelihoods of the American people."
"Millions of Americans are still hurting and yet, despite this reality, President Trump and Republicans appear ready to walk away from the negotiating table to do unworkable, weak and narrow executive orders that barely scratch the surface of what is needed to defeat the virus and help struggling Americans," they said in a statement.
Kudlow said Trump's team already has drafted an order for a temporary payroll tax cut -- but that would only help people still working and receiving paychecks.
August 7, 2020 (MLN): Chinese President Xi Jinping plans to visit Pakistan later this year, as reported by Bloomberg.
At the webinar in Islamabad, China’s ambassador Yao Jing said “We are talking about” extending the flagship Belt and Road program to Afghanistan, Bloomberg reported.
To recall, Xi’s visit in 2015 spurred Belt and Road projects in Pakistan known as the China-Pakistan Economic Corridor (CPEC) valued at more than $70 billion.
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Aug 07, 2020: The Central Development Working Party (CDWP) has approved locust Emergency and Food Security Projects (LEAFS) for uplift of local agriculture sector and combating the locust threat in the country.
The project is the first federal agricultural project, which financed by the World Bank in Pakistan, said a press release issued by the Ministry of National Food Security and Research here Friday.
It said that MinNFS&R is responsible for overall project implementation with the support of provincial governments, Department of Plant Protection, National Locust Control Centre, Food and Agriculture Organization and National Disaster Management Authority.
The project cost envelope is US$200 million equal to Rs32,800 million, it added.
LEAFS project will span out its activities all over the Pakistan focusing migratory, breeding and infestation routes of desert locust, besides it also encompasses capacity building of Department of Plant Protection (DPP) and includes compensation to farmers on account of losses due to locust.
It also includes livestock support program to mitigate negative impacts of desert locust on the livelihood protection and rehabilitation., besides strengthening and establishment of food security and nutrition information system is a major component of the project.
The specific project objectives will be embarked on control of the locust outbreak, to mitigate negative social and economic impact associated with locust attack and to strengthen the national food security system.
The MinNFS&R has overall coordination role of the project implementation through establishing a Federal Project Steering Committee (FPSC), responsible for approval of annual work plans, monitor and review of financial reporting, third party validation in the project and re-allocation of funds.
A project management Unit (PMU) under direct supervision of Secretary NinNFSR with an independent National Project Director with support of needed staff is proposed.
The FAO being technical agency and having the role of global management of locust will provide technical support and assistance to all partners including provincial governments and DPP, strengthening of FSNIS and early warning systems, international and regional coordination, regional locust surveillance and procurement support. The World Bank team will be responsible for effective implementation and monitoring support to the project.
Department of Plant Protection (DPP) is responsible entity mandated to manage the locust outbreak in the country.
In that role DPP will make national locust surveillance and pest management plan, threat assessment, monitoring of locust population, breeding and swarms, strategic coordination and control operations based on locust cycle (desert, cropping areas, cities).
The provincial governments will lead project implementation in the affected areas and agriculture departments will set up Provincial Project Implementation Units under direct supervision of the Secretary of Agriculture.
The NDMA and the PDMAs will support logistics, contingency planning, crisis preparedness and response, at federal and provincial level.
NDMA’s involvement to the project will be triggered only when the locust crisis grows beyond DPP’s control.
The financial benefits of the project are primarily a reduction in Damages and Losses (DALO) due to the locust outbreak.
Aug 07, 2020 (MNL): The KSE-100 index ended the trading session on Friday with a 136.43 point or 0.34 percent decline to close at 40,029.69, as investors resorted to profit-taking after enjoying a week full of boons.
The overall gains during the week amounted to 771 points, i.e. 1.96% higher than the previous week.
The Index traded in a range of 505.17 points or 1.26 percent of previous close, showing an intraday high of 40,467.09 and a low of 39,961.92.
Of the 94 traded companies in the KSE100 Index 40 closed up 53 closed down, while 1 remained unchanged. Total volume traded for the index was 368.85 million shares.
Sector wise, the index was let down by Commercial Banks with 68 points, Oil & Gas Exploration Companies with 43 points, Cement with 30 points, Power Generation & Distribution with 30 points and Fertilizer with 21 points.
The most points taken off the index was by UBL which stripped the index of 40 points followed by HBL with 33 points, HUBC with 26 points, MCB with 17 points and POL with 15 points.
Sectors propping up the index were Textile Composite with 23 points, Transport with 16 points, Insurance with 15 points, Engineering with 9 points and Cable & Electrical Goods with 7 points.
The most points added to the index was by MEBL which contributed 21 points followed by PIBTL with 16 points, KTML with 15 points, IGIHL with 13 points and PSMC with 9 points.
All Share Volume decreased by 98.04 Million to 728.77 Million Shares. Market Cap decreased by Rs.8.14 Billion.
Total companies traded were 402 compared to 415 from the previous session. Of the scrips traded 197 closed up, 188 closed down while 17 remained unchanged.
Total trades decreased by 10,365 to 185,126.
Value Traded decreased by 1.34 Billion to Rs.23.01 Billion
|Pakistan International Bulk Terminal||52,630,500|
|Maple Leaf Cement Factory||23,547,000|
|Aisha Steel Mills||18,025,000|
|Technology & Communication||210,762,500|
|Vanaspati & Allied Industries||50,411,300|
|Cable & Electrical Goods||40,177,700|
|Inv. Banks / Inv. Cos. / Securities Cos.||28,356,600|
|Food & Personal Care Products||28,267,960|
|Oil & Gas Marketing Companies||22,992,006|
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