Singapore, August 08, 2020 -- Moody's Investors Service ("Moody's") has today
confirmed the Government of Pakistan's B3 local and foreign currency
issuer and senior unsecured debt ratings with a stable outlook.
Concurrently, Moody's has also confirmed the B3 foreign currency
senior unsecured ratings for The Third Pakistan International Sukuk Co
Ltd. The associated payment obligations are, in Moody's
view, direct obligations of the Government of Pakistan.
This concludes the review for downgrade initiated on 14 May 2020.
The review for downgrade reflected Moody's assessment that the country's
participation in the G20 Debt Service Suspension Initiative (DSSI) raised
the risk that private sector creditors would incur losses. In the
last few weeks, Moody's has considered the evidence of implementation
of DSSI for a range of rated sovereigns, and statements by G20 officials.
While Moody's continues to believe that the ongoing implementation
of DSSI poses risks to private creditors, the decision to conclude
the review and confirm the rating reflects Moody's assessment that,
at this stage, for Pakistan, those risks are adequately reflected
in the current B3 rating. It remains unclear what influence is
being applied to Pakistan and to other participating sovereigns to treat
private creditors in a comparable manner to official sector creditors.
However, a number of elements suggest that the probability of broad-ranging
private sector involvement has diminished. These include the apparent
absence of progress in discussions about how private sector involvement
('PSI') would be effected in DSSI in general; indications
by the G20 that PSI would require the support of the borrowing government;
the government of Pakistan's continued assertion that PSI is not
contemplated; and evidence of some debt payments being made to private
sector creditors under a DSSI regime.
The risks that remain relate to the possibility that, in particular
cases DSSI is implemented with private sector creditors also being drawn
in to provide debt service relief and incurring losses in doing so.
Should the probability of default and losses to private sector creditors
increase as implementation of DSSI for Pakistan becomes clearer,
Moody's would reflect any related changes in risks to private creditors
in further rating announcements.
The stable outlook reflects Moody's view that the pressures Pakistan
faces in the wake of the coronavirus shock and prospects for its credit
metrics in general are likely to remain consistent with the current rating
level. In particular, while Moody's sees downside risks
to Pakistan's economy because of movement and activity restrictions
related to the pandemic, which would in turn intensify the government's
fiscal challenges, strong support from development partners including
for external financing, coupled with effective macroeconomic policies
started ahead of the crisis, contain external vulnerability and
liquidity risks.
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 CONFIRMING THE B3 RATING
Moody's initiated a review for downgrade for Pakistan's ratings
following the country's participation in DSSI to reflect the potential
for private sector losses given the call in the G20's 15 April term
sheet for private creditors to participate in debt service relief on comparable
terms to official creditors. The review for downgrade reflected
the tension evident between Pakistan's stated intention not to seek
relief from private sector debt service obligations, and the clearly-stated
view of the key sponsors of the DSSI, specifically the IMF and World
Bank, that private creditors should participate in the DSSI on comparable
terms. Private sector losses incurred as part of the DSSI would
likely constitute a default under Moody's definition.
There remains considerable uncertainty regarding the treatment of private
sector creditors of the sovereigns which choose to participate in DSSI,
including Pakistan. Recent statements by the Institute of International
Finance (IIF) suggest that some DSSI participants have had informal discussions
with private sector creditors regarding deferral of interest.
However, the risk of broad-ranging involvement of private
sector creditors in many or most DSSI cases appears to have diminished.
There has not been any material progress in clarifying where and how private
sector creditors would be asked to provide debt service relief.
While the most recent communiqué issued by the G20 Finance Ministers
and Central Bank Governors on 18 July reiterated that sponsors "strongly
encourage private creditors to participate in the DSSI on comparable terms"
the clarifying language "when requested by eligible countries"
seems to acknowledge the need for support from the borrower for that to
happen[1]. Participating governments including Pakistan have
continued to assert that they do not wish to engage with private sector
creditors. And a number of DSSI-participating governments
have continued to make interest and coupon payments to private creditors
as they fall due.
The risks that prompted the initiation of the review for downgrade for
Pakistan have not disappeared and there has been limited additional clarification
since the initial DSSI terms were announced. However, the
risks have become more specific to each DSSI implementation case and at
this stage, Moody's assesses the probability that private
sector creditors of Pakistan incur losses through DSSI to be captured
in the B3 rating. Should the probability of losses to private sector
creditors increase as implementation of DSSI for Pakistan becomes clearer,
Moody's would reflect any related changes in risks to private creditors
in further rating announcements.
RATIONALE FOR THE STABLE OUTLOOK
The coronavirus pandemic is weighing on economic activity in Pakistan,
resulting in lower tax revenue, a wider fiscal deficit, and
a higher debt burden for the government. While continued spread
of the virus poses downside risks to the economy and government finances,
financial and technical support from development partners mitigates external
vulnerability and liquidity risks. The government's commitment
to its current International Monetary Fund (IMF) Extended Fund Facility
(EFF) continues to unlock a large financial envelope that Moody's
expects will cover its external financing needs over the next 12-18
months, and provides an anchor for ongoing fiscal reforms.
Effective macroeconomic policies lower interest payments, supporting
debt affordability, and provide policy buffers.
Moody's expects Pakistan's economic growth to be positive
in fiscal 2021 (ending June 2021) from a recession in fiscal 2020,
but still low at around 1-2%. While Pakistan's
economy is relatively closed with low reliance on exports, movement
restrictions due to coronavirus will keep economic activity below the
pre-outbreak levels for some time.
The slow economic recovery will in turn weigh on government revenue,
keeping the fiscal deficit wide at around 8-8.5%
of GDP in fiscal 2021 under Moody's projections, at similar
levels compared to fiscal 2020, and leaving the government's
debt burden high at around 90% of GDP by the end of fiscal 2021.
Risks to the economy and government finances are to the downside,
particularly if more stringent measures are implemented to curb the spread
of the virus domestically.
However, even in downside economic and fiscal scenarios, Moody's
expects Pakistan to cover its external financing needs with continued
significant financial support from its development partners, including
the commitment to rollover most bilateral loans that come due, independent
of how DSSI is implemented. Moody's also expects the government's
ongoing engagement with development partners on fiscal reforms,
such as through the IMF EFF and other programmes with the Asian Development
Bank and World Bank, to contribute to a modest widening of the revenue
base, once the crisis passes, improving debt affordability
and containing fiscal risks over the next few years.
Meanwhile, external financing needs have declined relative to fiscal
2018-19 because of a narrower current account deficit, which
occurred as a result of the macroeconomic adjustments over the past two
years and continues to be supported by effective policies including currency
flexibility. Moody's projects the current account deficit
to be around 2% of GDP in fiscal 2021, after 1.1%
in fiscal 2020, substantially narrower than the average of around
5.5% over fiscal 2018-19.
Stability in the balance of payments will, in turn, allow
the State Bank of Pakistan, the central bank, to keep monetary
policy accommodative as inflation declines. This keeps a lid on
borrowing costs for the government domestically and lends further support
to debt affordability.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Environmental considerations are significant to Pakistan's credit
profile because it is vulnerable to climate change risk. Pakistan
is significantly exposed to extreme weather events, including tropical
cyclones, drought, floods and extreme temperatures.
In particular, the magnitude and dispersion of seasonal monsoon
rainfall influence agricultural sector growth and rural household consumption.
The agricultural sector directly accounts for around 20% of GDP
and exports, and nearly 40% of total employment. As
a result, both droughts and floods can create economic, fiscal
and social costs for the sovereign.
Social considerations are material to Pakistan's credit profile.
Access to quality healthcare, education and utilities such as electricity
and water remains limited, especially in rural areas, although
the government is addressing these issues as a key priority through its
"Ehsaas" programme that is aimed at reducing poverty and inequality,
strengthening social safety nets and promoting human capital development.
Moody's regards the coronavirus outbreak as a social risk under
its ESG framework, given the substantial implications for public
health and safety. For Pakistan, the epidemic exposes the
challenge to the government in enhancing healthcare and public services
provision.
Governance considerations are significant to Pakistan's credit profile.
International surveys of various indicators of governance, while
showing some early signs of improvement, point to weak rule of law
and control of corruption, as well as limited government effectiveness.
These weaknesses are balanced against a lengthening track record of effective
checks and balances and judicial independence for the level of development
in the country.
GDP per capita (PPP basis, US$): 5,919 (2019
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 1.9% (2019 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 8% (2019
Actual)
Gen. Gov. Financial Balance/GDP: -9.1%
(2019 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -4.8% (2019 Actual)
(also known as External Balance)
External debt/GDP: 38.2% (2019 Actual)
Economic resiliency: ba2
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983.
On 04 August 2020, 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 institutions and governance strength, 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.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
WHAT COULD CHANGE THE RATING UP
Upward pressure on Pakistan's rating would develop if ongoing fiscal
reforms were to expand the government's revenue base, raise
debt affordability, and lower its debt burden beyond Moody's
current expectations. Further reduction in external vulnerability
risks, including though higher levels of foreign exchange reserve
adequacy and/or increased economic competitiveness that were to lift export
prospects, would also put upward pressure on the rating.
WHAT COULD CHANGE THE RATING DOWN
Downward pressure on the rating would stem from renewed deterioration
in Pakistan's external position, including through a significant
widening of the current account deficit and erosion of foreign exchange
reserve buffers, which would threaten the government's external
repayment capacity and heighten liquidity risks. A continued rise
in the government's debt burden, without prospects for stabilisation
over the medium term, would also put downward pressure on the rating.
A rising probability of private sector participation in DSSI would likely
point to a lower rating, commensurate with the potential losses
to be incurred.
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, 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 further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
REFERENCES/CITATIONS
[1] G20 Communiqué, 18 July 2020
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
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Marie Diron
MD-Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
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Moody's Investors Service Singapore Pte. Ltd.
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