ISLAMABAD: Moody’s Investors Service on Tuesday kept Pakistan’s ratings unchanged at ‘Caa3’ with a stable outlook but highlighted that significantly high risks of liquidity and external vulnerability challenges following highly controversial elections, severely constrained decision-making capacity of the coalition government-in-waiting.

The international rating agency — one of the top three global rating firms — said it had completed last week review of Pakistan rating assessments but neither it was announcing a credit rating action, nor an indication of whether or not a credit rating action is likely in the near future.

“Pakistan’s ratings, including its Caa3 long-term issuer rating, with stable outlook remain unchanged,” it said. The agency had downgraded the country’s rating to Caa3 from Caa1 in February last year, owing to challenges with the IMF programme and the resultant depletion of foreign exchange reserves.

“Political risks are high, following a highly controversial general elections held on Feb 8, 2024,” observed the agency, adding that a coalition government looked set to be formed primarily by PML-N and PPP, but there was high uncertainty around the newly elected government’s willingness and ability to quickly negotiate a new IMF programme soon after the current one expires in April.

“The forthcoming coalition government’s electoral mandate may not be sufficiently strong to pursue difficult reforms that will likely be required by a successor programme. Until a new programme is agreed to, Pakistan’s ability to secure loans from other bilateral and multilateral partners will be severely constrained.”

Maintains Caa3 rating with high risks of liquidity, external vulnerability

It said the country’s credit profile reflected the government’s “very high liquidity and external vulnerability risks” as the very low levels of foreign exchange reserves remain well below what is required to meet its very high external financing needs over the near to medium term. “The country’s very weak fiscal strength and elevated political risks also constrain its credit profile,” it said.

At the same time, Pakistan’s credit profile takes into account its large economy and moderate growth potential, which contribute to its moderate economic strength. It noted that the caretaker government had maintained economic stability and pushed through some reforms over the past few months, unlocking financing from the IMF and other multilateral and bilateral partners and resulting in a modest accumulation of foreign exchange reserves.

While Pakistan is likely to meet its external debt obligations for the fiscal year ending June 2024, there is “limited visibility” regarding the sovereign’s sources of financing to meet its “very high external financing needs” after the current IMF Stand-By Arrangement ends in April.

Pakistan’s “baa3” economic strength balances the country’s large economy and moderate GDP growth potential against its low per capita income. The score also incorporates Pakistan’s high exposure to extreme weather events, such as heatwaves and floods, which can create negative economic and social costs. Pakistan’s institutions and governance strength score is at “b3”, reflecting the country’s weak governance and low monetary and fiscal policy effectiveness. The “ca” fiscal strength reflects the country’s large debt burden and very weak debt affordability. The high debt-servicing requirements associated with the large stock of debt will reduce the fiscal flexibility to undertake key expenditures on infrastructure and social initiatives. Pakistan’s susceptibility to event risk is at “caa”, driven by very high government liquidity and external vulnerability risks.

The stable outlook reflects Moody’s assessment that the pressures that Pakistan faces are consistent with a Caa3 rating level, with broadly balanced risks. Continued IMF engagement, including beyond the current programme, would help support additional financing from other multilateral and bilateral partners, which could reduce default risk if this is achieved urgently and without further raising social pressures.

Published in Dawn, February 28th, 2024