Moody’s downgrades Pakistan’s rating: As a result of the decline in the nation’s foreign exchange reserves and the increased risk of the repayment of international debt defaulting, Moody’s Investors Service has lowered the government of Pakistan’s domestic and foreign currency credit ratings from Caa1 to Caa3.
Yet, according to a statement on Tuesday, the global rating agency “adjusted the outlook to stable from negative.”
The agency also lowered the senior unsecured MTN program’s rating from (P)Caa1 to (P)Caa3, which is a worse rating.
According to Moody’s, Pakistan’s increasingly precarious liquidity and external situation significantly increase default risks to a level consistent with a Caa3 rating, which is why the decision to lower the ratings was made.
In particular, the nation’s foreign exchange reserves have significantly declined to extremely low levels, considerably below what is required to meet its short- and medium-term import demands as well as its external debt commitments.
However, “weak governance and heightened social risks impede Pakistan’s ability to continuously implement the range of policies that would secure large amounts of financing and decisively mitigate risks to the balance of payments.” Although the government is implementing some tax measures to comply with the conditions of the IMF programme, and an IMF disbursement may help to cover the country’s immediate needs.
Moody’s assessment on Pakistan’s rating level and outlook, with uncertainties on funding and default risk
The Caa3 rating level, with broadly balanced risks, is commensurate with the difficulties Pakistan is under, according to Moody’s assessment, which is reflected in the stable outlook. The release of the upcoming tranches under the current IMF programme and other linked finance, for example, may potentially lower default risk to a level consistent with a higher rating.
Yet, disbursements might not be secured in time to prevent a default given the current highly precarious balance of payments scenario. Additionally, Moody’s noted that there is very little certainty regarding Pakistan’s sources of funding for its sizable external payments demands once the present IMF program expires in June 2023.