NOTE: On April 10, 2015, the press release was corrected as follows: In the contact list at the end of the press release, changed the second contact from Alastair Wilson, MD-Global Sovereign Risk to Anne Van Praagh, MD - Sovereign Risk. Revised release follows.
Singapore, March 25, 2015 -- Moody's Investors Service has revised the outlook on Pakistan's foreign
currency government bond rating to positive from stable. The rating
is affirmed at Caa1.
Concurrently, Moody's has affirmed the government's issuer rating
and senior unsecured rating at Caa1. The Caa1 rating is also affirmed
for US dollar Trust Certificates issued by The Second Pakistan International
Sukuk Company Limited.
RATINGS RATIONALE
RATIONALE FOR THE POSITIVE OUTLOOK
Moody's decision to revise the outlook on Pakistan's foreign currency
rating is based on a strengthening external liquidity position,
continued efforts toward fiscal consolidation, and the government's
steady progress in achieving structural reforms under the IMF program.
First Driver - A stronger external liquidity position
Net foreign reserves with the State Bank of Pakistan climbed to $11.2
billion as of 13 March 2015, from $3.2 billion at
the end of January 2014. The cushion provided by foreign reserves
coupled with dwindling external debt repayments to the IMF has reduced
external vulnerabilities. This has in large part resulted from
a lower current account deficit, which was easily financed by the
issuance of a Eurobond in April 2014, a Sukuk issuance in December,
continued disbursements under the IMF program, and privatization
proceeds.
The narrowing of the current account deficit to 1.2% of
GDP in the fiscal year ended June 2014 (FY2014) from 2.1%
in FY2012 was largely due to the steady uptick in workers' remittances
and receipt of anti-terrorism Coalition Support Funds from the
US. We estimate that the current account will narrow further in
fiscal 2015 to 0.8% of GDP, on account of the fall
in oil prices.
Second driver - Efforts towards fiscal consolidation
Although wide fiscal deficits and high debt levels remain a credit constraint,
Pakistan has made progress towards fiscal consolidation. In FY2014,
the government was able to bring the deficit down to 5.5%
of GDP (excluding grants), from 8.2% the previous
year. The government is targeting a further shrinkage in the deficit,
to 4.9% of GDP in FY2015. Although the pace of deficit
reduction may be less marked than the budget forecasts suggest,
we expect the authorities will continue along the path of fiscal consolidation.
The government has relied on the banking system for deficit financing,
but such borrowing is gradually declining as privatization proceeds,
and the Eurobond and Sukuk issuances, have helped it to diversify
funding. Moreover, the maturity of domestic public debt is
lengthening as the government substitutes shorter-term treasury
bills with Pakistan Investment Bonds that carry a longer tenure.
This will reduce roll-over risks and volatility in debt issuance
prices.
Third Driver - Progress in achieving structural reforms and quantitative
targets under the IMF program
Under its program with the IMF, Pakistan has also made steady progress
on structural reforms. As of December 2014, it had cleared
five program reviews, receiving $3.2 billion in financial
assistance under the SDR 4.39 billion ($6.1 billion
at current exchange rates) program that it signed in September 2013.
In early February this year, the IMF issued a statement upon the
conclusion of its Staff Mission, indicating that the sixth review
had been conducted successfully and was being reviewed by the IMF's
Management Board.
Reform measures stipulated under the program primarily focus on fiscal
consolidation, debt management, and addressing structural
constraints in the energy sector. Authorities are striving to meet
the remaining structural benchmarks scheduled for the year ahead.
These include the passage of legislation to enhance independence of the
central bank, steps to improve monetary transmission and debt management,
and privatization and strategic stake sales of state-owned enterprises.
RATIONALE FOR AFFIRMING THE Caa1 RATING
Although Pakistan's international liquidity buffer has been replenished
and balance of payments pressures have subsided, an incipient recovery
in investor confidence has not yet significantly boosted direct investment
inflows. In addition, most of the build-up in official
reserves has come from external borrowings, including draw downs
from Pakistan's IMF program. Moreover, Pakistan's
economic recovery faces structural challenges, and reform measures
have not completely taken hold.
While a positive outlook suggests a diminution of the probability of default,
the Caa1 rating reflects Pakistan's structurally large fiscal imbalances,
high debt servicing costs, dependence on foreign creditors and substantial
refinancing needs. It also incorporates implementation risk associated
with economic reform and a high susceptibility to event risk -- both
on the political front and in terms of economic vulnerabilities that could
arise, primarily from Pakistan's reliance on bilateral and multilateral
support.
WHAT COULD MOVE THE RATING UP/DOWN
Upward triggers to the rating would stem from the further implementation
of reforms or the successful completion of the IMF program, additional
strengthening in the external liquidity position or continued fiscal consolidation.
Sustained progress in structural reforms would remove infrastructure impediments
and supply-side bottlenecks, improving Pakistan's investment
environment and eventually aiding a shift to a higher growth trajectory.
Domestic political stability and steady relations with international donors
would further support the rating.
Conversely, a stalling of the ongoing IMF program or the withdrawal
of other multilateral and bilateral support, a deterioration in
the external payments position or a more unstable political environment
would be viewed as credit negative.
COUNTRY CEILINGS
Pakistan's long-term local currency bond and deposit country ceilings
are maintained at B1, while the long-term foreign currency
bond and deposit ceilings are maintained at B3 and Caa2 respectively.
All short-term ceilings are at Not Prime. The local currency
country ceiling refers to risks affecting a given country that arise from
political, institutional, financial and economic factors either
within the country or externally. These ceilings act as a cap on
ratings that can be assigned to the foreign and local currency obligations
of entities domiciled in the country.
GDP per capita (PPP basis, US$): 4,574 (2013
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 4.14% (2014 Provisional)
(also known as GDP Growth)
Inflation Rate (CPI, % change Jun/Jun): 8.2%
(2014 Actual)
Gen. Gov. Financial Balance/GDP: -5.5%
(2014 Actual) (also known as Fiscal Balance, excluding grants)
Current Account Balance/GDP: -1.2% (2014 Actual)
(also known as External Balance)
External debt/GDP: 24.25% (2014 Actual)
Level of economic development: Very Low level of economic resilience
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983; these events occurred in 1998 and 1999.
On 23 March 2015, a rating committee was called to discuss the rating
of the Pakistan, Government of. The main points raised during
the discussion were: The issuer's fiscal or financial strength has
materially increased. The issuer has become less susceptible to
event risks.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in September 2013. Please see the Credit Policy page
on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Anushka Shah
Analyst
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Anne Van Praagh
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Moody's affirms Pakistan's Caa1 rating, changes outlook to positive
