ISLAMABAD: Highlig­hting political unrest and continued weakening of external, fiscal and economic metrics, Standard & Poor’s on Thursday lowered Pakistan’s long-term sovereign rating to CCC+ from B-negative and anticipated a stable outlook.

“The outlook is stable”, said the New York-based rating agency saying it “lowered its long-term sovereign credit rating on Pakistan to ‘CCC+’ from ‘B-’, and the short-term rating to ‘C’ from ‘B’ and also lowered long-term issue rating on Pakistan’s senior unsecured notes to ‘CCC+’ from ‘B-’.

The rating agency said the stable outlook reflected the balance of further risks to Pakistan’s external liquidity position and fiscal performance over the next 12 months against the prospect of additional support from multilateral and bilateral partners. On the downside, the S&P said it could further lower ratings if Pakistan’s external indicators deteriorate rapidly or fiscal deficits widen to exceed the domestic banking system’s financing capacity. One potential indication of domestic financing stress would be further increases in the government’s interest burden, estimated to exceed 40pc of government revenues in 2023.

Conversely, on the positive side, it said the ratings could be raised if Pakistan’s external and fiscal positions improve materially from current levels. Evidence of improvement could include a sustained rise in foreign exchange reserves, as well as a stabilisation of Pakistan’s debt service costs relative to revenues and a lengthening of debt maturities.

Downgrade reflects a continued weakening of external, fiscal and economic metrics

The agency explained that it lowered the ratings to reflect a continued weakening of Pakistan’s external, fiscal, and economic metrics. Given high gross external financing needs, and limited foreign exchange reserves, Pakistan’s balance of payments outlook remains vulnerable to energy price developments and the availability and timing of foreign support. “We expect the ratio of debt to GDP and budgetary deficits to remain elevated, with more than 40pc of government receipts used to finance interest payments, thereby reducing the government’s capacity to finance investment and social support”, it said.

It warned that Pakistan’s already low foreign exchange reserves would remain under pressure throughout 2023, barring a material decline in oil prices or a step-up in foreign assistance. A series of shocks — severe floods, surging food and energy inflation, and rising global interest rates — will lead to weaker economic and fiscal outcomes, and refinancing challenges over the medium term.

“Pakistan also faces elevated political risks, which may affect its policy trajectory over the next 12 months”, the S&P said. Severe flooding during the summer of 2022 has imposed additional hardships on households and businesses, further constraining growth.

Moreover, the Pakistani government is also facing fresh challenges in meeting the performance requirements of the IMF programme for subsequent reviews after completing eight reviews. Disbursements under the EFF, which began in July 2019, amount to approximately $4bn so far, including a $1.2bn allocation in August 2022.

Published in Dawn, December 23rd, 2022

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