Fitch upgrades Pakistan’s foreign-currency debt rating citing ‘improved external liquidity’
KARACHI: Fitch Ratings has upgraded Pakistan’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘CCC’ from ‘CCC-’, the credit rating agency said in a statement on Monday.
The upgrade comes after Pakistan secured a badly-needed $3 billion short-term financial package from the International Monetary Fund last month, giving the South Asian economy a much-awaited respite as it teeters on the brink of default.
“We expect the SLA [staff-level agreement] to be approved by the IMF board in July, catalizing other funding and anchoring policies around parliamentary elections due by October,” Fitch said.
IMF board approval of the Stand-by Arrangement (SBA) will unlock an immediate disbursement of $1.2 billion, with the remaining $1.8 billion scheduled after reviews in November and February 2024. Saudi Arabia and the United Arab Emirates have committed another $3 billion in deposits, and the authorities expect $3-5 billion in other new multilateral funding after the IMF agreement. The SBA should also facilitate disbursement of some of the $10 billion in aid pledges made at the January 2023 flood relief conference, mostly in the form of project loans ($2 billion in the budget), Fitch said.
The IMF deal comes on the heels of Pakistan taking measures to address shortfalls in government revenue collection, energy subsidies and policies inconsistent with a market-determined exchange rate, including import financing restrictions. These issues held up the last three reviews of Pakistan’s previous IMF program, before its expiry in June.
Most recently, the government amended its proposed budget for the fiscal year ending June 2024 (FY24) to introduce new revenue measures and cut spending, following additional tax measures and subsidy reforms in February. The authorities appeared to abandon exchange-rate management in January 2023, although guidelines on prioritizing imports were only removed in June.
Pakistani authorities expect $25 billion in gross new external financing in FY24, against $15 billion in public debt maturities, including $1 billion in bonds and $3.6 billion to multilateral creditors. The government funding target includes $1.5 billion in market issuance and $4.5 billion in commercial bank borrowing, both of which could prove challenging, although some of the loans not rolled over in FY23 could now return. $9 billion in maturing deposits from China, Saudi Arabia and the UAE will likely be rolled over, as in FY23.
Fitch said the ‘CCC’ Long-Term Foreign-Currency IDR also reflected the following factors:
Reserves Still Low: Liquid net FX reserves of the State Bank of Pakistan have hovered around USD4 billion since February 2023, or less than a month of imports, down from a peak of more than USD20 billion at end-August 2021. The collapse in reserves reflected large CADs, external debt servicing and earlier FX intervention by the central bank. We expect a modest recovery for the rest of FY24 on new external financing flows, although these flows will also lead to a renewed widening of the CAD.
Volatile Politics: Protests by supporters of former prime minister Imran Khan and his PTI party sharply intensified in May as Mr.Khan was briefly arrested on corruption charges, culminating in attacks on army facilities. In the ensuing crackdown, a large number of PTI members were arrested, with several high-ranking PTI politicians quitting politics. Nevertheless, the enduring popularity of Mr.Khan and PTI create policy uncertainty around elections.
Fiscal Deficits Remain Wide: We expect the consolidated general government (GG) fiscal deficit to widen to 7.6 percent of GDP in FY24, from an estimated 7.0 percent in FY23, driven by higher interest costs on domestic debt, which accounts for the difference between our forecast and a GG deficit of 7.1 percent of GDP in the revised FY24 budget statement (with a lower figure of 6.5 percent in the medium-term fiscal framework). Fiscal consolidation will drive a slight improvement in our forecast GG primary deficit to 0.1 percent of GDP in FY24, from 0.5 percent of GDP in FY23.
High, Stable Debt Level: The GG debt/GDP of 74 percent at FYE23 is in line with the median for ‘B’, ‘C’ and ‘D’ rating category sovereigns and debt dynamics are broadly stable owing to high nominal growth over the medium term. Nevertheless, debt/revenue (over 600 percent) and interest/revenue (nearly 60 percent) are far worse than that of peers.
Government Considering Bilateral Maturity Extension: The finance minister recently said that Pakistan would seek maturity extensions on loans by non-Paris club bilateral creditors, while reaffirming the government’s commitment to timely debt service. We understand that such maturity extensions would mostly relate to loans and deposits by China, Saudi Arabia and the UAE, which are already regularly rolled over.
In 2022, the prime minister and former finance minister raised the possibility of seeking debt relief from non-commercial creditors, including the Paris Club, but the authorities now appear to have moved away from this. Should Paris Club debt treatment be sought, Paris Club creditors are likely to require comparable treatment for private external creditors in any restructuring.
ESG — Governance: Pakistan has an ESG Relevance Score (RS) of ‘5’ for both political stability and rights and for the rule of law, institutional and regulatory quality and control of corruption. These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model (SRM). Pakistan has a WBGI ranking at the lower 22nd percentile.