KARACHI: Moody’s Investors Service downgraded Pakistan’s credit rating to ‘Caa1’ from ‘B3’ on Thursday and kept the outlook negative, citing the government’s dollar requirement to finance a widening current account deficit and the risk of debt sustainability in the aftermath of recent devastating floods.
The Pakistani government, on the other hand, strongly disputed Moody’s unilateral decision to downgrade its credit rating, claiming that the rating agency’s decision was based on incomplete information.
Pakistan’s team met with Moody’s at least twice in the last 24 hours – until Thursday evening – to update the global rating agency on debt sustainability and global community pledges worth billions of dollars to combat flood devastation.
“The Caa1 rating reflects Moody’s view that Pakistan will remain heavily reliant on financing from multilateral partners and other official sector creditors to meet its debt payments in the absence of affordable market financing,” Moody’s said in a statement.
Moody’s reduced Pakistan’s government’s local and foreign currency issuer and senior unsecured debt ratings from B3 to Caa1. It also reduced the senior unsecured MTN programme’s rating to (P)Caa1 from (P)B3, while the outlook remained negative.
Moody’s stated in its rationale for the revised rating that Pakistan’s economic outlook in the near and medium term had deteriorated sharply as a result of the floods, with preliminary estimates putting the economic cost of the floods at around $30 billion.
The $30 billion estimate, equal to 10% of the country’s GDP, is far higher than the estimated economic cost of $10 billion during the 2010 floods, which were the country’s worst flooding episode until this year.
“As a result, Pakistan’s debt affordability, which is already among the lowest among sovereigns rated by Moody’s, will deteriorate.” Moody’s estimates that interest payments will rise to around 50% of government revenue in fiscal 2023, up from 40% in fiscal 2022, and will remain at this level for the next few years.
“A significant portion of revenue going to interest payments will increasingly limit the government’s ability to service its debt while meeting the population’s essential social spending needs.”
Moody’s predicted that the current account deficit would rise to 3.5-4.5% of GDP in fiscal 2023, up from 3-3.5% before the flood. It also anticipated that a larger trade deficit would be offset in part by an increase in remittances, which typically increased during times of crisis.
