WASHINGTON: “Factious relations” among the executive, military and judicial branches of government have “hampered Pakistan’s institutional effectiveness,” says international credit rating agency Moody’s.

The agency, which gave a definitive B3 rating to Pakistan’s latest global bond offering earlier this week, warns that “these drawbacks have constrained the government’s policy effectiveness” as well. A B3 rating indicates a speculative economy and a high credit risk but with 95 to 97 percent credit recovery rate.

Moody’s, however, notes that the government has gained significant traction on reforms under the IMF program, key goals of which include deficit reduction, resolving constraints in the energy sector, and the privatization of several state-owned enterprises.

The rating agency describes Pakistan’s economic strength as “moderate” and notes that the country has “a supply-constrained economy that has been resistant to structural change.”

The definitive B3 rating came days after the government of Pakistan’s announced global bond offering, which, according to Mood’s has a “stable outlook.”

Ratings rationale

Moody’s definitive ratings for these debt obligations confirm the provisional ratings assigned on Sept 18, 2015. Moody’s notes that while the scale of the economy is relatively large; globally, Pakistan’s per-capita income level is relatively very low.

“Implementation of the China-Pakistan Economic Corridor will, over time, bolster growth through investment in transportation and power generation infrastructure,’ the rating agency observes.

Moody’s warns that Pakistan’s ‘very low fiscal strength and high susceptibility to event risk” also drive the country’s sovereign credit rating. Key fiscal and external credit metrics are weak intrinsically and relative to ratings peers.

These methodological factors are compounded by the country’s narrow tax base, low savings and shallow capital markets, the report adds.

All of these factors hinder stable domestic financing of sizable budget deficits.

But Moody’s also appreciates that the Pakistani government is striving to lengthen the maturity of debt, which will reduce gross financing needs.

“Government debt rollover risk is also reduced by sizeable recourse to domestic bank lending and, to some degree, by a debt structure which consists of long-tenor credits from multilateral and official bilateral creditors,” it adds.

Moody’s points out that the challenging operating environment, susceptibility to economic risks and political shocks, coupled with a high concentration to the sovereign, links the health of the banking system very closely to that of the government.

Banks are well managed but remain vulnerable to cyclical economic risks and to political shocks.

“The stable outlook represents our expectation of balanced upside and downside risks. Upward pressures stem from support from multilateral and bilateral lenders, which bolster an improving foreign reserve position and ongoing reform progress,” the report concludes.

Published in Dawn, October 6th , 2015

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