Monday 16 December 2019
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The News - 13 days ago

Negative to stable: Moody?s upgrades Pakistan?s economic outlook

KARACHI: Ratings agency Moody s Monday upgraded Pakistan s credit outlook to stable from negative after more than one year as the IMF-backed reforms helped it improve its balance of payments position and stabilise currency.Moody s Investors Service affirmed the country s local and foreign currency long-term issuer and senior unsecured debt ratings at B3 and changed the outlook to stable from negative. The change in outlook to stable is driven by Moody s expectations that the balance of payments dynamics will continue to improve, supported by policy adjustments and currency flexibility, Moody s said in a statement. Such developments reduce external vulnerability risks, although foreign exchange reserve buffers remain low and will take time to rebuild. In June last year, the New York-based credit ratings agency downgraded the country to negative outlook due to external account s vulnerability with foreign exchange reserves having plunged to the level not enough to pay 2 to 3 months of import bills.The government ascribed the latest feat of improvement in credit outlook to its stability measures taken to heal the sagging economy. The upgradation of outlook to stable is affirmation of government s success in stabilising the country s economy and laying a firm foundation for robust long-term growth, Adviser to Prime Minister on Finance Hafeez Shaikh said in a statement.Moody s sees a positive impact of IMF-backed reforms on the country s external account sector.In July this year, the IMF approved a $6 billion loan programme for Pakistan against a score of conditions considered tough because of its implications for further slowing down growth.The IMF program targets higher foreign exchange reserve levels and has unlocked significant external funding from multilateral partners including the Asian Development Bank and the World Bank. Nevertheless, unless the government can effectively mobilise private sector resources, foreign exchange reserves are unlikely to increase substantially from current levels, Moody s said.It said while fiscal strength has weakened with higher debt levels largely as a result of currency depreciation, ongoing fiscal reforms, including through the country s IMF program, will mitigate risks related to debt sustainability and government liquidity.It said the rating affirmation reflects the country s relatively large economy and robust long-term growth potential, coupled with ongoing institutional enhancements that raise policy credibility and effectiveness, albeit from a low starting point. These credit strengths are balanced against structural constraints to economic and export competitiveness, the government s low revenue generation capacity that weakens debt affordability, fiscal strength that will remain weak over the foreseeable future, as well as political and still-material external vulnerability risks. Concurrently, Moody s has affirmed the B3 foreign currency senior unsecured ratings for The Second Pakistan Int l Sukuk Co. Ltd. and The Third Pakistan International Sukuk Co Ltd. The associated payment obligations are, in Moody s view, direct obligations of the Government of Pakistan.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.Moody s said narrowing current account deficits, in combination with enhancements to the policy framework including currency flexibility, lower external vulnerability risks in the country. However, foreign exchange reserve adequacy will take time to rebuild. The ratings agency expects the country s current account deficit to continue narrowing in the current and next fiscal years, averaging around 2.2 percent of GDP, from more than 6 percent in fiscal 2018 and around 5 percent in fiscal 2019. Under Moody s baseline assumptions, subdued import growth will likely remain the main driver of narrowing current account deficits, it said. In particular, the ongoing completion of power projects will reduce capital goods imports, while oil imports will remain structurally lower given the gradual transition in power generation away from diesel to coal, natural gas and hydropower. Moody s said tight monetary conditions and import tariffs on nonessential goods would weigh on broader import demand for some time, although it sees the possibility of monetary conditions easing when inflation gradually declines towards the end of the current fiscal year.Moody s expects exports to gradually pick up on the back of the real exchange rate depreciation over the past 18 months, also contributing to narrower current account deficits.


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