Moody’s Ratings has upgraded Pakistan’s local and foreign currency issuer and senior unsecured debt ratings to Caa2 from Caa3, reflecting improving macroeconomic conditions and a slight enhancement in government liquidity and external positions. The rating agency has also upgraded the rating for Pakistan’s senior unsecured Medium Term Note (MTN) program to (P)Caa2 from (P)Caa3 and changed the outlook for the Government of Pakistan to positive from stable.
The upgrade to Caa2 indicates a reduction in Pakistan’s default risk to a level consistent with this rating. Moody’s attributes the improvement to better macroeconomic conditions and a moderate increase in government liquidity and external positions. The agency highlights that the certainty regarding Pakistan’s external financing sources has increased following a staff-level agreement with the International Monetary Fund (IMF) for a 37-month Extended Fund Facility (EFF) of $7 billion, reached on July 12, 2024. Moody’s anticipates the IMF Executive Board will approve the loan in the coming weeks.
Despite these improvements, Pakistan’s foreign exchange reserves have about doubled since June 2023 but remain insufficient to fully meet its external financing needs. Moody’s points out that Pakistan continues to depend on timely financing from official partners to meet its external debt obligations. The agency warns that the Caa2 rating still reflects Pakistan’s very weak debt affordability and high debt sustainability risks, with interest payments expected to consume about half of government revenue over the next two to three years.
The report notes that the positive outlook reflects a balance of risks skewed to the upside. It captures the potential for further reductions in liquidity and external vulnerability risks and improvements in the fiscal position, supported by the IMF program. Moody’s stresses that sustained implementation of reforms, including measures to increase government revenue, could enhance debt affordability. Moreover, prompt completion of IMF reviews would facilitate continued access to financing from official partners, aiding in the rebuilding of foreign exchange reserves.
Moody’s also raised Pakistan’s local and foreign currency country ceilings to B3 and Caa2 from Caa1 and Caa3, respectively. The upgrade reflects a two-notch gap between the local currency ceiling and the sovereign rating, driven by the government’s significant economic footprint, weak institutions, and high political and external vulnerability risks. The gap between the foreign currency ceiling and the local currency ceiling accounts for incomplete capital account convertibility and relatively weak policy effectiveness.
The ratings upgrade also applies to The Pakistan Global Sukuk Programme Co Ltd, with the positive outlook reflecting direct obligations of the Government of Pakistan. Moody’s underscores that ongoing reform efforts and successful IMF program implementation could further stabilize Pakistan’s economic position and improve its creditworthiness.
Overall, the rating upgrade and positive outlook signal a cautious improvement in Pakistan’s economic stability and external financing conditions, though challenges remain, particularly regarding debt sustainability and political uncertainties
