Singapore, June 11, 2015 -- Moody's Investors Service has today upgraded Pakistan's foreign
currency issuer and senior unsecured bond ratings to B3 from Caa1,
and assigned a stable outlook.
Key drivers for the rating action are expectations of:
1. Continued strengthening of the external payments position;
and
2. Sustained progress in structural reforms under the government's
program with the IMF.
As progress on these fronts becomes firmly entrenched, risks of
default are receding relative to other sovereigns in the Caa1-rated
category that are facing heightened external vulnerabilities.
Concurrently, Moody's has upgraded the rating assigned to the US
dollar Trust Certificates issued by The Second Pakistan International
Sukuk Company Limited to B3.
In today's rating action, Moody's has also changed Pakistan's
foreign-currency bond ceiling to B2 from B3, the foreign-currency
deposit ceiling to Caa1 from Caa2, and the local-currency
country risk ceiling to Ba3 from B1. The short-term country
ceilings for foreign-currency bonds and deposits remain unchanged
at Not-Prime (NP).
RATINGS RATIONALE
RATING UPGRADE TO B3 FROM Caa1
First Driver -- A strengthening external liquidity position
Pakistan's external liquidity position continues to strengthen.
Net foreign reserves have climbed steadily, to $11.9
billion as of end-May 2015 from a low of $3.2 billion
in January 2014.
Improvement in external liquidity has recently been bolstered by successful
recent privatization offerings that have been met with strong investor
appetite, in turn reinforced by Pakistan's underlying growth
potential and progress on structural reforms. Moody's expects
real GDP growth to rise to 4.7% year-on-year
in the fiscal year ending June 2016, and further to a range of 5-6%
in the following four years.
The China-Pakistan Economic Corridor with pledges worth $46
billion from Beijing, will also serve over time to accelerate growth
by boosting investment in transportation links with China and addressing
shortages in electrical power generation once implementation is underway.
Lower oil prices additionally relieve pressure on the current account
of the balance of payments. However, a durable improvement
in the external payments position will likely depend on sustained political
stability and continuity in policy.
Second Driver - Implementation of reforms under the IMF program
Pakistan continues to make steady progress on structural reforms.
In mid-May, the IMF issued a statement upon the conclusion
of its staff mission, indicating that the seventh review under the
Extended Fund Facility that it signed in March 2013 had been conducted
successfully and would be reviewed by the IMF's management board.
Cumulative financial assistance under the IMF's 4.4 billion
($6.2 billion at current rates) special drawing rights program
currently amount to $3.5 billion.
With the program now at its mid-point, we consider that the
government has achieved significant traction in reforms . Continued
commitment to the program would entail, amongst other goals,
the government meeting deficit-reduction targets. Coupled
with ongoing efforts to lengthen the maturity structure of Pakistan's
debt, this would contribute to a decline in large gross financing
needs.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook represents our expectation of balanced upside and downside
risks.
Upward pressures stem from support from multilateral and bilateral lenders,
which bolster an improving foreign reserve position and ongoing reform
progress.
Despite positive ongoing developments, rating constraints which
would put downward pressures stem from Pakistan's very low fiscal
strength, due to its high debt levels and weak debt affordability
in light of a narrow revenue base. Deeply entrenched weaknesses
in the power sector also act as a bottleneck to growth. While Pakistan's
government financing is mainly from domestic sources and system-wide
external debt is declining as a percent to GDP, the level of external
public debt poses a moderate degree of credit risk. In addition,
political event risks remain relatively high in Pakistan despite recent
stability.
RATIONALE FOR THE B3 RATING
Weak government finances, marked by elevated debt levels which will
continue to exceed the median for B3-rated peers, are the
primary constraint on Pakistan's B3 government bond rating.
Economic growth, while in line with other B-rated sovereigns,
is below potential, largely due to supply constraints that stem
from a lack of structural reforms in the energy sector.
The passage of ongoing reforms indicates that government effectiveness
is improving. Nonetheless, a fractious political environment
presents risks to smooth policy making. Moody's also sees an elevated
vulnerability to geopolitical risks
WHAT COULD MOVE THE RATING UP/DOWN
Upward triggers to the rating would stem from sustained progress in structural
reforms that would remove infrastructure impediments and supply-side
bottlenecks. This would improve Pakistan's investment environment
and eventually aid a shift to a higher growth trajectory. A fundamental
strengthening in the external liquidity position and meaningful reduction
in the deficit and debt burden would also be credit positive.
Conversely, we would view 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 to be credit negative.
GDP per capita (PPP basis, US$): 4,736 (2014
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 4.03% (2014 Actual)
(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: -1.3% (2014 Actual)
(also known as External Balance)
External debt/GDP: 26.1% (2014 Actual, overall,
including publicly guaranteed debt and )
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.
On 09 June 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 economic fundamentals, including
its economic strength, have materially increased. The issuer's
governance and/or management, have 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.
The following information supplements Disclosure 10 ("Information
Relating to Conflicts of Interest as required by Paragraph (a)(1)(ii)(J)
of SEC Rule 17g-7") in the regulatory disclosures made at
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Please see www.moodys.com for any updates on changes to
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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.
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Anne Van Praagh
MD - Sovereign Risk
Sovereign Risk Group
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Moody's upgrades Pakistan's bond ratings to B3 with a stable outlook