Singapore, June 20, 2018 -- Moody's Investors Service ("Moody's") has today
changed the outlook on Pakistan's rating to negative from stable
and affirmed the B3 local and foreign currency long-term issuer
and senior unsecured debt ratings.
The decision to change the outlook to negative is driven by heightened
external vulnerability risk. Foreign exchange reserves have fallen
to low levels and, absent significant capital inflows, will
not be replenished over the next 12-18 months. Low reserve
adequacy threatens continued access to external financing at moderate
costs, in turn potentially raising government liquidity risks.
The decision to affirm the B3 rating reflects Pakistan's robust
growth potential, supported by ongoing improvements in energy supply
and physical infrastructure, which are likely to raise economic
competitiveness over time. These credit strengths balance Pakistan's
fragile external payments position and very weak government debt affordability
owing to low revenue generation capacity.
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 our 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.
RATINGS RATIONALE
RATIONALE FOR THE NEGATIVE OUTLOOK
HEIGHTENED EXTERNAL VULNERABILITY RISKS AS ONGOING BALANCE OF PAYMENT
PRESSURES ERODE FOREIGN EXCHANGE BUFFERS
Moody's expects Pakistan's external account to remain under
significant pressure. The coverage by foreign exchange reserves
of imports will likely fall further from already low levels, while
coverage of external debt payments due will weaken from currently adequate
levels. In turn, higher foreign currency borrowing needs,
in combination with the low levels of foreign exchange buffers,
risks weighing on the ability of the government to access external financing
at moderate costs.
First, external vulnerability risks are related to Pakistan's
sizeable current account deficit, which Moody's expect will
only narrow slightly to around 4-4.3% of GDP over
the next few years, after an expected 4.6% in fiscal
2018 (FY2018, fiscal year ending June 2018) and compared to an average
deficit of around 1.5% between FY2014 and FY2016.
Further, continued growth in imports of goods -- driven by
demand for capital goods under the China-Pakistan Economic Corridor
(CPEC) project, higher fuel prices and robust household consumption
-- will prevent a significant narrowing of the current account deficit.
Although goods exports have picked up since the start of 2018, growing
around 10-15% year-on-year in US dollar terms,
they only amount to half the level of goods imports. While Moody's
assumes continued strong growth in exports, this will not be enough
to narrow the trade gap.
As a result, unless capital inflows increase significantly,
Moody's does not expect official foreign exchange reserves to replenish
from their current low levels. Stable foreign direct investment
(FDI) inflows, in particular, have not kept pace with the
increased outflows driven by trade. As of end-May 2018,
official foreign exchange reserves were around $10 billion,
down more than 40% from their October 2016 peak and sufficient
to cover just two months of imports. Under Moody's baseline
projection, the import cover of reserves will likely fall to around
1.7-1.8 months over the next fiscal year, below
the adequacy level of three months generally recommended by the International
Monetary Fund. Moody's expects the government's tax
amnesty scheme, which expires in June 2018, to have a modest
impact of around $2-3 billion in foreign exchange inflows.
Second, the coverage by foreign exchange reserves of external debt
payments due is weakening, pointing to further external vulnerability
risks. With a significant rise in equity inflows unlikely,
Moody's expects Pakistan's external financing gap to be met
by increased foreign currency borrowing, mainly by the government.
Pakistan's External Vulnerability Indicator, the ratio of
external debt payments due over the next year plus total nonresident deposits
over one year to foreign exchange reserves, will rise to over 120%
in FY2019 and further in FY2020, from around 80-85%
at the start of FY2018.
While policymakers have started to respond to the external pressures,
the policy tools available are politically challenging and would likely
have a negative economic impact. The authorities have so far allowed
the Pakistani rupee to depreciate by a total of 15% against the
US dollar since December 2017, raised policy rates by a total of
75 basis points, and imposed regulatory duties on imports of nonessential
goods. Moody's expects these measures to contribute to somewhat
lower growth, at 5.2% on average over the next two
fiscal years, from an expected 5.8% in FY2018,
and higher inflation at 7.0% in FY2019, from around
4% in FY2018. Further currency depreciation, higher
policy rates, fiscal tightening, and/or higher regulatory
duties would likely weigh further on growth and raise inflation above
Moody's current projections.
RATIONALE FOR THE RATING AFFIRMATION
ROBUST GROWTH POTENTIAL, SUPPORTED BY INFRASTRUCTURE PROJECTS
Pakistan's relatively strong growth potential, enhanced by
investment that strengthens and stabilizes power supply, provides
the economy with some capacity to absorb external or domestic shocks.
Notwithstanding a moderate slowdown in near-term economic activity
induced by policy tightening, Moody's expects GDP growth in
Pakistan to remain robust, above 5%. Pakistan's
growth potential has risen in part with the gradual elimination of the
country's chronic energy shortage, which encourage investment
in other sectors. Moody's expects the ongoing implementation
of CPEC-related infrastructure projects to raise the country's
growth potential further, by improving road and rail connectivity
within Pakistan, and allowing it to function as a transport and
logistics hub under China's Belt and Road Initiative.
CPEC-related investments over FY2019 and FY2020 include the ongoing
implementation of further energy projects, infrastructure projects
such as the Karachi Circular Railway, the Karachi-Lahore-Peshawar
Railway, and a highway connecting Gwadar and Quetta, which
will shorten travel times in the western route of CPEC, and the
establishment of special economic zones aimed at boosting Pakistan's
export sector.
That said, Pakistan's very low economic competitiveness remains
a significant credit constraint. The country's global competitiveness
ranking is low compared to peers, at 115th out of 138 countries
according to the World Economic Forum's 2017-2018 Global
Competitiveness Report, due mainly to poor infrastructure (including
the chronic power supply shortage that is gradually being addressed),
weak institutions, and deficiencies in health and primary education.
Like many of its South Asian neighbors, Pakistan is also vulnerable
to climate change risk. The magnitude and dispersion of seasonal
monsoon rainfall continues to influence agricultural sector growth and
rural household consumption. As a result, both droughts and
floods can create economic and social costs for the sovereign.
LOW REVENUE GENERATION CAPACITY, HIGH GROSS BORROWING WEIGH ON DEBT
AFFORDABILITY
In addition to the fragile external payments position, Pakistan's
weak revenue generation capacity is a main credit constraint for the sovereign.
Moody's expects government revenue to remain around 16% of
GDP over the next two fiscal years -- one of the lowest globally
-- albeit gradually increasing given the authorities' focus
on expanding the tax base and raising tax compliance. As a result,
debt affordability will remain among the weakest across Moody's
rated sovereigns and constrain the government's fiscal space,
particularly in light of ongoing infrastructure and social spending needs.
Moody's expects the government's fiscal deficit to remain
around 5% of GDP in FY2019 and FY2020, after a projected
deficit of 5.8% in FY2018. Unless nominal GDP growth
deteriorates substantially, Moody's does not anticipate that
the government's debt burden will rise significantly. However,
the debt burden will not fall from the current, relatively high
levels, hovering around 70-73% of GDP.
As a result of persistent deficits and a significant share of overall
debt being financed through short-term securities, the government's
gross borrowing requirement is one of the highest across Moody's
rated sovereigns, and expected to remain around 27-30%
of GDP over the next two fiscal years. With Treasury bills estimated
at around 12% of FY2018 GDP, and an average maturity of government
debt of less than four years, a sudden rise in the cost of debt
beyond Moody's assumptions would have a rapid and significant negative
effect on debt affordability.
WHAT COULD CHANGE THE RATING UP
The negative outlook signals that a rating upgrade is unlikely.
The outlook would likely be changed to stable if external vulnerability
risks decreased materially and durably, including through policy
adjustments that strengthen the external payments position. A resumption
of fiscal consolidation pointing to a meaningful reduction in the debt
burden would also be credit positive.
WHAT COULD CHANGE THE RATING DOWN
A further deterioration in Pakistan's external position, including
a more pronounced erosion of foreign reserve buffers, which would
threaten the government's external repayment capacity and heighten
liquidity risks further, would likely result in a downgrade of the
rating. Expectations that government debt would continue to rise
markedly, with a related deterioration in debt affordability from
already weak levels, would also put downward pressure on the rating.
GDP per capita (PPP basis, US$): 5,095 (2017
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 5.4% (2017 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 3.9%
(2017 Actual)
Gen. Gov. Financial Balance/GDP: -5.6%
(2017 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -4.1% (2017 Actual)
(also known as External Balance)
External debt/GDP: 27.3% (2017 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.
SUMMARY OF MINUTES FROM RATING COMMITTEE
On 18 June 2018, 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 economic fundamentals, including
its economic strength, have not materially changed. The issuer's
institutional strength/ framework, have not materially changed.
The issuer's fiscal or financial strength, including its debt profile,
has not materially changed. The issuer's susceptibility to event
risks has not materially changed.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in December 2016. Please see the Rating Methodologies
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 credit 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 credit rating action on the support provider and in relation to
each particular credit 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 credit rating action,
and whose ratings may change as a result of this credit 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.
Christian Fang
Asst Vice President - 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
Client Service: 852 3551 3077
Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
